Charities carrying out trading to which the statutory tax exemptions do not apply may arrange for a trading activity to be carried on by a wholly owned subsidiary trading company. Using this approach it is possible for some or all of the subsidiary company’s trading profits to be passed to the charity using the company Gift Aid scheme.
Companies owned by charities are liable to pay tax on trading profits in the same way as other non-charitable 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 outlined at section 191 CTA 2010 and subsequent sections, 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 corporation tax will be payable.
In the hands of the charity the donation is not trading income. The donation is taxable as income but is exempt from tax provided it is applied for charitable purposes (section 473(1) CTA 2010 and section 522 ITA 2007 refer).
It is important to remember that a charity's trading subsidiary company is not a charity. For VAT purposes a trading subsidiary is treated in the same way as a normal commercial enterprise. Most of the VAT reliefs for charities are not available to their trading subsidiaries. However, some VAT relief, such as zero-rating the sale of donated goods and the VAT exemption for certain fund-raising events, do extend to charities' trading subsidiaries.
Read more about trading subsidiaries and the sale of donated goods in paragraphs
2.3 and 5.5 of VAT Notice 701/1 Charities
Find out about when supplies at fundraising events can be exempt from VAT in 'How VAT applies to fundraising events'.
A trading company can pass up its trading profits to the parent charity using company Gift Aid. 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 will need to take account of the following:
In general, a company can only deduct a company Gift Aid donation (a charitable deduction) from its profits for the accounting period in which the monetary donation is actually made. It is not possible to carry back the deduction into an earlier period or to carry it forward into a later period.
However, where a company is wholly owned by one or more charities, it can make a claim to have the charitable deduction set against its profits of the earlier accounting period provided:
A company gets tax relief for the Gift Aid payments it makes in the form of a charitable deduction from its profit in its corporation tax computation, by making appropriate entries on its corporation tax return
A company makes the donation gross to a charity (that is, unlike for individual gift Aid, without deducting basic rate income tax). It gets relief for the actual monetary payment it makes to a charity. There is no certificate or declaration for the company to give to the charity but the company will need to retain normal accounting records and copies of any correspondence to support its claim for relief.
If a charity's premises, staff and services are shared with its 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 paragraphs 36-39 ' Calculating the profits of the trade'.
Gift Aid payments must 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.