Charities trading outside the statutory and concessional exemptions may arrange for a trading activity to be carried on by a wholly owned trading company. Using this approach it is possible for the trading profits to be applied for charitable purposes without incurring tax.
Companies owned by charities are liable to pay tax on trading profits in the same way as other companies. But, like other companies, they can get tax relief for charitable payments to a charity under the company Gift Aid scheme. Subject to certain restrictions in S339 ICTA 1988, a company donating all of its taxable profits to charity will get a tax deduction equal to the amount of the profits, so that no tax will be payable. In the hands of the charity the donation will not be regarded as trading income, so that it will be exempted from tax (provided, of course, it is used for charitable purposes).
For VAT purposes it is important to remember that a charity’s trading subsidiary is not a charity and is, therefore, generally treated in the same way as a normal commercial enterprise for VAT purposes. This means that, with certain specific exceptions, it is not entitled to the VAT reliefs available to charities.
The exceptions are:
A trading company can pass up its trading profits to the parent charity under company Gift Aid without deduction of tax. Such payments reduce the trading company’s profits chargeable to Corporation Tax. For further guidance about corporate Gift Aid see guidance about Gift Aid for companies.
When deciding how much of its profits to give to its parent charity, a trading company may need to take account of the following:
When the subsidiary company has determined what proportion of its profits should be passed to the charity, payments for a particular accounting period may, in most cases, be made up to nine months after the end of the accounting period and still qualify for tax relief for the accounting period to which they relate. Any claim to carry back the donation in this way must be made within two years of the end of the accounting period to which the gift relates.
The company gets tax relief for Gift Aid payments it makes in the form of a deduction in its corporation tax computation.
The company does not have to deduct any income tax when making a donation to charity. It will get relief for the actual payment it makes to the charity. The company does not have to give any form of certificate or declaration to the charity and will only need to retain normal accounting records and copies of any correspondence to support its claim for relief.
If the charity's premises, staff and services are shared with the trading company an appropriate allocation of the costs should be included in the company's accounts. The amount charged by the charity for the shared resources should generally not exceed the cost. However, where the charity is demonstrably trading in the services etc which it is providing, then there should be an appropriate mark-up. Any profit in the hands of the charity may be taxable as non-exempt trading income.
See the guidance at paragraph 47 Calculating the profits of the trade.
Gift Aid payments should be made as a payment of money from the company to the charity. The company and charity should avoid sharing one bank account so that this transfer can be seen to have taken place.
If a company is not wholly owned by a charity or charities, it can deduct a Gift Aid payment in the corporation tax computation only for the accounting period in which the payment was actually made. It is not possible to carry back the deduction into an earlier period, or to carry it forward into a later period.
