Profit distribution to charitable parent

It is common practice for a trading subsidiary company to pay their profits to their charitable parent as a donation under gift aid. This is tax efficient for the subsidiary company, as the profits that have been donated are treated as a donation expense and therefore there is no corporation tax due if paid within 9 months of the year-end.

This is an instance of where accounting treatment and tax treatment differs, as (under company law) such payments of profits are treated as a distribution from the subsidiary rather than an expense. The latest Charity SORP Update Bulletin 2 has clarified this treatment.

In the trading subsidiary’s accounts

This should be shown in the statement of changes in equity, rather than as a donation expense. It should also not be accrued, unless a legal obligation exists at the year-end, for example under a deed of covenant.

If there is no legal obligation to make the payment, the distribution should not be recognised until the payment is made.

There may be a requirement to disclose this distribution after the year-end, or you may choose to disclose for clarity.

In the charitable parent’s accounts

The gift aid payment from the subsidiary should be recognised as income when it has entitlement, is measurable and probable. If there is a deed of covenant, this will qualify for recognition at the year-end.

If there is no deed, it may still be possible to recognise the income in the year end accounts, for example if the payment from the subsidiary has been communicated to the charity then a constructive obligation arises. In addition, if it is the usual practice to pay it over, or if the articles require it, then it can also be recognised.

Deed of covenant

This is a legal document and so legal advice should be sought.

I’d welcome any thoughts on the above: jaimieking@whitingsllp.co.uk

Disclaimer - All information in this post was correct at time of writing.