9 December 2018
The current situation
A large number of charities operate trading subsidiaries which allow them to operate commercial operations with the intention that any profits are used for the benefit of the charity.
Under UK tax law, such subsidiaries are permitted to pay their profits in full to their charitable parent and thereby ensure that no Corporation tax is payable.
Up until now, it has been acceptable for the subsidiary to ‘accrue’ the gift aid payment within their financial statements at the company’s year-end even though the payment was to be made some time after the year-end.
What has changed?
This area of accounting was reviewed by the Financial Reporting Council in 2017 and an amendment to Financial Reporting Standard 102 was made, which changes how gift aid is accounted for within charities’ commercial subsidiaries.
For accounting periods commencing on or after 1 January 2019, no such gift aid accrual will be permitted. This is because it has been argued that no legal obligation existed at the balance sheet date and, therefore, it would be incorrect to make such an accrual. The gift aid payment can only be accounted for when paid, unless a Deed of Covenant is in place (which creates such a legal obligation). A board decision to pay profits is not considered to create a legal obligation.
This will result in profits being reported within the financial statements of subsidiaries, however, no tax charge need be included as there is a full expectation that no tax will be payable.
What you need to do
The parent charity may, however, be able to accrue the gift aid income at its year-end from their subsidiary as there is a full expectation that there will be such a receipt. Clearly, where this is the case, a consolidation adjustment will need to be made where the charity prepares group financial statements are prepared as a result of this accounting mismatch.
This change takes place for accounting periods commencing 1 January 2019, so essentially for charities with year-end of 31 December 2019 onwards. As this is a change in accounting standard, this is also likely to require a prior year adjustment in the financial statements.
It is important that this change is considered well in advance of your year-end to ensure that you are clear about the accounting implications and ensure that any stakeholders understand these changes.
It is also important to note that charities can still benefit in full from the gift aid tax exemption as the above is only a change in how this area is accounted for.
Can we help?
If you would like to discuss this, or any aspect of your charity’s finances, please contact me or any member of our Charity Sector team here. Alternatively, you can read more about the services we provide to charities here.
