…or have a legally enforceable obligation to do so in order for the charity to recognise gift aid on the donations.
Previously, many charities would accrue gift aid donations of its trading subsidiary's profits, even if the payment was not made until after the end of the accounting year. This will no longer be possible; the payments must have either already been made before accounting year end, or there must be a legal obligation for such payments to be made.
If the donations are not paid and no legal obligation exists before the end of the accounting year, the charity will have to recognise the gift aid donation the following year.
The FRC have made it clear that these changes do not impact the tax treatment itself of gift aid payments. Providing it is probable that the trading subsidiary's profits will be paid to the charity within nine months of the end of the accounting year in which the profits are made, there is no need to recognise a deferred tax liability in the accounts. If the trading subsidiary actually pays its profits to the charity within nine months, there will be no tax to pay on those profits.
The guidance is clear that the following are not sufficient to create a legal obligation:
Whilst there is no clear definition of what constitutes a 'legal obligation', general consensus is that a deed of covenant or deed of gift should be put in place between the charity and its trading subsidiary before the end of the accounting year for the avoidance of any doubt.
A deed of covenant would generally require that the trading subsidiary pay all of its profits to the charity in any accounting period, meaning that there is no requirement to enter into a new deed each year.