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Charity Commission guidance changed for payment of Gift Aid by charity subsidiary companies

The Charity Commission has withdrawn guidance from its website regarding the payment of Gift Aid beyond distributable profits from charity trading arms to the parent charity.

Some charities own subsidiary trading companies through which they carry out trading activities for a profit. The subsidiary may donate some or all of its profits to the charity. Depending on the amount so donated, the subsidiary reduces or eliminates its corporation tax liability for that year.

This may result in breaches of company law under the Companies Act 2006. ICAEW has produced technical guidelines to provide more information for members.

In the event that taxable profits of the trading subsidiary exceed distributable profits, for example through timing differences and the differing treatment of certain expenses, and the subsidiary then proceeds to donate to the parent charity an amount which is greater than the amount of distributable profits then, under the Companies Act 2006, the excess amount is likely to be repayable by the charity and adjustments will be required for prior incorrect payments.

This does not necessarily mean that affected charities will, in practice, need to repay money to the subsidiary, but affected charities will need to consider the implications for them in light of their own circumstances.

For more information read the technical guidelines. If you are concerned this could affect your charity please speak to your adviser.

Why has ICAEW published this technical note?
We have been looking into the issue of gift aid payments by trading subsidiaries to their parent charities following concerns raised by our members. We have sought leading counsel’s opinion on the possibility that payments in excess of distributable profits for the year could be in breach of company law under the Companies Act 2006. We have published technical guidelines which outline the issues which those charged with governance of charities and trading subsidiaries need to consider.
Has the Charity Commission updated its guidance on this issue?
We have discussed this issue with the Charities Commission who have removed their current guidance. We understand that they are currently reviewing this guidance and will update it.
Do I need to take any action?
At this stage you need to consider whether donations from the trading subsidiary to the charity may have been in excess of distributable profits for the year in which they were given. If you are unsure what this means or are aware that this has occurred then you need to read our technical guidelines.
What are the implications for my charity if our trading subsidiary has paid more than it should have done?
It is possible that the excess amount is likely to be repayable by the charity and you may need to adjust your financial statements to account for this. This doesn’t mean your charity will necessarily need to repay money to the subsidiary.