Income Tax Bill

House of Commons

Session 2006 - 07
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Income Tax Bill

Income Tax Bill
Part 10 — Special rules about charitable trusts etc
282

Restrictions on exemptions
539
Restrictions on exemptions
(1)
This section applies if a charitable trust has a non-exempt amount for a tax year
(see section 540).
(2)
The exemptions under this Part do not apply, and are treated as never having
5
applied, to so much of any income of the charitable trust for the tax year as is
attributed under section 541 to the non-exempt amount.
(3)
Section 256(4) of TCGA 1992 contains corresponding restrictions which apply
in relation to section 256(1) of that Act (gains accruing to charities not to be
chargeable gains).
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540
The non-exempt amount
(1)
A charitable trust has a non-exempt amount for a tax year if it has—
(a)
non-charitable expenditure for the tax year (amount A), and
(b)
attributable income and gains for the tax year (amount B).
(2)
The non-exempt amount for the tax year is—
15
(a)
amount A, or
(b)
if less, amount B.
(3)
For the purposes of this Part—
(a)
a charitable trust’s “attributable income” for a tax year is the charitable
trust’s income for the tax year that is exempt from income tax as a result
20
of any of the exemptions under this Part,
(b)
a charitable trust’s “attributable gains” for a tax year are any gains
accruing to the charitable trust in the tax year that as a result of section
261 of TCGA 1992, are not chargeable gains, and
(c)
a charitable trust’s “attributable income and gains” for a tax year is the
25
sum of its attributable income for the tax year and its attributable gains
for the tax year.
(4)
In applying subsection (3)(a) ignore any restrictions on the exemptions under
this Part which result from section 539(2).
(5)
In applying subsection (3)(b) ignore any restriction on the exemption under
30
section 256(1) of TCGA 1992 which results from section 256(4) of that Act.
541
Attributing income to the non-exempt amount
(1)
This section applies if a charitable trust has a non-exempt amount for a tax
year.
(2)
Attributable income of the charitable trust for the tax year may be attributed to
35
the non-exempt amount but only so far as the non-exempt amount has not been
used up.
(3)
The non-exempt amount can be used up (in whole or in part) by—
(a)
attributable income being attributed to it under this section, or
(b)
attributable gains being attributed to it under section 256A of TCGA
40
1992.

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Part 10 — Special rules about charitable trusts etc
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(4)
The whole of the non-exempt amount must be used up by—
(a)
attributable income being attributed to the whole of it under this
section,
(b)
attributable gains being attributed to the whole of it under section 256A
of TCGA 1992, or
5
(c)
a combination of attributable income being attributed to some of it
under this section and attributable gains being attributed to the rest of
it under section 256A of TCGA 1992.
(5)
See section 542 for the way in which income is to be attributed to the non-
exempt amount under this section.
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542
How income is attributed to the non-exempt amount
(1)
This section is about the ways in which attributable income can be attributed
to a non-exempt amount under section 541.
(2)
The trustees of the charitable trust may specify the attributable income that is
to be attributed to the non-exempt amount.
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(3)
A specification under subsection (2) is made by notice to an officer of Revenue
and Customs.
(4)
Subsection (6) applies if—
(a)
an officer of Revenue and Customs requires the trustees of a charitable
trust to make a specification under this section, and
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(b)
the trustees have not given notice under subsection (3) of the
specification before the end of the required period.
(5)
The required period is 30 days beginning with the day on which the officer
made the requirement.
(6)
An officer of Revenue and Customs may determine the attributable income
25
that is to be attributed to the non-exempt amount.
Non-charitable expenditure
543
Meaning of “non-charitable expenditure”
(1)
For the purposes of this Part a charitable trust’s non-charitable expenditure for
a tax year is—
30
(a)
any loss made in the tax year in a trade carried on by the charitable trust
unless—
(i)
the trade is a charitable trade in relation to the tax year, or
(ii)
the trade is not a charitable trade in relation to the tax year but
profits of the trade arising in the tax year would be exempt from
35
income tax as a result of one of the exemptions in clauses 526,
529 or 530,
(b)
any payment made in the tax year by the charitable trust in connection
with a trade in circumstances where relief is available under section 96
(post-cessation trade relief) unless—
40
(i)
the trade was a charitable trade in relation to the tax year in
which the cessation occurred, or

