Section C: Gift Aid for companies

Contents

3.17 Introduction

3.17.1

Companies (and unincorporated associations) can claim tax relief for qualifying donations to UK charities. Generally, relief for Gift Aid donations is available in the accounting period during which the donation is made, but there are special rules for companies wholly owned by charities.

3.17.2

Gift Aid donations made to UK charities by companies are paid gross. For the charity the donation is treated as an annual payment for which an exemption from tax can be claimed. If a company deducts tax from a donation incorrectly, the charity cannot reclaim the tax from HMRC but must recover the shortfall from the donor.

3.17.3

Charities receiving Gift Aid donations from companies should keep normal accounting records of donations received, for inclusion in their accounts and tax return, as annual payments.

3.17.4

The rules for company donations to charity were different for donations made before 1 April 2000; advice on the taxation treatment of payments made and received before that date can be obtained from HMRC Charities if needed.

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3.18 Tax treatment of companies making Gift Aid donations to UK charities

3.18.1

When a company makes a qualifying donation to a charity, the amount paid is treated as a ‘charge on income’. The company can make a claim in its corporation tax self assessment (CTSA) return to set the amount of the donation against its taxable profits, to the extent that it reduces the chargeable profit to nil.

3.18.2

Charitable donations cannot be used to create or augment a company’s trading losses, nor can excess charges on income be carried forward or back although they may be surrendered as group relief. Excess charges that cannot be surrendered won’t therefore be tax effective.

3.18.3

The donor company should keep normal accounting records to support entries on its CTSA return along with any other relevant documentation e.g. correspondence with the charity in relation to the donation such as a ‘thank you’ letter.

3.18.4

Non-resident companies within the UK corporation tax regime can also make Gift Aid donations; this will generally apply to companies trading in the UK through a branch or agency. Non-resident companies that are only chargeable to UK income tax in respect of income arising in the UK cannot get Gift Aid relief on donations to UK charities.

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3.19 Qualifying donations and restrictions on Gift Aid treatment

3.19.1

Gift Aid relief for donations made by companies only applies to payments which are ‘qualifying donations’. A qualifying donation is a payment of a sum of money which is not a distribution of profit. For more information about distributions of profit see paragraph 3.22.2.

3.19.2

There are certain restrictions on what constitutes a qualifying donation and therefore the availability of Gift Aid relief for companies. For donations made before 1 April 2006 these restrictions applied to close companies only. For donations on or after that date they apply to all companies.

A payment will not be a qualifying donation if:

  • It is made subject to a condition as to repayment, or
  • the company or a connected person receives a benefit which exceeds the relevant value in relation to the payment
  • it is conditional on or part of an arrangement involving the charity acquiring property (other than as a gift) from the company or a connected person
  • it is made by a charity

Detailed guidance about the restriction relating to benefits received by a donor company, including definitions of “connected persons”; and the “relevant value” test can be found at paragraph 3.25 donor benefits.

Example:

  • On 1 June 2007 ABC Retailing donates £1250 to a museum which is a charity,
  • As a consequence of the donation its four directors receive free entry to an event at the museum, worth £20 each. The benefit to the company is£80 (4 x £20).
  • The amount of benefit is greater than the relevant value, which (in this case 5% of the donation, i.e. £62.50).
  • The donation cannot therefore be treated as a ‘qualifying donation’ for Gift Aid.

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3.20 Companies wholly owned by a charity

3.20.1

Charities often set up wholly owned subsidiary companies to carry out trading activities that fall outside the tax exemptions available to them. For example a charity may set up a wholly owned subsidiary to operate a retail trade through a network of charity shops.

3.20.2

These companies often enter into a Gift Aid arrangement with their parent charity, under which they agree or contract to pay to the charity a sum of money equivalent to some or all of their taxable profits, (sometimes referred to as 'profit shedding').

3.20.3

When a charity owned company makes such a payment it is not treated as a distribution of profit, but as a qualifying donation, under the company Gift Aid rules and is relievable as a charge on income.

3.20.4

Company dividends are not included in this treatment. They are still treated as distributions of the taxed profits of the company and do not therefore reduce the company's tax liability.

3.20.5

Before April 1 2006 only companies wholly owned by a single charity could use Gift Aid donations to 'profit-shed' in this way. Companies owned by two or more charities, which made donations in proportion to each charity’s shareholding, were treated as making distributions of profit. As distributions don’t reduce a company’s taxable profit, the subsidiary company was liable to pay corporation tax on the profit out of which the distribution was made.

3.20.6

From 1 April 2006 the rules have changed so that payments (other than dividends) made to shareholders by a company which is wholly owned by two or more charities are no longer automatically treated as a distribution of profit to those charities.

3.20.7

In practice, a charity owned company may pay a dividend to its shareholder(s), instead of, or in addition to making a Gift Aid donation. However, payments other than dividends made in proportion to shareholdings, by a company that is jointly owned by two or more charities will not be automatically treated as distributions and may be treated as Gift Aid donations. Alternatively, if a company which is only partly owned by a charity makes a donation in proportion to shareholdings (including, but not limited to, dividends) the payment will be treated as a distribution – for detailed guidance see paragraph 3.22.2.

3.20.8

Companies which are wholly owned by a charity (or from 1 April 2006 one or more charities) have nine months from the end of an accounting period in which to determine the amount they want to donate or are obliged to pay to the charity as a qualifying donation.

