New guidance on donations by a company to its parent charity


Filed Under: AIM-listed

The Institute of Chartered Accountants in England and Wales (“ICAEW”) has recently issued a new technical release (TEC 16/14 BL) giving guidance on donations by a company to its parent charity. The technical release clarifies the accounting implications and legal status of profits donated "by a trading subsidiary to its parent charity".

Many charities own subsidiary trading companies through which they carry out secondary purpose trading activities at a profit. The trading subsidiary is used so as to not prejudice the tax status of the parent charity. The taxable profits are usually donated by the subsidiary to the parent thereby reducing its taxable profits to nil and allowing the profits to flow up to the parent charity free of tax.

The Charity Commission’s old guidance note CC35 gave guidance that such payments were not "a distribution" as defined by the Companies Act 2006, but expenditure. The implication of this guidance was that the amounts donated could and often did exceed the amount of profits available for distribution under
the Act.


The ICAEW became aware that this position was being questioned and given the importance of this issue to charities, sought counsel’s opinion on the matter. The legal advice received is contrary to the guidance in CC35 which is that payments are in fact distributions under the Companies Act 2006 and therefore subsidiary companies should have regard to the amount of distributable profits available. As a consequence, any payments made in excess of distributable profits will be regarded as unlawful.

The implications are that:

  • Such donations should be treated as a dividend in the accounts of the subsidiary and where this exceeds distributable profits available are unlawful. The charitable parent is liable to repay the excess to the subsidiary.
  • There will now be a disparity between tax charge in the accounts of the subsidiary and the accounting profit which will need to be explained in the tax reconciliation notes. 
  • In addition, subsidiaries should consider whether a liability exists for the distribution to be paid at the balance sheet date. A constructive obligation (based on past practice) will no longer be recognised since the payment is a distribution rather than an expense. Therefore, a trading subsidiary will need to formally approve the distribution before the end of the financial year in the same way that dividends are approved to shareholders.


It should be noted that there are no changes to the tax relief on gift aid donations paid within nine months of the year end.


We recommend that legal advice be sought for your charity and its subsidiary companies if it is identified that distributions have been made unlawfully.


The Charity Commission and HMRC are reviewing their own guidance in light of the ICAEW’s findings.

For more information, please contact Mark Hart or your usual Blick Rothenberg contact.