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(ii)
the trade was not a charitable trade in relation to that tax year
but profits of the trade arising immediately before the cessation
would have been exempt from income tax as a result of one of
the exemptions in clauses 526, 529 or 530,
(c)
any loss made in the tax year in a trade, or in a UK property business or
5
an overseas property business, carried on by the charitable trust, if—
(i)
the loss relates to land, and
(ii)
profits of the trade, or income of the business, generated from
the land in the tax year would not be exempt from income tax
as a result of the exemptions in section 531,
10
(d)
any payment made in the tax year by the charitable trust in connection
with a trade or UK property business in circumstances where relief is
available under section 96 or 125 (post-cessation trade or property
relief), if—
(i)
the payment relates to land, and
15
(ii)
profits of the trade, or income of the business, generated from
the land immediately before the cessation would not have been
exempt from income tax as a result of the exemptions in section
531,
(e)
any loss made in the tax year in a miscellaneous transaction entered
20
into by the charitable trust otherwise than in the course of carrying out
a charitable purpose,
(f)
any expenditure incurred by the charitable trust in the tax year, not
falling within paragraphs (b) or (d), which is not incurred for charitable
purposes only and is not required to be taken into account in
25
calculating—
(i)
the profits of, or losses made in, any trade, UK property
business or overseas property business carried on by the
charitable trust, or
(ii)
the profit or loss made in any miscellaneous transaction entered
30
into by the charitable trust,
(g)
any payment made in the tax year by the charitable trust to a
substantial donor which is treated under section 551(1) or (5) as non-
charitable expenditure,
(h)
any non-charitable expenditure treated as incurred under section
35
551(2) as a result of a transaction between the charitable trust and a
substantial donor,
(i)
the amount of any of the charitable trust’s funds that is invested in the
tax year in an investment which is not an approved charitable
investment (see section 558), and
40
(j)
any amount lent in the tax year by the charitable trust, if the loan is
neither an investment nor an approved charitable loan (see section 561).

But anything which falls within more than one of the above paragraphs counts
as non-charitable expenditure only once.
(2)
An amount may also be non-charitable expenditure for a tax year as a result of
45
section 562 (excess expenditure treated as non-charitable expenditure of earlier
years).
(3)
This section needs to be read with—
section 525 (meaning of “charitable trade”),
sections 544 to 548 (supplementary provision in relation to this section, in
50
particular in relation to subsection (1)(f), (i) and (j)),

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sections 549 to 557 (transactions with substantial donors),
section 558 (approved charitable investments), and
section 561 (approved charitable loans).
544
Section 543: supplementary
(1)
This section applies for the purposes of section 543.
5
(2)
For rules about the calculation of losses, see—
(a)
section 26 of ITTOIA 2005 (losses of a trade calculated on same basis as
profits),
(b)
section 272 of that Act (which applies section 26 of that Act, so that
losses of a UK property business or overseas property business are
10
calculated on the same basis as profits), and
(c)
section 872 of that Act (losses from miscellaneous transactions
calculated on same basis as miscellaneous income).
(3)
A transaction is a miscellaneous transaction if it is of such a nature that, if
income or gains had arisen from it—
15
(a)
ignoring section 527 (exemption from charges under provisions to
which section 950 applies), it would have been charged to income tax
under or by virtue of any provision to which section 950 applies, and
(b)
the trustees of the charitable trust would have been liable for any tax so
chargeable.
20
(4)
References to a charitable trust making a loss in a trade in a tax year are to the
charitable trust making a loss in the trade in the basis period for the tax year.
545
Section 543(1)(f): meaning of expenditure
(1)
For the purposes of section 543(1)(f) “expenditure” includes expenditure of a
capital nature.
25
(2)
None of the following is “expenditure” for those purposes—
(a)
the investment of any of the charitable trust’s funds,
(b)
the making of a loan by the charitable trust, or
(c)
the repayment by the charitable trust of the whole or a part of a loan
made to it.
30
546
Section 543(1)(f): tax year in which certain expenditure treated as incurred
(1)
This section applies for the purposes of section 543(1)(f).
(2)
Subsection (3) applies to expenditure which is referable to commitments
(whether or not of a contractual nature) that the charitable trust has entered
into before or during a tax year.
35
(3)
The expenditure is treated as incurred in the tax year if, had the charitable trust
been required to draw up accounts that met the requirements mentioned in
subsection (4), the expenditure would have been required to be taken into
account in preparing those accounts.
(4)
The requirements referred to in subsection (3) are—
40
(a)
that the accounts are drawn up for the tax year, and

