TECH 16/14BL: Payments made in excess of profits available for distribution are ‘unlawful’

Following the publication of TECH 16/14BL from the Institute of Chartered Accountants in England and Wales (ICAEW), the Charity Commission has said it will update its CC 35: guidance on charity trading.

In the technical release (TECH 16/14BL), published on 31 October 2014, the ICAEW provides guidance on donations by a company to its parent charity. The ICAEW understood that the position in CC 35 was being questioned and, given the importance of the issue to charitable groups and their advisors and the absence of clear and simple Court precedent, the ICAEW has sought Counsels’ opinion on the matter.

It has long been the situation that a charity has a trading subsidiary set up to handle its commercial operations. TECH 16/14BL looks at 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.

Under guidance note CC35, such payments were not considered as distributions. However, legal advice taken by ICAEW has confirmed that the payments in question are indeed distributions. This now 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’.

The Charity Commission has now withdrawn CC 35 in order to review guidance on this issue.

The ICAEW has said that where the subsidiary company has made unlawful distributions, its parent charity will be liable to repay the excess.

HMRC are currently considering the tax implications of this for charities and their trading subsidiaries and will publish their views in due course.


Hawsons’ Charity and Not-For-Profit Partner, Simon Bladen said: “This guidance has obviously taken a lot of charitable groups by surprise and has challenged what has been the status quo for a number of years. We would encourage people to get in touch with us if they feel this issue affects them.”

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Simon Bladen Partner

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.[/author_info]

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