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Application of company law on distributions to donations by a company to its parent charity

13th November 2014

The ICAEW has sought legal opinion on the position where a trading subsidiary pays a gift aid donation in excess of its distributable reserves. Essentially, this is an illegal distribution and creates a liability for the charity to repay the unlawful payments it has received (and an equivalent asset in the subsidiary). Broadly, the opinion is that these assets and liabilities should be recognised (as determined under FRS 12 and FRS 102).

Although we have been aware of this as a potential issue for some time, Charity Commission guidance has previously offered some comfort by advising that a trading subsidiary may make a donation greater than its accounting profits. However, the Charity Commission guidance is now withdrawn and HMRC are considering the potential tax implications. HMRC will publish their view in due course.

This should not be a problem for the most part, as many organisations have tended to avoid making donations in excess of distributable reserves. Instead, organisations make gift aid donations from the accounting profits of the nine months following the end of the tax year and relate these donations back for tax purposes. This remains acceptable, although the opinion does clarify that it is necessary that the Company prepares interim accounts.

The accounting implications for the limited number of organisations that have actually provided for excessive gift aid donations, giving rise to the recognition of a negative distributable reserve, will need to be considered. Subject to what HMRC have to say, it may be possible to address the matter by issuing share capital followed by an immediate share capital reduction to create the necessary reserve. Though it will be important to be aware that this will now be under the spotlight and HMRC could well express a negative view on this.  

If this issue is of concern to you, please contact Katharine Arthur ( or James Cameron (