Targeted giving is tax efficient

Companies that want to make a difference in the world, while reducing their tax bills, are setting up charitable foundations, writes Sally Percy

Charitable foundations are a popular option for companies wishing to be philanthropic in a tax-efficient way. Entrepreneurs, in particular, tend to favour them when they want to channel profits from their businesses into targeted worthwhile causes.

“Foundations are being set up by individuals who have made a lot of money from their companies,” says Kate Sayer, partner of charity audit firm Sayer Vincent. “They see a foundation as a good way to give structure to their charitable giving.”

By establishing a charitable foundation and making cash donations to that foundation, a company can enjoy the same tax benefit that it would if it made donations to any other charity. In other words, it can offset its giving against corporation tax.

Furthermore, if an entrepreneur chooses to donate some of their own shares in the company to the foundation, this would prove more tax efficient than selling the shares and donating the proceeds to the foundation. This is because no capital gains tax would be payable in the first instance, whereas it probably would be in the second.

Cash and shares are not the only tax-efficient gifts that companies can make to a foundation. They can donate trading stock as well as capital assets and staff time when staff members have been seconded to the foundation. These can all be set against the company’s costs of doing business. Companies will also make gifts that cannot be offset against tax.

“A lot of corporate giving is about garnering support among customers and staff, and getting them to give their time and effort,” says Philip Kirkpatrick, joint head of the charity and social enterprise team at law firm Bates Wells Braithwaite.

STRATEGIC APPROACH

Establishing a foundation allows a company to take a more strategic approach to its giving. It can plan for the long term, especially with regard to its own sustainability, and the communities and environment in which it operates. With foundations, companies have the advantage of being able to claim tax relief in years when business is going particularly well, while smoothing out their future giving so that it has a steady impact over a longer time frame.

Companies can use their foundations to support local community projects that are not charities as well as charities based overseas

“Companies will want to give more in years when their profits are better,” says Mr Kirkpatrick. “But at the point of giving, they may not have a long-term strategy to do that giving. If they have their own foundation, they can put the money into the foundation so it can be spent over many financial years.”

Another advantage is the broader scope that a foundation offers. Tax relief on corporate giving is restricted to donations made to UK registered charities. So companies can use their foundations to support local community projects that are not charities as well as charities based overseas, while still claiming tax relief. Given that UK-based companies frequently have a presence in countries all over the world, this is an important consideration.

There are benefits for staff morale too. “Many organisations are using their charitable foundations as a means of drawing together collective endeavour within the business and getting people interested in philanthropy,” says Mr Kirkpatrick.

Nevertheless, foundations do present challenges. The main one is ensuring that the sponsoring company and the foundation are sufficiently independent of one another, yet still aligned. A foundation will have its own board of trustees and its own governance structure, but it will usually have representatives from the company among its trustees and draw on the company’s internal experts for advice.

“There has to be a very clear delineation in governance between the foundation and the corporate that is clear to the public,” says Klara Kozlov, head of corporate clients at the Charities Aid Foundation.

Since it is important that the sponsoring company and foundation hold similar values, controls should exist to prevent the two from becoming distant from each other. For example, the sponsoring company might be able to revoke the licence that allows the foundation to use its name.

“What you really want is a foundation that develops its own policy and its own giving strategy in line with the company’s business strategy, while recognising that it has to do its own thing,” says Mr Kirkpatrick. “And the trustees, when acting as trustees, have to act solely in the interests of the charity.”

Ultimately, the popularity of foundations is underpinned by their sponsors’ desire to give rather than their tax advantages. “We have a tax system that allows you to not pay tax on the amount you put into the foundation,” says Adam Waller, a tax partner at PwC. “But people aren’t doing it for that reason. They are doing it because they have a desire to make a difference and want to be very targeted about making a difference.”