Charitable Donations when Loss Making

[numbersrule]

Business has made Charitable Donation and made a loss.

My understanding is that Donations must not increase losses ie can only be made out of Profits in terms of CT600.

So how should the Donation be presented in the Accounts Filing as needs to be below the bottom line used for CT600.

I am testing GBooks and also TaxCalc in parallel to see which to take forward.

 

[David Griffiths]

The losses are added back in the tax computation in the same way as other non allowable expenses, such as depreciation.

You can carry forward any unrelieved donations to a future tax return when you make enough profit

 

[Daybooks]

The donation would not normally be allowed in the computation of the trade profit or loss - therefore should be added back as needed.

The donation if a qualifying donation [box 305?] can then be used to reduce total profit. You would only relieve as much as necessary to reduce total profits to nil; carrying forward if applicable. If there were a trading loss then you have the options to carry forward or back as appropriate.

https://www.gov.uk/hmrc-internal-manuals/company-taxation-manual/ctm09005
https://www.gov.uk/hmrc-internal-manuals/company-taxation-manual/ctm08620

 

[numbersrule]

The donation would not normally be allowed in the computation of the trade profit or loss - therefore should be added back as needed.

The donation if a qualifying donation [box 305?] can then be used to reduce total profit. You would only relieve as much as necessary to reduce total profits to nil; carrying forward if applicable. If there were a trading loss then you have the options to carry forward or back as appropriate.

https://www.gov.uk/hmrc-internal-manuals/company-taxation-manual/ctm09005
https://www.gov.uk/hmrc-internal-manuals/company-taxation-manual/ctm08620

If I enter +X in Box 305 the Loss increases by X.
It seems to me that X is supposed to be excluded from the P&L so that the Bottom Line Loss for Tax purposes does not include the Charitable amount of X.
That way, X need not be entered in Box 305 when a Loss is made because a Donation must not increase a Loss.
When a Profit is made entering +X in Box 305 would reduce the Profit as it should for a Relief on X.
This means that in both the case of a Loss and the case of a Profit X should not be entered as an Expense above the bottom line ( for transfer to CT600 ) in the P&L.

But my question was in relation to the Annual Accounts. If the Donation is excluded from the P&L should it be shown in the Notes? Or is there anything in the Accounts Production Software that allows items to be recorded below the taxable bottom line?

 

[numbersrule]

The losses are added back in the tax computation in the same way as other non allowable expenses, such as depreciation.

You can carry forward any unrelieved donations to a future tax return when you make enough profit

Yes, I thought that was the case but my question relates to how a Donation should be presented in the Accounts given that it should not be included as an expenditure item.

 

[eteb3]

how a Donation should be presented in the Accounts given that it should not be included as an expenditure item.

Caveat I’m not an accountant, just interested in this having one year made more Gift Aid donations than tax I paid, so I had to pay to HMRC the tax assumed to have been reclaimed by the charity.

Why do you think this payment shouldn’t be recorded as an expense, given it has contributed to the company’s loss for the year?

Look forward to an accountant’s answer; but seems to me from a balance sheet perspective it’s a tx like any other. It’s only at tax calculation stage that it can reduce the taxable profit (if any). If there’s a loss, it makes no difference even for tax, so you’ll state it as normal.

 

[Bobbo]

Yes, I thought that was the case but my question relates to how a Donation should be presented in the Accounts given that it should not be included as an expenditure item.

Yes it should be presented as an expenditure item. It is still an item of expenditure incurred by the company.

It just, as already said in the replies, is added back in your tax computation.

 

[numbersrule]

Yes it should be presented as an expenditure item. It is still an item of expenditure incurred by the company.

It just, as already said in the replies, is added back in your tax computation.

Thank you for that clarification Bobbo.

So with the Donation included as Expenditure, the Loss is minus L.
When the Donation +X is entered into Box 305 on CT600 the Loss becomes minus L minus X.
But this is not correct. The correct Loss for Tax purposes should be minus L plus X.
That way X has not contributed to the Loss after X is added back in.
So have I got it wrong and is Box 305 expecting a minus figure?

 

[eteb3]

I’m gonna chance an answer for my personal edification :

Box 235 includes the donation expense, and is therefore a larger loss than if the donation expense were not included (and it must be included)

Box 305 must be left empty, because the donation cannot reduce the profits chargeable to tax, because there are none. Thus it is not a “qualifying donation”.

CTA10 s.189
3)The amount of the deduction is limited to the amount that reduces the company's taxable total profits for the period to nil.
4)Except as otherwise provided, a deduction is allowed only in respect of qualifying charitable donations made by the company in the accounting period concerned.

Corporation Tax Act 2010

An Act to restate, with minor changes, certain enactments relating to corporation tax and certain enactments relating to company distributions; and for connected purposes.

www.legislation.gov.uk

@Bobbo?

