Targeted giving is tax efficient

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.”