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Changes to accounting rules – will your charity need a deed of covenant?

Charities with subsidiary companies need to understand changes to accounting rules that were announced by the Financial Reporting Council in December 2017. They may have to create a deed of covenant to allow the accounts to show the gift of that year’s profits from subsidiary to the parent charity.

Accounting for corporate Gift Aid – until now
It’s common practice for a charity to place its trading into a wholly owned subsidiary company, paying its profit to the parent charity. This generally means the charity can minimise its corporation tax charge. The profit donation can be made up to nine months after the year end and still be tax effective. Until now, the subsidiary’s accounts have generally recognised the post year end payment as a creditor when there is a “substantive” obligation to make the payment at the year end.

However, a number of charities and accounting firms have recently been following different accounting practice, therefore new changes to the accounting standard FRS 102 are intended to promote consistency.

New accounting rules for corporate Gift Aid
The December 2017 FRS 102 amendments cover all UK financial reporting and, for charity subsidiaries, include a clarification of accounting for corporate Gift Aid, treating the payment as a corporate distribution. Under the new guidance, a subsidiary’s expected Gift Aid payment to its parent charity won’t be accrued unless there is a legal obligation at the reporting date – a board decision on its own won’t be enough.

So how can you establish the legal obligation? One way is for the subsidiary company to execute a deed of covenant.

Recognising the Gift Aid will be particularly important to a parent charity that relies on the subsidiary’s annual trading profits to stay solvent, and such a charity will want to ensure there is legal obligation.  On the other hand, some charities may not be concerned about the Gift Aid accounting presentation, deciding they don’t need a deed or other means of creating a liability.

The new accounting treatment for tax
There is a helpful new accounting treatment for tax. An expected Gift Aid payment will eliminate the equivalent tax from the accounts, irrespective of whether it’s accrued for.

Does this mean the charity might need to pay tax?
No, none of this affects the tax to pay. It’s purely a change in accounting rules.

What do we need to do and when?
First, understand how the change in rules will change your current accounts. Then decide if you need to create a legal obligation, and whether you want to.

If it affects you then call us or speak to your professional accountant soon.

Call 0330 024 0888  or  email:


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Larking Gowen

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