Gift Aid for Companies and Wholly Owned Subsidiaries

Donations Made By Companies to Charities

A company that produces profits will be subject to Corporation Tax. However the company can enjoy the benefits of corporation tax relief on a donation made to a charity.

If a company decides to give money to a charity it simply makes a payment to that charity. The donation will be treated as a non-trade charge. No tax is deducted from the payment and the company does not have to make a Gift Aid Declaration to the charity. The charity will consequently not have to make a Gift Aid tax repayment claim because no tax has been paid on the payment.

In order to obtain the corporation tax relief the company will then deduct the amount of the donation from the total profits for that accounting year prior to the calculation of corporation tax. The claim will be made in the Corporation Tax Self Assessment Return (CTSA).

The company should keep normal accounting records to support its claim for relief in the CTSA. Any other relevant correspondence should be retained by the company such as a thank-you letter from the charity for the donation.

The donations cannot be carried over into another accounting period in-order to reduce the taxable profit for that year.

Example:

Company A makes a donation of £20,000 to Charity B. Company A makes a total profit for the year of £300,000. The £20,000 donation is deducted from the £300,000 profits to leave £280,000. The corporation tax payable by the company is calculated against the £280,000 figure, not the total profits of £300,000.

A qualifying Donation:

A company may claim tax relief on any donation so long as it is a ‘qualifying’ payment. A distribution of profit such as a dividend will not qualify as a donation for the purpose of tax relief.

Other non-qualifying Gifts:

-Gifts that are subject to a condition such as repayment
-Gifts which are associated with or conditional upon the charity’s acquisition of any property from the donor or any person connected to the company (except by way of Gift)
-Gifts where the company or a person connected to the company has received a benefit over a certain value in return.

The benefits which a donor may receive in return for a donation are restricted as follows:

-for donations of £0-100: 25% of the donation
-for donations of £101-1000: £25
-for donations above £1000: 5% of the donation
-for donations above £10,000: £500

Example:

Company A makes a donation of £950 to Charity B. As a thank-you gesture Charity B decides to make a gift to the company. In order for the original donation to remain as a qualifying gift the charity’s own gift to the company must not value more than £25.

A company wholly owned by a Charity:

Many charities now establish subsidiaries companies to carry out trading activities. These non-charitable subsidiaries will of course be liable to corporation tax on their profits. However these companies can make payments to the parent charity equivalent to some or all of its taxable profits.

The payment will be treated as a non-trade charge and will be deducted from the subsidiaries taxable profits. Dividends paid to the charity will still be viewed as a distribution of profits and therefore will not qualify as a donation for the purposes of tax relief.

Normally a company cannot carry any donation into another accounting period but special rules apply for companies owned wholly by a charity. A wholly owned subsidiary has nine months from the end of the relevant accounting period in which to make a donation. Therefore if the payment is made within nine months of the particular accounting period it can choose to treat it as if was paid in that earlier accounting period

For Example:

The accounting period ends in April 2010. The subsidiary can make the donation up to nine months after the April 2010 date and it will still be considered as having been made in the April 2009/2010 year.

Deferring the payment can assist in the cash flow of the company as subsidiaries will often want to make payment of their entire profits. The timing of the Gift Aid payments is primarily a matter for the directors of the subsidiary.

A company partly owned by a Charity:

A charity can establish a ‘joint venture’ company with another company which will be jointly owned by the two entities. Joint ventures can make Gift Aid donations and claim tax relief. However unlike companies wholly owned by a charity the joint venture does not enjoy the nine month rule. The tax relief must be claimed for the accounting period during which the payment was made.

Any payment made by the joint venture to the charity in its capacity as a shareholder will not be viewed as a qualifying donation by HMRC. Whether the payment is classed as a distribution of profits with respect to shares will depend on underlying nature of the payment.

If the payment was made in direct relation to the shareholding of the charity then this would not qualify for Gift Aid purposes.

For example:

The joint venture makes a profit of £400,000. The charity owns 50% of the venture. If 50% of the profits are donated to the charity this could be well viewed by HMRC as a distribution of profits with no subsequent tax relief for the joint venture.

Sources

See HMRC website for detailed guidance on this matter.

The Fit and Proper Persons Test

The newly introduced 'Fit and Proper Persons Test' has created an uproar within the UK charity Sector. The test, which scrutinises the suitability of directors/trustees has come in for scathing criticism. Many charities are understandably worried that they may be caught out by the new scheme and consequently lose their charitable tax status.

The HMRC have gone some way to allaying these concerns by publishing a Questions and Answers guide. The guide stresses that a charity will not automatically lose their charitable tax reliefs if one or more trustees/directors fail the 'fit and proper' test. The HMRC will work with charities to mitigate against such penalties arising.

The Guidance goes on to say that the HMRC approach will depend upon the individual circumstances in each case. It would be hoped that such flexibility would mitigate against the otherwise draconian measures introduced for any failings. Of course on the flip side such an individualistic approach may leave charities with little idea as to what may happen to their status right up until the HMRC makes its decision.

