A guide to third sector trading - WCVA

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It’s an idea, but is it business? A guide to third sector trading 1: Getting started 2: First steps 3: Business planning 4: Legal and governance 5: Funding and resourcing 6: Financial controls 7: Managing growth 8: Management and governance 9: Social enterprise 10: Sources of support Donations which do not qualify: • A payment will not be treated as a qualifying donation for Gift Aid if: − it is a distribution of profit to shareholders − the company or a connected person (eg a close relative of a director) receives a benefit which exceeds the ‘relevant value’ in relation to the payment, as defined by HMRC (see ‘donor benefits’ below) − it is made subject to repayment conditions − it is part of an arrangement involving the charity acquiring property (other than as a gift) from the company or a connected person − it is made by a charity. • Donor benefits: There are complex HMRC regulations which limit the benefit that a company donor can receive as a result of a Gift Aid donation to a charity. In a few rare cases Gift Aid donations by a subsidiary company could bring benefits to the company or its directors – for example when donations are received from an enterprise’s commercial sponsors who may hope for advertising benefits or complimentary tickets to events. Companies owned by charities Arrangements for companies wholly owned by charities: • Gift Aid donations versus profit distribution. − Gift Aid reduces the profits of the donor – which is why corporation tax is not paid on it. − But payments of company dividends are still treated as distributions of the taxed profits of the trading company. They do not reduce the company’s tax liability. So there is usually no point in using dividend payments as an alternative to Gift Aid. • Jointly owned companies: Companies owned by partnerships of two or more charities (and which distributed their profits according the shareholding of each charity) were treated differently before 1st April 2006. Now payments (other than dividends) may be treated as donations under the Gift Aid scheme. • Gift Aid donations after the end of the financial year: Companies which are wholly owned by one or more charities have nine months from the end of an accounting period in which to determine the amount they want to donate or are obliged to pay to the charity as a qualifying donation. 200
It’s an idea, but is it business? A guide to third sector trading 1: Getting started 2: First steps 3: Business planning 4: Legal and governance 5: Funding and resourcing 6: Financial controls 7: Managing growth 8: Management and governance 9: Social enterprise 10: Sources of support − As long as that payment is made to the parent charity within nine months of the end of a particular accounting period, the company can treat the donation as paid in that accounting period (rather than the current year). − This gives a charity-owned company time to calculate its profits precisely, so that it can donate its entire profit, and reduce its corporation tax liability to nil. − If a charity-owned company makes Gift Aid donations of less than the full amount of the corporation tax profit within ninemonths of the end of an accounting period, it cannot claim further tax relief on any remaining profit which it donates later. • This nine-month ‘carry-back’ facility applies only to companies which are wholly owned by one or more charities. This covers: − subsidiary companies limited by shares where all the ordinary share capital is owned by charities (or by a company owned by a charity) − companies limited by guarantee owned by charities – ie where their memorandum and articles make it clear that their beneficiaries are charities or subsidiaries of charities. • Estimated donations: There is a risk of tax complications if estimated profits are donated to a charity and they turn out later to exceed the actual profit. The original donation must be properly recorded by both the company and the charity. Check the implications with HMRC guidance or your accountant. Private sector partnerships: Companies which are owned jointly by a charity and a separate private company are subject to different rules. Joint ventures are complicated arrangements where mistakes in taxation planning could be costly and even divisive. It is assumed that trading ventures of this complexity will be subject to professional guidance on taxation arrangements even before they are set up. But you should be aware that: • In practice a donation to the charity which is proportionate to the charity’s shareholding will be treated as profit distribution and not eligible for tax relief under Gift Aid. • Such companies are still able to make Gift Aid donations provided they are not linked to shareholding. Further information: For further information and guidance on how to deal with more complex issues check the HM Revenue and Customs web site www.hmrc.gov.uk/charities. 201
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