3.20.9

As long as that payment is made to the parent charity within nine months of the end of a particular accounting period, the company can elect to treat the donation as paid in that accounting period. Rather than getting the tax relief for the accounting period during which it is actually paid. This allows a charity owned company sufficient time to determine its precise corporation tax profits; to enable it to pay the parent charity an amount equal to its entire profit; and so reduce its corporation tax liability to nil.

3.20.10

A charity owned company wishing to take advantage of this nine month extension must make a claim to have the donation treated as paid in an earlier accounting period, within two years of the end of the accounting period during which the donation is actually paid.

3.20.11

If a charity owned company makes Gift Aid donations of less than the full amount of the corporation tax profit, within nine-months of the end of an accounting period, no further relief can be given for any remaining profit subsequently paid to the charity outside the nine month period.

Example:

  • The shares in A Enterprises Ltd are all owned by Charity A. The company’s accounting period ends on the 31 December.
  • Corporation tax profit for the accounting period ended 31 December 2007 is £17,000.
  • On 1 August 2008 A Enterprises ltd makes a Gift Aid donation of £17,000 to Charity A (i.e. within nine months of the end of the accounting period).
  • On 1 December 2009 the A Enterprises ltd makes a claim for that donation to be treated as if it was paid during the year ended 31 December 2007.
  • As the claim is made before 31 December 2010 (i.e. within two years of the end of the accounting period during which the payment is made), the donation can be deducted, as a charge in the corporation tax computations for the accounting period ended 31 December 2007.

3.20.12

The nine-month carry-back facility only applies to companies that are wholly owned by a charity (or from 1 April 2006 one or more charities). In the case of a company limited by share capital, this means that all the ordinary share capital must be owned by one charity (or from 1 April 2006 one or more charities). The share capital can be owned directly or indirectly e.g. through an intermediate company.

3.20.13

However, charity owned companies are not confined to those limited by share capital. Often companies, controlled by charities, are limited by guarantee. This type of company is also included in the nine-month carry-back provisions as long as every person who is beneficially entitled to:

  • participate in the company's profits, or
  • share in the net assets at a winding-up

is a charity or a company wholly owned by a charity (or after 1 April 2006 a company wholly owned by one or more charities). The Memorandum and Articles of a company limited by guarantee will normally indicate if the company meets the conditions outlined above.

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3.21 Estimated donations

Introduction

Sometimes, charity owned companies will estimate their expected corporation tax profits and make a qualifying donation based on that estimate. HMRC Charities will expect to see an amount deducted in the charity-owned company's accounts and a matching entry in the charity's accounts.

Where a charity-owned company makes an estimated donation to its parent charity, to extinguish any corporation tax liability and this proves to be excessive and so is partly repaid by the charity, HMRC Charities will expect to see some evidence (e.g. correspondence; Board minutes; or profit shedding deed*) that the intention was to pay over only the taxable profits and that any money paid over was clearly provisional or loaned until the profits were finalised. If there is a need for a charity to repay part of such a donation, HMRC Charities would look for evidence about the purpose of the payment by the charity to the company. If there is otherwise no legal basis for a charity repaying an ‘excess’ of a donation, then the excess repaid will be non-charitable expenditure and will have tax consequences for the charity.

*deeds of covenant although no longer effective for tax purposes, are still legal documents and are evidence of intention to pay over only the profit for CT purposes.

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3.22 Companies only partly owned by a charity

3.22.1

The extension of Gift Aid treatment does not apply to companies which are only partly owned by a charity e.g. ‘joint venture’ companies: jointly owned by a charity or charities and other companies. These companies can still make donations to charities, and obtain Gift Aid relief as long as those payments are not distributions in respect of shares in the company. However, the normal corporation tax rules apply, and such companies may only claim a deduction, for a charge on income (such as a Gift Aid donation), in their corporation tax computations for the accounting period during which the charge is actually paid.

3.22.2

Whether a payment made by a company to a charity is a distribution in respect of shares is a question of fact. It should also be noted that a ‘distribution in respect of shares’ has a wider meaning than ‘dividend’. Broadly, any payment made by a company to a charity in its capacity as a shareholder is regarded as a distribution in respect of shares in the company, and as such will not qualify as a Gift Aid donation (i.e. as a charge on income). Factors that HMRC would take into account in deciding whether a payment is a distribution, made to a charity in respect of its shareholding, would include evidence from underlying documents (e.g. the company’s minutes of meetings; correspondence between the company and its shareholders; whether payments were made to the non-charity shareholders -and if so when and in what amounts).

Example:

  • A company, A to Z Trading Ltd is jointly owned by a two companies: A Ltd, which owns 60% of the issued share capital and is a trading company, and Z Ltd, which owns 40% of the issued share capital and is a charity.
  • The company made a profit of £75,000 in its accounting period ended 31 March 2007.
  • On 1 October 2007 the company made payments of £30,000 to A Ltd and £20,000 to Z Ltd.
  • The minutes of a directors’ meeting on 30 September 2007 recorded that the directors resolved to distribute current reserves to the shareholders, and the payments made were in direct proportion to the shareholdings.
  • These payments are distributions of profit, so the £20,000 paid to Z Ltd would not qualify as a Gift Aid donation.
  • On 1 November 2007 the company made a payment of £15,000 to Z Ltd, in response to a public appeal by that charity.
  • This payment would be accepted as a qualifying donation for Gift Aid purposes.