Although this practice was endorsed by the Charities Commission, legal advice obtained by the Institute of Chartered Accountants in England and Wales (ICAEW) stated that the payments in question are distributions and, therefore, to the extent that any payment exceeds profits available for distribution, payment of the excess is unlawful. 18 months later, HMRC have published updated guidance on this issue which mirrors the ICAEW’s position.
What does this mean in practice?
- Any Gift Aid payment in excess of the subsidiary’s company profits available for distribution is unlawful. ‘Distributable profits’ is defined in The Companies Act 2006.
- As distributable profits are related to accumulated reserves in the balance sheet, it is acceptable for a subsidiary to make a Gift Aid payment in excess of its annual profit. However tax relief is still restricted to the taxable profits for the accounting period.
- Where the subsidiary company has made unlawful distributions, its parent is statutorily liable to repay the excess. As per the Companies Act 2006 a claim for repayment may be made up to six years from the date when the unlawful distribution was made. If the claim is not made within this time, it becomes time barred.
- The liability arising from the claim in the parent and the corresponding debtor in the subsidiary should be recognised in the accounts of the accounting period when the claim is made.
- In accordance with the new HMRC guidance, the tax treatment for accounting periods commencing on or after 1 April 2015 is as follows: A Gift Aid payment that represents an unlawful distribution is not allowable as a qualifying donation.
- A repayment of a previous unlawful distribution is not taxable
- Repayment of excess distributions can be by direct payment from the parent to the subsidiary or by offsetting a current year distribution legally declared by the subsidiary against the parent’s liability. If the group wishes to clear the parent liability through distribution offset but the subsidiary does not immediately have sufficient distributable profits to clear the whole liability, the company may waive an amount of the repayment debt equal to its profits available for distribution each year and hence progressively waive the debt due.
- For any distribution to qualify for Gift Aid tax relief, that amount must be payment of a sum of money. Therefore any book entry offset of distribution and parent liability will not qualify for tax relief. The distribution must be paid to the charity.
- For any distribution to qualify for Gift Aid tax relief, that payment must not be subject to a condition for repayment or benefit to the subsidiary. Any repayment from the parent should not be planned or timed such that a distribution could be challenged as being part of a repayment or benefit arrangement if Gift Aid tax relief is to be claimed.
- If the parent is unable to repay the excess, the directors of the subsidiary at the time of the distribution may be liable where they are financially able to make up any shortfall. Although unlikely for most subsidiaries, legal advice should be sought if this situation may arise.
If there is any reason to suppose that your situation differs from those provided for illustrative purposes in either HMRC’s guidance or the ICAEW technical release or you wish to discuss the impact of the above, please contact Phil Waller, Russell Fretwell or Jahirrol Alom in the Mazars not-for-profit tax team or your local Mazars tax contact.