Charitable giving is something many organisations might not be considering in the current climate, especially as everyone is struggling to pay their bills. But if you have money to spare within your business, then charitable giving is a great way to reduce your tax bill on company profits while simultaneously helping a good cause.
The rules around charitable giving for companies are similar to those for Gift Aid for individuals. For companies, the maximum amount of Gift Aid that can be claimed is equivalent to the amount of tax you would have had to pay on the profits made by your business in a single tax year. There are special rules for companies that are wholly owned by charities which your accountant can help you with if you are in this position. But this article is focusing on general companies looking to make charitable donations in a tax-efficient way.
How does a charitable donation reduce Corporation Tax?
If your company has a particular affinity with a specific charity, then not only will your chosen charity benefit from your largesse by making a donation, it can reduce the amount of Corporation Tax you pay too. Gift Aid relief is applied to what the Government terms “qualifying donations” which need to meet certain conditions.
A payment is not a qualifying donation, according to Gov.uk, if:
- It’s a dividend or distribution of profits.
- It is made subject to a condition as to repayment.
- The company or a connected person receives a benefit which exceeds the ‘relevant value’in relation to the payment.
- It’s made by a charity or community amateur sports clubs.
- It’s conditional on the charity acquiring property that has not been gifted to them.
- It’s part of an arrangement whereby the charity acquires property that has not been gifted to them.
There are various ways that you can make your donation, but in each case, you must keep proper records of what was donated and when.
What ways can my business make a donation?
There are a number of different ways that your company can make a donation to a charity. The most obvious is by giving money directly to the charity of your choice. But you can also donate equipment or trading stock, land, property or shares in a company that isn’t your own – your own company’s shares don’t qualify – provide employees on secondment to the charity, and through sponsorship payments.
To claim the relief, you would need to ask your accountant to make sure the donation is listed in the company tax return for the relevant period that the donation was made.
How do I make the claim?
The way you make the claim depends on how you have made your donation. For example, if you have donated money or given or sold land, property or shares to the charity, then you would enter the total value of your donations into the ‘Qualifying donations’ box on the ‘Deductions and Reliefs’ section of your Corporation Tax return.
If you have seconded employees to work with the charity or sponsored the charity, then these would be deducted from your company profits as a business expense.
In both cases, the charitable donation would be paid out of your gross profits, so there is no need for any Gift Aid to be reclaimed by the charity. Remember, you cannot donate more than the profits generated in a single accounting period. The most your profits can be reduced to is ‘nil’, you cannot donate to make your company make a loss for tax purposes.
If you have given or sold land, property or shares to a charity, then there are special rules which apply to how you calculate their value. Your accountant is best placed to help you with this.
We can help you
If you need help to decide whether you should make charity donations from your business, and if so, how much they should be, then please get in touch with us and we will help you understand what you need to do.