On 31 October 2014 the ICAEW issued its technical release ‘Guidance on donations by a company to its parent charity’ which considers the accounting implications of legal advice that donations of taxable profits by a subsidiary company to its charitable parent constitute distributions rather than donations.
- donations should be treated as a distribution of reserves in the accounts of the subsidiary rather than as an expense; and more importantly;
- where these distributions exceed available distributable reserves (typically because profits have been gift aided based on taxable profits rather than accounting profits), they are unlawful and the charitable parent is liable to repay the excess to the subsidiary company.
With donations now being recognised as a distribution for accounting purposes but allowed as a donation for tax purposes, there will be a disparity between the tax charge in the accounts and the accounting profit which needs to be reconciled via a note in the trading company financial statements. It is expected that HMRC will publish their guidance on the tax impact very shortly.
Please contact Heather Wheelhouse or Nick Sladden if you want to discuss how this change will impact your school.