HMRC and Charities Commission

Guidance on donations by a subsidiary company to its parent charity

On 24 February, HM Revenue & Customs (HMRC) and The Charities Commission issued revised guidance following The Institute of Chartered Accountants in England and Wales (“ICAEW”) technical release in October 2014 in relation to the lawfulness of donations made by wholly owned trading subsidiaries to its parent charity.

Recap of the issue highlighted by the ICAEW:

  • Part 6 of the Corporation Tax Act 2010 allows trading subsidiaries of charities to claim relief for upward donations of profits to their parent. Therefore wholly owned trading subsidiaries of charities frequently donate all taxable profits to the parent charity;
  • This practice enabled the subsidiary to reduce its profits, and related tax charge, to nil;
  • In some cases, these upward donations exceeded the level of profits available for distribution under the Companies Act 2006;
  • The ICAEW obtained Counsel’s opinion on the practice – Counsel’s opinion indicated that the payments in question are distributions and as such where payments exceed the level of profits available for distribution, the excess was unlawful;
  • The ICAEW provided a Technical Release outlining how practitioners may minimise risk of excessive distributions in future and correct current issues charities and their subsidiaries might have (this technical release can be accessed here – please note that this has been updated following the revised guidance from HMRC and the Charities Commission).

Revised HMRC guidance released on 24 February:

Following discussions between the ICAEW and HMRC, HMRC have issued revised guidance stating that they expect the guidance in the ICAEW’s Technical Release to be followed by all charities and their subsidiaries for subsidiary accounting periods commencing on or after 1 April 2015.

What does this mean for you?

  • For accounting periods commencing on or after 1 April 2015 subsidiary companies must not pay more to the charity than the level of profits available for distribution, even if the level of taxable profits are higher.

What are the implications of having made an unlawful distribution in prior years?

  • A donation that represents an unlawful distribution is not allowable as a qualifying donation for tax purposes;
  • Where the subsidiary company has made unlawful distributions, its parent is liable to repay the excess;
  • In addition, the directors of the subsidiary at the time of the distribution may be liable in certain circumstances;
  • This liability includes such excess amounts arising over the previous six years – although it is unlikely that HMRC would use its discovery powers to make adjustments to periods that are before the statutory enquiry window (assuming that the claim for the donation was adequately disclosed in the subsidiary company’s tax return); and;
  • The repayment of a previous unlawful distribution is not taxable in the hands of the subsidiary company.

The practical application of these rules to unlawful distributions made in previous periods will need to be considered on an individual case by case basis – if you believe this impacts you please do get in touch with your usual Deloitte contact or one of our Not for Profit Corporate Tax team who will be happy to help.

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