Gift Aid and trading subsidiaries during the pandemic

Many charities will currently be in the process of preparing their accounts for the last financial year, and those with trading subsidiaries will be considering how best to manage their tax position. The usual approach for a subsidiary that has generated profits is to donate that profit to its parent charity, either by gift aid or deed of covenant, which if done within 9 months of the year end can be offset for tax purposes, reducing or even eliminating any corporation tax liability.

The directors of the trading subsidiaries need to be careful though. Whilst the accounts for periods ending before the COVID-19 pandemic took hold may show profits being generated with sufficient cash sitting in the bank, it should not be automatically assumed that these should be passed up to the parent charity. The pandemic may well have had a detrimental impact on the trading subsidiary’s results, placing pressure on its financial position. Directors of the trading subsidiary need to prioritise its solvency and its ability to meet its obligations as they fall due for payment, and this may mean holding back on the payment of the prior year profit to the parent charity. This is certainly true for gift aid donations, which in company law are distributions akin to dividend payments and where the directors have a duty to their company to manage its finances responsibly, and whilst the use of deeds of covenant may appear to place an obligation on the company to pay up its profit there is usually relief from doing so if it would leave the trading subsidiary lacking reserves and in an insolvent position.

This does mean of course that trading subsidiaries may find themselves in the unusual position of having a tax bill. Whilst this will need to be paid, usually 9 months after the company’s year end, it is possible that when the current year’s accounts and tax computations are prepared any losses that have been incurred as a result of the pandemic can be carried back and offset against that tax liability, triggering a repayment.

What is clear is that what is usually a straightforward decision for the directors of trading subsidiaries will require a little more thought this year to ensure that the company’s finances are accounted for appropriately.