Section I - Using A Trading Company

IV.29 Introduction

IV.29.1 Charities carrying on trades outside the statutory and concessional exemptions usually arrange for the trade 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 tax-free.

IV.29.2 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 donations to charity. By donating all of their taxable profits to charity the company can 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).

IV.29.3 Prior to 1 April 2000, trading companies invariably used profit shedding deeds of covenant to pass all or part of their profits to the charity. There is nothing to prevent a trading company continuing to base the amount of the profits to be transferred on a legally binding agreement, such as a deed of covenant. However, from 1 April 2000, all charitable payments made by a company to a charity will attract tax relief under the Gift Aid scheme.

IV.30 The Gift Aid scheme

IV.30.1 From 1 April 2000, a trading company can pass up the trading profits without deduction of tax to the parent charity under the Gift Aid scheme.

IV.30.2 When deciding how much of their profits to give to charity, companies may need to take account of the following:

  • any limitations imposed by the Insolvency Act 1986 on the amount they can pay out
  • retention of sufficient profits to avoid a cash drain ( see paragraph IV.36)
  • any restrictions imposed by the Memorandum and Articles of Association of the company and any other requirements that may be imposed upon them.

IV.31 Tax relief for payments under the Gift Aid scheme.

IV.31.1 When the 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.

IV.31.2 The company gets tax relief for Gift Aid payments it makes in the form of a deduction in its corporation tax computation.

IV.32 Making the Gift Aid payments

IV.32.1 Prior to 1 April 2000, on making a donation to charity, a company was required to account for an amount of basic rate income tax and pass to the charity the net amount. The company would get tax relief in its corporation tax computation for the gross amount of the donation ( being the net amount paid to the charity plus the basic rate income tax it had accounted for on the payment). The charity would claim the basic rate income tax back from the Inland Revenue and therefore receive the full amount of the profits that the company intended it should receive.

IV.32.2 From 1 April 2000 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. By doing this the charity no longer has to make a claim to the Inland Revenue because the company has not deducted tax from the payment. This applies even if the payment made after 1 April 2000 is to be related back to an accounting period before that date as outlined in paragraphs IV.33 to IV.33.4. Companies will need to ensure that they pay over to the charity the full amount they wish to give, remembering that the charity will not be receiving an additional amount back in tax from the Inland Revenue.

IV.32.3 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.

IV.33 Calculating profits to be passed to the charity

IV.33.1 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. Any profit in the hands of the charity may be taxable as non-exempt trading income.

IV.33.2 See paragraphs IV.25 to IV.26.3 for more information on how to calculate the profits of a trade.

IV.33.3 Gift Aid payments may be made by 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 take place.

IV.33.4 If a company is not wholly owned by a charity 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.