Making a charitable donation through your limited company can support a worthwhile cause. It may also help reduce your Corporation Tax bill.
The rules for company donations differ from the Gift Aid rules for individuals. It is therefore important to understand how the relief works and which payments qualify.
How Does the Tax Relief Work?
A limited company can usually deduct qualifying charitable donations from its taxable profits. This deduction takes place before the company calculates its Corporation Tax.
For example, a company may have taxable profits of £50,000 and make a qualifying donation of £2,000. It may then calculate its Corporation Tax on profits of £48,000.
The company claims the relief through its Corporation Tax return. However, it cannot normally use the donation to create or increase a trading loss.
In most cases, the company cannot carry unused relief forward or back. Group relief may apply in certain circumstances.
Which Donations Qualify?
HMRC generally allows relief for monetary donations to a recognised charity or Community Amateur Sports Club (CASC).
The payment must qualify as a genuine gift. For example, the company should not expect the charity to repay the money as a loan.
Certain other payments will also fail to qualify. This includes a distribution of company profits.
The same applies if the company attaches certain conditions to the payment. For example, it cannot require the charity to purchase property from the company or a connected person.
Companies make charitable donations from their gross income and do not deduct tax from the payment. Unlike donations from individuals, charities cannot reclaim basic rate tax on company donations.
What Happens if the Company Receives a Benefit?
A company may receive a small benefit in return for making a donation. Tickets to an event are one example.
However, HMRC limits the value of benefits that a company or connected person can receive.
For donations of up to £100, the benefit cannot exceed 25 per cent of the donation.
Where the donation falls between £101 and £1,000, the maximum permitted benefit is £25.
Once a donation exceeds £1,000, the benefit cannot exceed 5 per cent of the donation. An overall maximum benefit of £2,500 also applies.
These limits also cover benefits received by people or businesses connected with the company. This can include close relatives of company owners.
If a benefit exceeds the permitted amount, the company may lose its entitlement to charitable donations relief.
Is the Payment a Donation or Sponsorship?
HMRC may treat a payment as sponsorship if the company receives a business-related benefit in return.
Examples include advertising or the use of the charity’s branding. Other benefits could include product promotion or access to the charity’s mailing list.
A company may still deduct qualifying sponsorship payments as business expenses. To qualify, it must make them wholly and exclusively for the purposes of its trade.
Different tax rules apply to sponsorship. The company should therefore record these payments correctly.
Donations From Companies Owned by Charities
Special rules can apply to companies wholly owned by one or more charities.
In certain circumstances, the company can make a donation within nine months after its accounting period ends. It can then treat the donation as relating to that earlier period.
This rule can help a charitable trading company donate some or all of its taxable profits to its parent charity.
Specific conditions apply. Companies should therefore review the timing and amount of the payment carefully before claiming relief.
Keeping Suitable Records
Companies should keep clear records of all charitable donations.
Useful evidence may include bank statements, receipts and correspondence from the charity. Companies should also record details of any benefits received in return.
Good records can support the Corporation Tax deduction. They can also help show that the donation meets HMRC’s qualifying conditions.
How Cobble Can Help
Charitable giving can help a company support worthwhile causes while managing its tax position.
Cobble can help determine whether a donation qualifies for Corporation Tax relief. We can also explain the difference between a donation and sponsorship.
Our team can ensure you record the payment correctly in your company accounts and Corporation Tax return.
Please contact us if your company is considering making a charitable donation. We can also advise you about a payment your company has already made.