The Financial Reporting Council (FRC) has recently issued changes to FRS 102 that willhave significant consequences for charities with trading subsidiaries. It’s going to affect how these charities account for gift aid payments.
Why the changes?
There’s been previous discussions on the treatment of gift aid following the publication of an ICAEW technical paper. The paper concluded that gift aid payments were in fact distributions of profit. And on this basis, it was determined that gift aid payments could not exceed taxable reserves, causing particular problems for those subsidiaries whose accounting and tax profits differed.
Following this interpretation by the ICAEW, it wasn’t clear whether gift aid payments could continue to be accrued on the basis they were constructive obligations (as had often been the case) because profit distributions, such as dividends, can only be accrued where there is a legal obligation.
So, to standardise treatment across the sector, the FRC have published FRED 68. It clarifies that gift aid payments are indeed distributions and must be accounted for as such.
When will it happen?
The amendments are effective for periods commencing on or after 1 January 2019.So, the first accounts affected will be those with a 31 December 2019 year end.
What you can do?
Put clauses in your memorandumand articles – Some trading subsidiaries have clauses in their memorandum and articles stipulating the payment of taxable profits to their parent charity. There is still some difference of opinion as to whether this creates a sufficient legal obligation.
Create a legally binding agreement – A legally binding agreement, such as a deed of covenant, can be prepared which creates a legal obligation and would continue to allow the gift aid payment to be accrued in the year the profit is generated.
Pass a resolution – The parent charity company could pass a resolution, pre-year end, confirming the payment and removing the discretion to make the payment from the subsidiary company.
Estimate the profits – The profits of the trading subsidiary can be estimated before the year-end and paid over, although this will lead to some issues as it may be difficult for the correct amount to be determined.
Nothing for now – Do nothing and account for the gift aid payment in the year in which it is paid.
And what are the tax implications?
Luckily none! The FRC has agreed that even if not accrued, the gift aid payment remains a tax-deductible expense in the subsidiary provided it is remitted within 9 months of the year-end.
If you work for a charity with trading subsidiaries and you have questions about what you should do, please get in touch.