Careful when making donations from trading companies to charities

Many charities that I come into contact with use a subsidiary company to carry out their trading activities. This includes charity shops, gift shops within say a museum or other trading that’s done to support the main charity.

donations to parent charitiesThe subsidiary company would then donate their trading profits to the parent charity. This is usually done in such a way as to leave no taxable profits in the subsidiary that would otherwise be subject to corporation tax.

HMRC has for many years accepted these payments as valid charges against profits. But care must be taken to ensure that the sums transferred up to the parent charity are legal under company law.

In law it has been held that these payments are “distributions” made by the subsidiary to the parent. Making sure that the amounts paid don’t exceed the accumulated profits of the subsidiary as shown on its balance sheet.

This can happen if its profits liable to corporation tax are higher than its accounting profits, and there are a number of situations in which this could happen.

If it does happen the ‘distribution’ could be held to be unlawful. This could mean the charity or the directors of the subsidiary having to pay the excess back. Sometimes trading subsidiaries may have to ‘swallow’ a small corporation tax bill to prevent themselves being put in this position.

Basically it means that the trading company and their professional advisors will need to look at the situation carefully before deciding how much should be paid by way of donation to the parent charity.

Tony Kelly Charities Expert


Post by Tony Kelly,

Charities Specialist Partner