Subsidiary Gift Aid payments to a parent charity

For a while now we have seen separate trading entities being established that have a Charity acting as its parent entity.  This is usually done as a way around the rules on primary purpose trading for charities, and is most commonly seen when a charity shop is run through a separate company compared to the charity it is supporting.  What usually happens is most of the profits from the subsidiary are gift aided/donated to the parent charity to reduce any corporation tax liability of the subsidiary.  From 1 January 2019, updated legislation (named FRED 68) is due to come into force, and charities need to be careful to comply to avoid any breaches of legislation.

In the past the ‘usual’ practice would have been to accrue any gift aid payments from the subsidiary to the parent charity at the year end.  The subsidiary then had 9 months to pay the amount to the parent.

However, gift aid payments are a distribution of profits and can only be transferred when they are actually paid, or there is a legal obligation to make the payment.  Directors agreeing to transfer profits to the parent charity before the year end does not constitute a legal obligation, and is merely an intent. 

Under the updated guidance of FRED 68, subsidiaries will no longer be able to accrue the income in the financial statements.  They will only be able to record the payments in the accounts when they are actually paid, and will be treated as a payment from equity rather than as an expense in the Statement of Financial Activities.

So what about the tax position of the subsidiary, does this mean that the subsidiary will face a large corporation tax bill?  In short, the answer is no.  FRED 68 is not proposing that the tax effect will alter, and providing the payment will be made within 9 months, it is an allowable deduction for tax.

It is clear that going forwards Directors of subsidiaries will need to consider making payments in the year, rather than making a retrospective accrual. 

Should you require any assistance on this matter, please do not hesitate to contact a member of the charity team.