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ICAEW publishes TECH 16/14BL Guidance on donations by a company to its parent charity

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03 Nov 2014

The Institute of Chartered Accountants in England and Wales (ICAEW) has today published TECH 16/14BL 'Guidance on donations by a company to its parent charity'. This Technical Release provides clarification of the legal status of payments by trading subsidiaries of charities to the parent charity.

TECH 16/14BL addresses the situation in which a trading subsidiary of a charity donates all of its taxable profits to the parent charity and claims charitable donations relief on this amount. Charities Commission Guidance Note CC 35 (withdrawn in October 2014) gave guidance that such payments were not distributions as defined in the Companies Act 2006. The implication of this was that the amount donated could exceed the amount of profits available for distribution under the Act.

ICAEW became aware that the position set out in CC 35 was being questioned and accordingly sought Counsels' opinion on the matter. The advice received from Counsel is that, contrary to the guidance in CC 35, these payments are distributions under the Act and should have had regard to the amount of distributable profits available to the company. Accordingly, any payments made in excess of distributable profits will have been unlawful.

TECH 16/14BL gives the following guidance on the consequences of this advice:

  • Where an unlawful distribution has been made, the parent charity has a liability to repay such amounts received over the previous six years and the subsidiary company has a corresponding asset. These are not financial assets / liabilities as they arise from the operation of the law and not from a contract. They should be recognised at the full amount due (subject in the case of the asset to write-downs for any irrecoverability).
  • It is reasonable to say that, in order for the recognition of these assets and liabilities to give rise to a prior year error, the parent charity / the company would need to have known at the time that the payment was an unlawful distribution. Accordingly, the liability and asset would usually be recorded by current year entries and not a prior year adjustment.
  • In certain circumstances the subsidiary company may have a legal right to recover unlawful distributions from its directors. However, this right is unlikely to have accounting consequences unless the charity is financially unable to repay the unlawful distributions but the directors are.

As well as setting out these consequences, the TECH also gives some practical remediation steps available to charities and their subsidiaries, as well as steps to take in relation to future payments.

The TECH also notes that HMRC are considering the tax impact of this development for charities and their trading subsidiaries and that guidance on this is expected in due course.

*Update 26 February 2016 - HMRC has now issued specific guidance on the tax treatment.  The revised guidance is available on the HMRC website.  The Charity Commission has also issued revised guidance which is available on the Charity Commission website*

The full text of TECH 16/14BL (revised) is available from the ICAEW website.

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