Gift aid donations from trading arms

The Charity Commission has said it will update its guidance on charity trading following advice given from the Institute of Chartered Accountants in England and Wales (ICAEW).

The Commission will update its CC35 guidance, www.gov.uk/government/publications/trustees-trading-and-tax-how-charities-may-lawfully-trade-cc35, in reflection of a technical report from the ICAEW to state that a distribution cannot be made from a trading subsidiary’s reserves for the purpose of a gift aided distribution to a parent charity.

The ICAEW said it understands that the position in CC35, guidance on charities and trading, was being questioned. It said that in the absence of a clear and simple court precedent and the importance of the issue to charities, it has sought counsels’ opinion on the matter. The legal advice confirmed that the payments are distributions, and therefore “to the extent that any payment exceeded profits available for distribution, payment of the excess was unlawful”.

The Commission said that it has withdrawn the section of guidance following a legal opinion by the ICAEW Charities Technical subcommittee. The section, 4.5 in the guidance, was a response to the question “Can a trading subsidiary pay more to its parent charity in Gift Aid than the level of trading profits (in accounting terms) which it has earned?”

The ICAEW issued a technical report covering “guidance on donations by a company to its parent charity”, which can be downloaded at www.icaew.com/~/media/Files/Technical/technical-releases/legal-and-regulatory/tech16-14bl-guidance-for-donations-by-a-company-to-its-parent-charity.pdf.

The Charity Commission guidance had previously noted that the point had been debated and was subject to a number of different opinions. As a result it had recommended charities take advice on the matter.

The ICAEW said that where the subsidiary company has made unlawful distributions, “its parent is liable to repay the excess and those who were directors of the subsidiary at the time of that distribution may be liable in certain circumstances” and that charities may wish to take legal advice in relation to their specific circumstances.