Social Franchise Agreements- key issues

Social Franchise Agreements

Key Points:

A Franchise is only as good as the agreement underpinning it. It is essential that the franchise agreement be drafted in a thorough and robust way. It must cover all of the relevant issues and perhaps, even more importantly, all the possible eventualities.

What Should the Agreement Include?

The number of issues that must be covered is quite exhaustive but some of the key points can be summarised as follows:

1. The Grant: Will be found at the beginning of the agreement and in effect allows the franchisee to operate the business and use the intellectual property of the franchisor in a specific area. From the grant everything else flows.

1. Fees: The fees will likely include an initial set fee as payment for support during the start-up phase and also an ongoing fee which may be fixed or based on a % of revenue/profits. There may also be an annual fee to cover any advertising done by the franchisor on behalf of the franchise at large.

2.The Term: How long will the franchise last? Generally the agreement will be for a 5 or 10 year period. At the end of term the agreement should contain rights of renewal which will allow the franchise to continue unless a major breach of the agreement has occurred.

3. Exclusivity: A franchisee will want to know that they have exclusive rights to the franchise in a particular geographical area. If you set up a fast food franchise the last thing you want to see is another franchisee setting up just down the street.

4. Franchisors obligations: Can be divided up into the initial obligations such as start-up advice and training and the on-going obligations which will include the parting of general know how, advising on on advertising and the continued training of staff as and when required etc.

5. Franchisees obligations: The franchisee will be expected to meet its numerous obligations. They will include adhering to the franchise system, protecting the brand and maintaining standards etc.

6. Intellectual property: The intellectual property of the franchise will include:
-the business name
-the goodwill generated by the franchise
-the copyright of all manuals, websites, promotional materials, software and all other confidential information.
-the trademarks of the business

The franchisor should ensure that the agreement ensures the protection of all of the above.

7. Right to sell: The franchisee will of course want the right to sell on the franchise. From the franchisors perspective, they will want any agreement to give them a veto over any sale if they do not feel that the buyer meets the required standards.

8. Right to Intervene/Terminate: The franchisor may wish to intervene in a more direct fashion if the franchisee is not meeting required operational standards or they may simply wish to terminate the agreement due to major breaches of the agreement.

Useful Resources

For a number of interesting articles on social franchising/replication see the work carried out by UnltdVentures on the Unltd website

Northern Ireland Assembly debate on Credit Union Reform

Fresh concerns have been raised about yet more delays to the proposed legislative reform of credit unions in Northern Ireland. The Assembly heard of the possible difficulties that may arise as the consequence of an incoming Conservative Government which has stated its intention to abolish the Financial Services Authority (FSA).

The proposed reforms for Northern Ireland are based on the proviso that Credit Unions here are to to be placed under the regulation of the FSA. This in turn would allow credit unions to drastically expand the services they can offer to their members and it would also afford greater protection for those members' savings (an issue highlighted all too starkly by the Presbyterian Mutual Society collapse).

Obviously any abolition of the authority would throw these proposals into limbo.

The Minister did stress that she would press both the Treasury and the new Secretary of State on the reforms.

Co-operatives & Community Interest Companies

Community Interest Companies have generally been structured as Companies Limited by Guarantee or by Shares. However Co-operatives UK have now created a Co-operative template for those wishing to set up a CIC but who do not want to go down the traditional company route.

This once again highlights the evolving nature of the CIC structure.

Examples of Co-operative community interest companies include:

Rygbi Gogledd Cymru

Upstart

Charitable Incoporated Organisation (CIO)

The new CIO legal structure is facing yet more delays, with its introduction now pushed back until the end of the year or possibly the beginning of 2011.

This will be of great disappointment to the many organisations that are eagerly awaiting the arrival of this new structure as a much needed alternative to the current legal vehicles employed by charities.

Many charities, particularly those small in size, will be constituted as either unincorporated associations or trusts. Although flexible and relatively straightforward they do not protect trustees from liabilities arising from the organisations operations. With no separate legal personality, trustees face serious personal risks if litigation were to arise.

In the past charities have often incorporated as Companies Limited by Guarantee as a way of avoiding liability. However incorporation in this form is not really suitable for small charities given the regulation and accounting requirements governing such forms. As an added headache, such legal forms suffer from the regulation requirements of both the newly formed NI Charity Commission and Company House. Many charities can as a consequence become suffocated by a mountain of red-tape.

The Government placed the two key tenets of unlimited liability and dual regulation at the forefront of their policy objectives underpinning the new CIO. The structure was designed to provide charities with a separate corporate personality (and thus reduced personal liability) and also end the dual regulation requirements.

Whilst the structure does appear to offer very real benefits to charities, its true worth will not be established until the final corresponding regulations governing the structure are published by the Government (Don't hold your breath).

Charity Commission (Northern Ireland) Timeline

The Charity Commission (NI) has announced its timeline for the introduction of a charity register. It is hoped that new charities will begin registering from the end of June and that charities currently registered with the HMRC will register later in the year (with the largest going first).