Part 5
There are a number of ways in which profits generated by the trading subsidiary may be transferred back to the parent charity. The path taken will have tax implications and this will often be the deciding factor in choosing the appropriate method.
- Funds may paid in the form of a share dividend pursuant to the share capital acquired by the charity.
The payment of a dividend to a Charity, whilst retaining a certain 'prestige' factor will often not be the optimum way of transferring money. Whilst a dividend is not taxable in the hands of the charity, it does not reduce the trading subsidiaries taxable profits. Thus the subsidiary would be liable to corporation tax.
The most common method of paying funds therefore is through the Gift Aid Scheme. Like the dividend, the Gift Aid payment will be exempt from tax in the hands of the charity, so long as the money is used for charitable purposes. However where the Gift Aid scheme differs is that the payments do reduce the subsidiaries taxable profits. n fact it is possible for a subsidiary to mitigate its entire tax liability through paying all of the companies profits to the charity under Gift Aid.
There is nothing underhand with this approach, it is a perfectly acceptable way in which to reduce the amount of tax owed by the trading subsidiary.
However, giving all of the profits to the charity under the Gift Aid scheme can cause some difficulties. A transfer of all the profits may leave the subsidiary with a lack of working capital, with the cash-flow problems that would entail. HMRC do give subsidiaries wholly owned by a charity some lee-way in this regard but it may be prudent in some instances for the subsidiary to retain some of its profits to meet working capital requirements. The charity would have to accept the ensuing tax liability for the amount of profits retained.
No comments:
Post a Comment