Companies (and unincorporated associations) can claim tax relief for qualifying donations paid to charities (bodies or trusts accepted as charities for UK tax purposes). 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.
Gift Aid donations made to charities by companies are paid gross and so, unlike the individual Gift Aid scheme, no tax is repayable to charities. For the charity the donation is treated as potentially taxable income, but is exempt from tax provided the donation is applied for charitable purposes.
Charities receiving Gift Aid donations from companies should keep sufficient accounting records of such donations received, so that they can identify these in their accounts and tax return.
When a company makes a qualifying donation to a charity, the amount paid can be set against profits for Corporation Tax purposes. 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.
Charitable donations cannot be used to create or add to a company’s trading losses, nor can excess charitable donations be carried forward or back although they may be surrendered as group relief.
The donor company should keep normal accounting records to support entries on its CTSA return along with any other relevant documentation for example, correspondence with the charity in relation to the donation such as a ‘thank you’ letter.
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 charities because Gift Aid donations are only deductible against Corporation Tax profits.
Gift Aid relief for donations made by companies only applies to payments which are ‘qualifying charitable donations’. A qualifying charitable donation is a donation to a charity consisting of a payment of a sum of money, subject to the restrictions outlined below.
There are certain restrictions on what constitutes a qualifying charitable 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 is not a qualifying donation if:
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 in the section ‘donor benefits’.
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.
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').
When a charity owned company makes such a payment it may not be treated as a distribution of profit, but as a qualifying charitable donation under the company Gift Aid rules.
Company dividends are not included in this treatment. Dividends are still treated as distributions of the taxed profits of the company and do not reduce the company's tax liability.
Before 1 April 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.
From 1 April 2006 the rules 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.
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 3.16
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 pay the amount they want to donate to the charity as a qualifying charitable donation.
As long as the 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 earlier 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 and so enable it to pay the parent charity an amount equal to its entire profit and hence reduce its Corporation Tax liability to nil.
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 - the claim can be made in the Corporation Tax return (an amended return if applicable) for the accounting period to which the payment was carried back.
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.
The nine-month carry-back 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 for example, through an intermediate company.
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:
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 association of a company limited by guarantee will normally indicate whether the company meets the conditions outlined above.
Sometimes, charity-owned companies will estimate their expected Corporation Tax profits and make a qualifying donation based on that estimate. Where a charity-owned company makes an estimated qualifying charitable donation to its parent charity to extinguish any Corporation Tax liability which proves to be excessive and so is partly repaid by the charity, the original payment will not be regarded as being made with ‘a condition as to repayment’ and the amount repaid will not be treated as non-charitable expenditure by the charity provided:
The extension of Gift Aid treatment does not apply to companies which are only partly owned by a charity, for example, ‘joint venture’ companies: jointly owned by a charity (or charities) and other companies not wholly-owned by a charity or charities. These companies can still make donations to charities, and obtain Gift Aid relief. However, the normal Corporation Tax rules apply, including the restrictions in paragraph 3.13.2 and such companies may only claim a deduction for a charitable donation in their Corporation Tax computations for the accounting period during which the donation is actually paid to the charity.
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 (that is, as a charge on income). Factors that HM Revenue & Customs 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 (for example, 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).