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Does FRED 68 make any sense?

FRED 68 seems to abandon the matching concept. Where’s the logic?

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FRED 68 deals with donations by trading subsidiaries to charitable parent entities.

For some time now we’ve been told that such payments should be accounted for as distributions. OK - I get the point. But FRED 68 introduces the idea that the donor should recognise in its accounts the tax effects of a donation that will “probably” be made in the following nine months.

So - for periods beginning on or after 1 January 2019 - donors must now recognise the tax effects of the donation in one period, even though the donation itself may not be not recognised until the following period (if indeed the donation is ultimately paid at all).

Such outmoded concepts as prudence and matching seem to have had little influence on the Draft.

Do any of my fellow professionals think the new requirements are rather... odd, to put it mildly?


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By johnt27
22nd May 2019 18:26


I think to the layperson the drafting makes perfect sense - I have a charity with a trading sub, set up to make profits, that I give back to the charity (for which no tax is payable).

The "old" rules, such as they were, were to put through an accrual for the notional dividend paid hence the CT line said nil as did the profit line (or near as damn it).

Then ICAEW got involved and said this was a distribution and you can't have an accrual, but the because the CT return is filed after year end you end up with an estimated tax liability of £Nil! Or you may have estimated tax and then reversed the following year as an overprovision. Now you have a timing difference so deferred tax comes into play (although no one ever bothered).

FRED 68 basically says - yes we know technically the transfer of a benefit to a charity from a trading sub is a distribution, and you receive the tax relief for the year reported, plus deferred tax is something no one ever really understands so let's just go back to the good old days without the madness of gifting profits that didn't exist because of tax deductibles :)

The cash for the "distribution" never used to move until the following year so matches the accounting. If it's such a big issue why not just consolidate out.

You'd do the same on a s455 liability and take the relief for the loan repayment the client is definitely going to make in 9 months time...

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to johnt27
22nd May 2019 18:57

Thanks for your reply johnt27.

On the s455 point, I see what you’re saying, though of course that’s “balance sheet only” so there is no impact on the CT charge in p&l regardless of timing or alternative views on when the relief for s458 should be booked.

I’m still not persuaded... the FRED suggests donors can recognise the tax benefit of something that only arises (or might arise) after the balance sheet date.

It’s a bit like a trading company not recognising a tax charge this year just because it will “probably” make a massive pension contribution or buy a load of vans next year to generate a tax loss for carry back. What’s the difference?

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By johnt27
to fishfishyfishfish
23rd May 2019 11:39

I think the difference is intention.

A trading sub of a charity should only be created (and the CC are very critical about this) to generate profits to be utilised for the charitable aims of the group. The only way for this to happen is for these profits to be distributed back to the charity and it would seem unlikely that the charity wouldn't want this to happen on an, at least, annual basis. This is what happens in practice as well.

The problem arises with tax timing and what the accounting rules permit. If you could accrue for dividends like you would for say staff bonuses (allowable if paid within 9 months of year end) then this wouldn't be an issue.

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By Bobbo
to fishfishyfishfish
23rd May 2019 14:39

The difference is that in your example there would have been a Corporation Tax liability for year 1 and this amount should have been paid before the next accounting period has ended and as such any tax loss can be calculated.

Where in the parent charity trading sub situation the post year end distribution is taken into account in year 1's tax computation which therefore shows nil liability and so there is no charge to recognise.

Additionally you said "(or might arise)" - the wording FRED68 uses is "probable" which is defined in FRS102 as "more likely than not" which I would suggest is stronger than 'might'.

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22nd May 2019 19:08

Another way I think about this is that the payment of the donation post year end is in effect a non-adjusting event. The payment arose after the balance sheet date - and is not associated with conditions existing at the balance sheet date - so is non-adjusting.

Yet we will now be required to recognise the tax benefit of the event - the donation - even though it is a non-adjusting, post balance sheet event.

Just strikes me as completely muddled and contradictory.

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