News & Insights

Back to News & Insights Archive

Gift Aid payments by charity subsidiary companies: new ICAEW guidance

26th February 2016

The ICAEW has issued updated guidance on the donations made by subsidiaries to their charity parent company (24 February). This is following on from their guidance issued in October 2014.

As a recap, the 2014 ICAEW guidance was issued following the withdrawal of the Charity Commission guidance (CC35). The CC35 guidance referred to the ability for a subsidiary to pay a donation in excess of accounting profits and did not confirm whether it believed this practice to be legally possible or not. As such, the ICAEW sought legal advice on the matter in order to gain certainty for the sector.

This legal advice confirmed that, for company law purposes, donations are considered to be distributions and, as such, any payments in excess of the profits available for distribution are unlawful.

Further to discussions between the ICAEW and HMRC, the ICAEW guidance has now been updated further to include reference to some of the specific tax questions that have arisen around this issue (Tech 16/14BL). HMRC has also updated the guidance on its website regarding the position, although this is somewhat brief. In summary, the key points arising are:

  • HMRC expect the updated guidance to be followed for all accounting periods commencing on or after 1 April 2015.
  • Donations made in excess of distributable profits are not deductible by the trading subsidiary for corporation tax purposes.
  • HMRC have the ability to challenge the tax deduction of donations made prior to 1 April 2015, where they are unlawful.
  • A repayment of a previous unlawful distribution will not be taxable income for the subsidiary company.

There are likely to be a number of alternative solutions for remedying previous unlawful distributions. As such, any adjustments needed to correct previous unlawful payments will need to be reviewed carefully to understand the accounting and tax implications for both parties.

If you would like to discuss these issues further, then please Louise Veragoo, NFP Tax Director.