Charities and wholly owned trading subsidiaries – new Financial Reporting Council guidelines on the accounting treatment of gifts of profit

The Financial Reporting Council has published a set of “clarifications” to Financial Reporting Standard 102, which will have an impact on how charities and their trading subsidiaries account for profits paid by the subsidiary to the charity under gift aid.


These “clarifications”, issued in December 2017, are in reality new interpretations of the existing rules, but have been phrased as statements on how the accounting treatment should already be carried out, and so have immediate effect.

Changes to accounting treatment

The new guidelines change the way subsidiaries and their parent can account for gifts of profit from the subsidiary to the parent. Until a gift payment is actually made to the parent, or until there is a “legal obligation” to make the payment, the gift cannot be recognised in the Profit and Loss Account.

If no legal obligation exists, and the subsidiary does not make the gift of profit before the end of the accounting year in which the profit was made, then the gift payment can only be shown in the accounts for the year in which the gift is actually made. This applies even if at the time the accounting year ended the subsidiary “expected” to make the gift, and does in fact make it within nine months of the accounting year end.

It is unclear precisely what steps need to be taken to create this “legal obligation”, but evidence of past practice and board meetings to approve a future payment will not be enough. The consensus among the accounting industry is that a Deed of Covenant is the safest way to ensure that a legal obligation is created.

No changes to deferred tax treatment or to actual tax payments

The tax treatment of gift aid payments is not affected by this change.  As long as it is “probable” that the subsidiary’s profits will be paid to the parent within nine months of the end of the accounting year in which the profits were made, then there is no need to recognise a deferred tax liability in the accounts.  In addition, the actual tax to be paid remains unchanged. If the subsidiary actually gives its profits to its parent within nine months of the accounting year in which they were made there will be no tax to pay on those profits.

What should charities and their trading subsidiaries do now?

If charities and their trading subsidiaries want to account for gifts of profit from the subsidiary to the parent in the year the profits were made, where the gift will not be physically paid to the parent until after the year end, they should ensure that they have Deeds of Covenant or Deeds of Gift in place before the relevant year end. A board meeting or series of regular annual payments will no longer be sufficient.

In particular, for trading subsidiaries which have 31 March as their accounting year end, the Deed of Covenant or Deed of Gift must be in place before 31 March 2018.

Please contact Luke Fletcher, Bill Lewis, Susan Shi or your usual BWB contact for advice on how your charity may be affected by the new guidelines. 

This information is necessarily of a general nature and doesn’t constitute legal advice. This is not a substitute for formal legal advice, given in the context of full information under an engagement with Bates Wells.

All content on this page is correct as of March 2, 2018.