# Deeds of covenant could provide solution to Gift Aid rule changes

- Link: https://fundraising.co.uk/2017/03/01/deeds-covenant-provide-solution-gift-aid-rule-changes/
- Published: 2017-03-01T10:30:05+00:00
- Author: Melanie May

**Implementing deeds of covenant could provide a solution to rules over how profits
of subsidiary companies are traditionally gift aided up to the parent charity, accountancy
firm Bishop Fleming has suggested.**

Charities that receive income from their trading activities through a separate company
need to be aware of the [guidance](http://www.icaew.com/en/technical/charity-and-voluntary-sector/tax/gift-aid-taxation),
which was issued by the [Institute of Chartered Accountants](http://www.icaew.com/en)(
ICAEW) in response to HMRC revising its guidance on corporate Gift Aid last year.
It covers how profits of subsidiary companies are traditionally gift aided up to
the parent charity and states that a subsidiary must have enough distributable reserves
to cover the gift aid payment. The Charity Commission also updated its [guidance](https://www.gov.uk/government/publications/trustees-trading-and-tax-how-charities-may-lawfully-trade-cc35)
in line with that of the ICAEW.

According to [Bishop Fleming](http://bishopfleming.co.uk/), although it has been
made clear that a distribution can only be made out of available reserves, this 
creates an issue as trading subsidiaries will not have any reserves as they will
have been given to the charity in previous years. This means that labelling a payment
to the charity as a gift aid donation will no longer avoid it being seen as a distribution.

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Bishop Fleming director and charity tax specialist, Jon Sparkes said:

> “As the company is unlikely to have any reserves brought forward, any adjustments
> that have to be made to calculate its taxable profits will create a problem where
> the tax-adjusted profit ends up being greater than the accounting profit, as this
> will create an unwelcome tax charge in the company.”

Bishop Fleming is advising charities with trading subsidiaries to safeguard their
trading profits from this tax issue by implementing deeds of covenant for their 
subsidiaries where they don’t already exist. It states that deeds of covenant would
circumvent the ruling that gift aid payments should only be recognised in accounts
when they are actually made, and that as a covenant creates a legally binding obligation
on the subsidiary to make the payment, they give a certainty that the payment will
be made.

Sparkes added:

> “The rather ad hoc nature of gift aid payments from subsidiaries will need to 
> be replaced by a more formal arrangement, and I would recommend that the best 
> way to do this is to return to deeds of covenant. They may have fallen out of 
> popularity, but they could be about to make a comeback.”

 * **[Advanced Gift Aid Portal reaches £1 billion milestone](https://fundraising.co.uk/2017/04/11/advanced-gift-aid-portal-reaches-1-billion-milestone/)**(
   11 April 2017)
 * **[How charities marked the first Gift Aid Awareness Day](https://fundraising.co.uk/2018/10/04/charities-marked-first-gift-aid-awareness-day/)**(
   4 October 2018)
 * **[Two-day Gift Aid course in Manchester next month](https://fundraising.co.uk/2019/05/10/two-day-gift-aid-course-in-manchester-next-month/)**(
   10 May 2019)

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