Donations and Tax Computation of Limited Company

A client made donations to charities but at year end there was `Net loss` in profit & loss account.

This brought the question of how to treat the donation in tax computation.

Below I have listed few examples of how donations should be treated.

 

Example 1: Taxable profit and donation

Company A has a net profit of £3,000 and has made donations of £50001.

 

Computation of Tax

Net Profit 3,000
Add: Donations 5,0002
Taxable Profit 8,000
Less: Qualifying donations 5,000
Profits chargeable to corporation tax 3,000

 

 

 

Example 2: Taxable Loss and donation

Company A has a Net Loss of £3,000 and has made donations of £5000.

Computation of Tax

Net Loss (3,000)
Add: Donations 5,0002
Taxable Profit 2,000
Less: Qualifying donations 2,0001
Profits chargeable to corporation tax Nil

 

Please note donations are restricted to the amount of taxable profits. Qualifying donations cannot create a loss. Thus in this case £3,000 donations cannot be carried forward to be set-off against future profits and are lost forever.

In case this company was part of a group, the excess could have been used as group relief.

 

Example 3: Taxable loss and a small donation

Company A has a Net Loss of £3,000 and has made donations of £1,000.
Computation of Tax

Net Loss (3,000)
Add: Donations 1,0002
Taxable Profit (2,000)
Less: Qualifying donations Nil
Profits chargeable to corporation tax Nil
Unused trading losses to carry forward 2,000

In this case none of the donations were used, as even after adding the donations there was no taxable profits. Again in this case whole of £1,000 donations cannot be carried forward to be set-off against future profits and are lost forever.

Again, in case this company was part of a group, the excess could have been used as group relief.

 

Notes:

  1. Assumed all donations made were qualifying.
  2. Add back all donations made by the company.

 

 

Acknowledgements:

The above was determined with help of my good friend Gagan Anand a fellow accountant.

 

References:

  1. Basic guidance on gov.uk
  2. Tolley also has provided detailed guidance.

 

 

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