distribution of profits or not

distribution of profits or not

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Hi

There is a company limited by guarentee that has a very wide reaching objects statement.  It is not a charity.  

It has a single member that is a registered charity whos objects are narrower than the subsidiary.  The subsidiary has a non-profit distribution clause in its articles that says:

"The income of the company shall not be paid or transferred directly or indirectly by way of dividend  bonus or otherwise howsoever by the way of profit to the members of the company"

Does the payment of a donation from the subsidiary to the member charity using corporate gift aid come under the the remit of "dividend  bonus or otherwise howsoever by the way of profit" as prescribed in the article.

Obviously its not a dividend or bonus but does "otherwise howsoever by the way of profit"  cover donations under gift aid?

it seems to me that a donation is not "by the way of profit" and actually this clause is purely talking about distributions of profit - donations not being a distribution but simply an expense.

but I just didn't like reading this catch all phrase "otherwise howsoever"

Can anyone confirm my understanding

thanks

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Teignmouth
By Paul Scholes
26th Jun 2013 18:41

You are right

A donation to the charity should, subject to HMRC's rules, qualify for tax relief in the donor company and will not be regarded as a distribution of profits.

In case you are not aware, and unless things have changed in the past year or two, the benefit of having a subsidiary, rather than a free-standing trading company, is that donations up to 9 months after the company's year end, can be treated as if paid in the financial year.  This allows you to do the accounts and to ascertain the taxable profits then makiing the donation to reduce them.  With a free-standing trading company it only gets relief for donations actually made in the year.

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By hairyfingers
27th Jun 2013 08:56

I'm glad it was you who answered
Always glad to see your responses, Paul, with your not for profit experience :)

While I've got you - did you ever get any response to your comment ages ago about the mechanism a company limited by guarantee would use to distribute profits in the article about guarantee companies.

This of course is not the same company as above but one that world have standard articles without a non profit distribution clause. Nor is it a charity subsidiary making use of gift aid. Its a standalone company.

The only mechanism I see fit is a members vote to agree a distribution of equal amounts to each member. Not sure how this would be shown in stat accounts? Perhaps just a members distribution line against reserves where you normally see dividends?

Its a strange one but unusually I've got a client ltd by guarantee company that operates social enterprise activity using grant funding. It trades in other stuff too. The grants are restricted funds but the other trade profit is potentially available for distribution. They actually choose not to distribute but apply it all to other social stuff. But hypothetically......

What do you think?

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Teignmouth
By Paul Scholes
27th Jun 2013 09:27

Hi hairyfingers

No never got an answer, probably because nobody has ever seen it done.

The Companies Act (S829 on) talks about distributions of profits and dividends, ie on shares, are just the usual way to do this.

You are right, in the case of a LBG company, the way in which profit distributions are approved and paid, is exactly the same as with dividends and, with regard to disclosure in the accounts, I would suggest that you just change the word dividend to profit distribution and show it in exactly the same way in the notes.

 

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By hairyfingers
28th Jun 2013 10:51

Thanks Paul

yeah, makes sense.  cheers feller!

 

Just for anyone else that comes across this thread in the future I've since found some stuff that confirms what has been said.

s194(3) Corp Tax Act 2010 states:

A payment (other than a dividend) made by a company which is wholly owned by a charity is not to be regarded as a distribution

 

So a qualifying donation to a parent charity would not come under the restriction of a "non profit distribution" article clause

 

Also on the second point HMRC corp tax manual at page CTM15130 defines what a share is in the context of distributions

"Share includes stock and any other interest of a member in a company. It includes the rights of a member in a company limited by guarantee."

this confirms that a CLG can partake in distributions and presumably therefore the treatment of such distributions is the same as a CLS.

 

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