 

[Daybooks]

If I enter +X in Box 305 the Loss increases by X.
It seems to me that X is supposed to be excluded from the P&L so that the Bottom Line Loss for Tax purposes does not include the Charitable amount of X.
That way, X need not be entered in Box 305 when a Loss is made because a Donation must not increase a Loss.
When a Profit is made entering +X in Box 305 would reduce the Profit as it should for a Relief on X.
This means that in both the case of a Loss and the case of a Profit X should not be entered as an Expense above the bottom line ( for transfer to CT600 ) in the P&L.

But my question was in relation to the Annual Accounts. If the Donation is excluded from the P&L should it be shown in the Notes? Or is there anything in the Accounts Production Software that allows items to be recorded below the taxable bottom line?

The donation is not excluded from the annual (statutory) accounts. If that means there is a loss then so be it. It is excluded ( by way of add back) in the corporation tax computation; a separate exercise. The amount to enter in the qualifying donation box is an amount up to its value without creating a total taxable loss. Any tax liability calculated is then posted back into the accounts to complete.

If you have a loss from the trade then you utilise that loss by either carrying forwards or backwards. If you cannot fully use the qualifying donation as a result then carry it ( or any unused amount ) forward as per the guidance.

 

[numbersrule]

Thank you Daybooks and David and eteb3 and Bobbo. That has clarified it thanks.

 

[NortonBishop]

Reference the assertions above that charitable donations causing a loss can be carried forward, I see that this is contradicted by the guidance at https://taxpipe.co.uk/blog/corporation-tax-charity-donations-relief

Can anyone clarify which is correct please?

Donations cannot create a loss​

Qualifying donations can reduce your taxable profits to zero, but they cannot create or increase a tax loss. If your company's profits are less than the donation amount, you only get relief up to the level of profits. The excess donation is lost — it cannot be carried forward or back.

This is a critical planning point: if your company has a bad year, consider reducing charitable donations or deferring them to a profitable period.

 

[eteb3]

Can anyone clarify which is correct please?

There are two types of loss here: a loss for the purposes of statutory accounts (which mainly aim to show creditors what assets are available to them), and a loss for the purposes of reducing tax.

Trading losses will reduce the tax payable. But a charitable donation is by definition not a trading loss, because it's gratutitous: legally "trading" is an exchange of one thing for another*.

Therefore any loss generated by the donation must be reflected in the statutory accounts, and must also be cancelled out before calculating the tax due.

*(I know the tax definition of trading is rather more complicated, but the basic principle still applies)

 

[NortonBishop]

Okay, thank you.

So it's not possible to

carry forward any unrelieved donations to a future tax return when you make enough profit

 

[eteb3]

Ah, I'm sorry, I misunderstood your question. I know as an individual you can carry forward Gift Aid you weren't able to fully claim in a low-tax year, for up to four years. But I can't tell you about CT. It would make sense for it to be the same, but who knows.

Also, re-reading my post, it sounds like I meant the whole donation "loss" has to be cancelled out at tax calculation stage. That was me assuming the context did all the work. Better put, that only applies to the loss in excess of the tax liability.

 

[NortonBishop]

The question is, can a company carry a loss created by a charitable donation forward to a future tax year so as to reduce CT payable in that later year.

David Griffiths above suggested one could - and this answer was liked by a couple of others.

However https://taxpipe.co.uk/blog/corporation-tax-charity-donations-relief says one cannot.

 

[DWS]

The question is, can a company carry a loss created by a charitable donation forward to a future tax year so as to reduce CT payable in that later year.

David Griffiths above suggested one could - and this answer was liked by a couple of others.

However https://taxpipe.co.uk/blog/corporation-tax-charity-donations-relief says one

Never had to deal with this, but after a quick look on both Croner and the legislation they both seem to indicate that the donations can only be used in the accounting period that they are paid and cannot create a loss, any unrelieved donations can be neither carried forward or back and therefore are lost.
As I said I have never dealt with this so please do not take this as advice, it is just the way I have interpreted what I have read.

 

[eteb3]

I would be slightly suspicious of taxpipe myself, because the tone is somewhat ChatGPTish.

But hard sources seem to support their position.

See last paragraph of this page...

CTM09005 - Corporation Tax: charitable donations relief: introduction - HMRC internal manual - GOV.UK

www.gov.uk

...which refs subsection (4) of the primary legislation

Corporation Tax Act 2010

An Act to restate, with minor changes, certain enactments relating to corporation tax and certain enactments relating to company distributions; and for connected purposes.

www.legislation.gov.uk

I've checked the "subject to" so you don't have to, because this is my weekend fun: the ref'd exceptions apply to abuse only. So just the "and any other express exceptions" to clear up, but my confident guess is that's rear-end-covering by the draftsman.