Donations by a Trading Subsidiary to its Parent Charity

Many charities own subsidiary companies through which they carry out trading activity for profit. In the past it was established practice for wholly owned subsidiaries to donate some or all of their taxable profits to the parent charity each year. In October 2014 the Institute of Chartered Accountants in England and Wales (ICAEW) issued technical guidance on the legal status of such donations which concludes that they are a distribution by the subsidiary under company law. The difference is that, under company law, a distribution can only be made from profits available for distribution (based on accounting profits) which may be different to the taxable profits which have often been donated to the parent charity. To the extent that any payment exceeds profits available for distribution, payment of the excess, over the previous six years, was unlawful. This was a significant change in the accounting treatment of Gift Aid donations.

In February and March 2016 the Charity Commission, HMRC, and the ICAEW itself have issued further guidance and comment on the matter which clarifies the legal principles, and the tax and accounting treatments that result.

Charity Commission

The Commission has published a new version of CC35 – Trustees, trading and tax. The main change is the insertion of a new section 4.5: “Can trustees expect their charity’s wholly-owned trading subsidiary to always Gift Aid all the profits shown in the profit and loss account to its parent charity?”

The Commission has also issued a “regulatory alert” about charities’ commercial partnerships and arrangements with their trading subsidiaries.


HMRC’s guidance for charities “Annex IV Trading and business activities – basic principles” has also been updated at sections 45 and 47 to make clear that any donation payment made by a subsidiary company to its parent charity which exceeds the subsidiary’s profits available for distribution is unlawful under the Companies Act 2006.

A consequence of this is that where the taxable profits are greater than its distributable profits the trading sub may have a tax liability.


The Institute of Chartered Accountants in England and Wales has published an updated version of their original guidance (Tech 16/14BL revised) which outlines potential ways of addressing the resulting accounting issues. It is important to note that HMRC expect this guidance to be followed by all charities and their wholly owned subsidiaries for accounting period beginning on or after 1 April 2015, so March 2016 year ends for many charities.

If you have a query about donations by a company to its parent charity, please contact Euan Morrison at or call 0131 558 5800.