I have picked up a new client who is a Self Employed Evangelist. On working on his expenses, he has listed 'Donations' which come to around £7,000 to various charities both UK and Abroad. The last three sets of accounts his previous accountant has prepared have included these donations in the expenses section of the income and expenditure. On looking at the Self Assessments, he has also included these donations as expenses and not disallowed them.. I would normally enter donations under the 'Charitable Giving' section of the Self Assessment as Gift Aid payments for example, and not include them anywhere near his 'income and expenditure' statement,(thus increasing his higher rate tax starting band). Am I missing something? Or if the previous accountant has been doing this wrong, the last few yeas (by including these donation figures as expenses), this has created a loss to be carried forward, and no personal tax has been paid, oops. I am going out to see the client tomorrow afternoon to go through the figures, before finalising the self assessment, and I don't think he will be a happy bunny if I give him duff information. But any advice would be much appreciated. Thank you.
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Business gifts to charities
Subject to the general "wholly & exclusively" rule these can be treated as allowable expenses, see HMRC's BIM
Important question - gift aid
It is extremely important that the nature of the donations is ascertained before going any further.
Fundamentally were they Gift Aid donations or not? I am absolutely certain that in the case of legitimate UK charities the donation's status as to an individual paying under Gift Aid arrangements or not would be ascertained / become known at the time of the charity receiving the donation.
If Gift Aid then absolutely NOT allowed as a tax deduction in the accounts - instead claim via main body of the tax return instead. Ignoring this obvious potential error would result in double tax relief being obtained.
If NOT gift aid then an advantage that accrues is a reduction in Class 4NIC liabilities if the donations are passed through the P&L account provided that they pass the test for tax deductibility against business profits.
Wholly and exclusively??
I can't see that a payment can be a charitable donation (out of the goodness of his heart etc) and at the same time be wholly and exclusively for the purposes of his trade or vocation (ie, in order to earn profits). If there is duality of purpose then it is disallowable.
Not my understanding
Carolynne - see the link I gave you above and specifically:
For businesses subject to income tax, tax relief is potentially available via a deduction from trading profits (see above) or, if it is a cash gift, and the cost is not deductible against trading profits, the individual trader or partner(s) maybe able to obtain tax relief via Gift Aid instead.
A agree with Paul, Chicken Farmer and DMGBus
As Paul says in his first post, a donation will be deductible from business profits if it is expenditure incurred wholly and exclusively for the purposes of the trade.
I agree with Chicken Farmer though that there will be few circumstances when a voluntary payment can be said to be expenditure incurred wholly and exclusively for the purposes of the trade though. It would normally be necessary for it to produce some positive publicity or other benefit for the trade to be said to be for the purposes of the trade, and it than still needs to be wholly and exclusively for those purposes.
If it doesn't qualify as a trade deduction and is to a registered UK or EEA charity then Gift Aid will be available, as per Paul and DMGBus.
Carolynne
You ask whether the past should really be revisited - I think you know the answer and I am sure your client would wish to 'do the right thing'