It is fairly common practice for charities of a certain size to have a profit-making subsidiary, for parts of the operation that are not purely charitable in purpose but which contribute to the charity. Recently there has been a U-turn in the Charity Commission guidance to charities about the extent to which those trading subsidiaries can make payments up to the parent so as to maximise use of tax relief in the subsidiary. See for example the report below in "Civil Society.co.uk". It has now been confirmed that such payments are subject to the usual rules on companies only being able to make distributions to the shareholders to the extent of their "distributable reserves", broadly equivalent to the retained profit in the company. Many charities have previously been encouraged to think that these rules did not apply to them in the same way as other companies. Now that has been found to be wrong. It will require significant examination and potentially expensive reorganisation of the finances of some charities in order to deal with problems arising from this finding. There are ways of unpicking problems caused by this but depending on the exact circumstances, it may not be easy. It is difficult to see how the Charity Commission (with HMRC sanction, it is suggested) has got this so wrong before though.
The Charity Commission has said it will update its guidance on charity trading... following a technical report from the ICAEW to say that a distribution cannot be made from a trading subsidiary’s reserves for the purpose of a gift aided distribution to a parent charity. The ICAEW...said that in the absence of a clear and simple court precedent and the importance of the issue to charities, it has sought counsels’ opinion on the matter. It said that the legal advice confirmed that the payments are distributions, and therefore “to the extent that any payment exceeded profits available for distribution, payment of the excess was unlawful”. The guidance, was a response to the question “Can a trading subsidiary pay more to its parent charity in gift aid than the level of trading profits (in accounting terms) which it has earned?”