Donations to a CIC: how to account for them and why Gift Aid does not apply

A community interest company can take donations, but it cannot claim Gift Aid on any of them, so £100 given to a CIC stays £100 while the same £100 given to a charity is worth £125. That is not an administrative gap you can close with a better declaration form. Gift Aid attaches to a gift made to a charity, charity has a fixed statutory meaning for tax, and a CIC cannot meet it. What is left within your control is the accounting: record each donation by the conditions the giver attached to it, keep genuine gifts apart from money that bought something, and decide whether the shortfall is large enough to be a structure question.

Why does the Gift Aid claim fail?

Because the recipient is not a charity in the sense the tax Acts use. Section 416 of the Income Tax Act 2007 makes a gift a qualifying donation only where an individual makes a monetary payment to a charity and the conditions on repayment, deductions and donor benefits are met. Finance Act 2010 Schedule 6 then supplies the definition used across income tax, corporation tax, VAT and the rest: a body established for charitable purposes only that also satisfies the jurisdiction condition, the registration condition and the management condition.

A CIC fails at the first of those requirements, and it fails it by statute rather than by circumstance. Section 26(3) of the Companies (Audit, Investigations and Community Enterprise) Act 2004 provides that a CIC established for charitable purposes is treated as not being so established, is not an English or Northern Ireland charity, and must not be entered in the Scottish Charity Register. It is regulated at Companies House by the Office of the Regulator of Community Interest Companies, not by the Charity Commission. No amount of good work changes the classification. This also means there is no application to lose and no HMRC decision to appeal, which is worth telling a board that expects the problem to be fixable.

What does the donor lose?

An individual giving to a charity triggers two claims. The charity recovers 25p for every £1 given, and a donor paying above basic rate recovers the difference between their rate and the basic rate on the gross amount through Self Assessment. Give the same money to a CIC and neither claim exists. Higher rate givers often notice this before the company does, because it shows up in their own return.

Companies lose a different relief. Corporation Tax Act 2010 section 189 allows qualifying charitable donations as a deduction from total profits, and section 190 defines those as the qualifying payments to charity in Chapter 2 together with certain disposals of investments to charity under Chapter 3. A payment to a CIC is outside both, so the donating company gets no deduction for it as a gift. The distinction between a gift and a purchase matters here: sponsorship that buys advertising, a stand, or a named programme is consideration for a supply, deductible to the payer on ordinary trading principles and potentially a taxable supply for VAT in your hands. Our note on the tax treatment of business donations sets out how the charity side of that comparison works.

How should a donation be recorded in CIC accounts?

Start from what the giver got back, not from what they called the payment. Three cases cover almost everything.

• A pure gift. Nothing supplied in return. Recognise it when you are entitled to it and present it separately from trading turnover, so the board and the Regulator can still read the trading result. Outside VAT, because there is no supply.
• A gift with conditions. Money given for a named project, staged across years, or repayable if milestones are missed. Recognise it in line with those conditions rather than when the cash lands, and carry the unspent balance forward as a liability or deferred income where the condition is not yet met.
• Payment for something. Sponsorship packages, advertising, tickets, naming rights, a service the payer or their staff use. This is turnover, it counts towards your VAT taxable turnover, and calling it a donation in the ledger does not change that.

A CIC has no charity law concept of restricted funds, so a project restriction binds you contractually rather than as a trust. The bookkeeping answer is unchanged: analyse by fund from day one. Funders expect reporting that reconciles to the filed accounts, and the community interest report you file with those accounts has to explain how assets and profits were applied. Recognise it a year early or late and the reported surplus and the taxable profit both move. Our guide to where CIC funding comes from covers the funder side of the same records.

Is a donation to a CIC taxable income?

It depends on what the receipt actually is, and that is settled before the year end rather than after it. Money that is consideration for goods or services the company supplies is a trading receipt and falls into the corporation tax computation with everything else. A genuine unconditional gift with no supply behind it sits differently, and where a receipt is material it is worth having a specialist review the terms it came with before the computation is prepared. The risk is not usually the tax itself. It is a receipt described as a donation in the accounts that HMRC reads as payment for a supply, which moves both the corporation tax position and the VAT position at once.

What are the practical options if giving matters to you?

There are three, and they are structural rather than procedural. You can accept the shortfall, which is rational where individual giving is a small part of a contract funded income mix. You can convert to a charity or a charitable incorporated organisation, which opens Gift Aid at 25p per £1 and charitable rate relief of up to 80% off the rates bill, at the cost of Charity Commission registration, trustee duties and objects you can no longer change freely, and subject to the asset lock. Or you can work alongside a separate registered charity that receives the public donations and funds the community work, an arrangement that only works where the two bodies are genuinely independent of each other.

Whichever route you take, test it on your own numbers first. A Gift Aid calculation on last year's individual giving gives you the size of the prize in one figure. Set it against the added cost of charity registration and reporting before anyone drafts a conversion plan. Our CIC against charity comparison puts the two structures side by side, and the wider position on accounts and tax for community interest companies explains what else changes with the wrapper.

What should you do next?

Three things, in order. Separate genuine gifts from payments for supplies in this year's ledger, before the accounts are drafted. Check that any project money is being recognised on the conditions attached to it rather than on the date it arrived. Then put a number on what individual giving costs you in forgone Gift Aid, because that figure, and nothing else, tells you whether the structure question is worth opening.