Many charities have subsidiaries which carry out trading activities in order to generate income which can then be applied to further the objects of the parent charity. There are a number of ways in which such income can be paid up to the parent charity and one frequently used route is to make a donation to the charity.

Such donations can attract Gift Aid, and so can be very tax-efficient for both the trading subsidiary (which will see the amount of profit liable to corporation tax reduced accordingly, and possibly eliminated altogether) and the parent (because receipt of such Gift Aid payments will be exempt from corporation tax if applied solely for charitable purposes). Where the parent charity is a trust, this will also apply but in relation to its liability to income tax rather than corporation tax.

The Charity Commission originally supported what was a common practice of trading subsidiaries donating all their taxable profit to the parent organisation. However, in 2014 the Institute of Chartered Accountants in England and Wales (ICAEW) sought advice from counsel on this point, which concluded that:

  1. such payments from subsidiary to parent are a distribution, and
  2. the provisions of the Companies Act 2006 (section 830) prohibit the making of a distribution other than from distributable profits, which may differ from taxable profit (the example often given is different treatment of expenses).

Payment of all taxable profit upwards as a Gift Aid donation could, therefore, be unlawful if the amount of distributable profit were lower. The ICAEW published guidance in this regard in October 2014.[1] The Charity Commission and HMRC only recently (in February and April 2016, respectively) revised their respective guidance to clarify that only distributable profits should be donated to the parent for any accounting period starting on or after 1 April 2015.[2]

It remains to be seen whether HMRC will attempt to take retrospective action to recover tax on Gift Aid claims from previous accounting periods but it would perhaps seem somewhat harsh to do so in light of the fact that charities may well have been making payments which they innocently believed to be condoned by the Charity Commission. What is clear is that all charities with trading subsidiaries should carefully review their position to ensure they are compliant going forwards, and any organisation in doubt should seek professional advice.

By Rachael Taylor

[1] The ICAEW guidance on donations by a company to its parent charity (TECH 16/14BL) is available at

[2] The revised guidance of the Charity Commission “Trustees trading and tax: how charities may lawfully trade (CC35)” is available at, the revised HMRC guidance is available at