Your company needed cash to buy new machinery. Your parents were happy to gift the money to help the business. Naturally, your happy about this but want to know whether the company will have to pay tax on the gift? What’s the answer?
Gifts and tax
As a rule the recipient of a gift of money isn’t liable to pay tax on it – inheritance tax is an exception in some circumstances. However, that’s not always the case where the recipient is a company. The tax position depends on several factors, especially the relationship between the company and the giver.
Trap. A gift to a company can be taxable if there’s an existing relationship between the parties. For example, if your parents lent money to your company a “loan relationship” exists. If they then waive the loan it counts as a non-trading loan relationship credit which is liable to corporation tax (CT). The same result can occur in other circumstances where a trading relationship exists between the receiving company and the giver.
Trading receipt
HMRC’s view, which has been confirmed by the courts, is that if there’s a trading relationship between a company and an individual, business or other organisation that gifts it cash, the sum received is liable to CT. The justification for this is that the reason for making the gift must be linked to and be because of a trade arrangement. While it is possible to challenge this view, you would need strong evidence to prove that the motive and reason for the gift were other than because of a business relationship.
Tax neutral or not?
A gift received by a company might be taxable on the one hand but on the other, where the money is spent on trading costs, equipment, etc. it will receive CT tax relief for the expense. Consequently a gift is entirely tax neutral if the expenditure occurs in the same accounting period as the receipt of the gift. Even if the expenditure falls in a later year than the gift the difference is only one of timing. That is, unless the rate of CT changes between the accounting period in which the gift is received and that in which the money is spent.
No trading or other relationship
In our subscriber’s case there is no loan or trading relationship between his parents and his company and therefore a gift from them to it won’t be liable to CT. However, there is a risk that HMRC might argue otherwise and our subscriber should be prepared to answer questions. At the very least this would be inconvenient, time consuming and potentially costly if he has to pay an accountant to argue the point.
Tip. A more tax-efficient option is for our subscriber’s parents to give the money to him, and for him to lend it to the company. The company then owes our subscriber and can repay him tax and NI free as and when it can afford to. As well as being more tax efficient this option is also better where the company has shareholders apart from our subscriber because the gift from his parents only benefits him and not the others.
If there’s no connection, e.g. a trading or loan relationship, between the company and the person making the gift the company won’t have to pay tax on it. However, a more tax-efficient alternative is for the parents to give the money to their son and for him to lend it to his company.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.