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There is a lot happening with Gift Aid at the moment and it is important that charities keep on top of the issue.

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Update to CC35: Trading arms cannot make gift aid donations from reserves to parent charities

It has long been the situation that companies that are wholly-owned trading subsidiaries of charities donate all taxable profits to the parent charity and claim charitable donation relief but, following a technical report issued by the ICAEW, this guidance is now being reviewed.

When the ICAEW technical report – TECH 16/14BL – was first released in November 2014 we commented that the new guidance had taken a lot of charitable groups by surprise and raised more questions than it answered. A year on from the initial publication and many charitable groups are still unsure where they stand with regard to payments of gift aid from charity trading arms to the parent charity.

TECH 16/14BL attempts to clarify this accounting position

TECH 16/14BL attempts to clarify the situation and the accounting implications when a trading subsidiary of a charity donates all of its taxable profits to the parent charity and claims charitable donations relief on this amount.

Under the Charity Commission’s guidance note CC35 (which was withdrawn in October 2014) such payments were not considered as distributions. Following concerns raised over the guidance, however, the ICAEW set out to review CC35.

Given the significance of this guidance to charities, the ICAEW sought legal advice on the matter. Following that advice the ICAEW confirmed that the payments in question are, in contrast to the regulators guidance note CC35, distributions. This being the case, these distributions can only be paid out of distributable reserves and therefore any payments made in excess of profits available for distribution are unlawful.

Do charities need to take action?

Simon Bladen, Charity Partner at Hawsons, commented: “This guidance has challenged what has been the status quo for many years and, even a year on from its release, it has left many charities in limbo. The key point to understand from the withdrawal of guidance note CC35 is that any wholly-owned trading subsidiaries of charities that donate all taxable profits to the parent charity and to claim charitable donation relief will be in breach of company law under the Companies Act 2006.”

“Charitable groups should consider whether donations from the charity’s trading arms to the parent charity were given in a year in which they may have been in excess of distributable profits. If you are unsure of your position you should seek professional advice.”

More from our charity experts

You can find all of our latest charity sector news and newsletters here.

If you are looking for advice in a particular area, please get in touch with your usual Hawsons contact.

Alternatively, we offer all new clients a free initial meeting to have a discussion about their own personal circumstances – find out more or book your free initial meeting here. We have offices in Sheffield, Doncaster and Northampton.

Simon Bladen is the partner responsible for looking after the firm’s legal clients and has worked at Hawsons throughout his career. For more information or advice on anything covered in this article, please contact Simon on [email protected] or 0114 226 7141.

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