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(b)
that UK generally accepted accounting practice applies with respect to
them.
547
Section 543(1)(f): payment to body outside the UK
A payment made, or to be made, to a body situated outside the United
Kingdom is non-charitable expenditure under section 543(1)(f) if—
5
(a)
it is incurred for charitable purposes only, but
(b)
the trustees of the charitable trust have not taken such steps as are
reasonable in the circumstances to ensure that the payment will be
applied for charitable purposes.
548
Section 543(1)(i) and (j): investments and loans
10
(1)
Subsection (2) applies if in a tax year a charitable trust—
(a)
realises the whole or part of an investment which was made in the tax
year and is not an approved charitable investment (see section 558), or
(b)
is repaid the whole or part of a loan which was made in the tax year and
is neither an investment nor an approved charitable loan (see section
15
561).
(2)
Any further investment or lending in the tax year of the sum realised or repaid,
so far as it does not exceed the sum originally invested or lent, is not non-
charitable expenditure as a result of section 543(1)(i) or (j).
Substantial donor transactions
20
549
Transactions with substantial donors
(1)
For the purposes of this section and sections 551 to 553, “substantial donor
transaction” means any of the following—
(a)
the sale or letting of property by a charitable trust to a substantial
donor,
25
(b)
the sale or letting of property to a charitable trust by a substantial
donor,
(c)
the provision of services by a charitable trust to a substantial donor,
(d)
the provision of services to a charitable trust by a substantial donor,
(e)
an exchange of property between a charitable trust and a substantial
30
donor,
(f)
the provision of financial assistance by a charitable trust to a substantial
donor,
(g)
the provision of financial assistance to a charitable trust by a substantial
donor, and
35
(h)
investment by a charitable trust in the business of a substantial donor.
(2)
For the purposes of this section and sections 551 to 553, a person is a substantial
donor to a charitable trust for a tax year if—
(a)
the charitable trust receives relievable gifts of at least £25,000 from the
person in a period of 12 months in which the tax year wholly or partly
40
falls, or

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(b)
the charitable trust receives relievable gifts of at least £100,000 from the
person in a period of six years in which the tax year wholly or partly
falls.
(3)
If a person is a substantial donor to a charitable trust for a tax year as a result
of subsection (2)(a) or (b), the person is a substantial donor to the charitable
5
trust for each of the following five tax years.
(4)
A transaction entered into in a tax year with a person who is a substantial
donor for that year may be a substantial donor transaction, even if it was not
until after the transaction was entered into that the person first met the
definition of “substantial donor” for the tax year.
10
550
Meaning of “relievable gift”
A gift is a “relievable gift” for the purposes of section 549(2) if relief is available
in respect of it under—
(a)
section 83A of ICTA (gifts in kind),
(b)
section 339 of ICTA (donations by companies),
15
(c)
sections 587B and 587C of ICTA (gifts of shares, securities and real
property),
(d)
section 257 of TCGA 1992 (gifts of chargeable assets),
(e)
section 63 of CAA 2001 (gifts of plant and machinery),
(f)
sections 713 to 715 of ITEPA 2003 (payroll giving),
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(g)
section 108 of ITTOIA 2005 (gifts of trading stock),
(h)
sections 628 and 630 of ITTOIA 2005 (gifts from settlor-interested
trusts), or
(i)
Chapters 2 or 3 of Part 8 of this Act (gift aid and gifts of shares,
securities and real property).
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551
Non-charitable expenditure in substantial donor transactions
(1)
A payment made by a charitable trust to a substantial donor in the course of,
or for the purposes of, a substantial donor transaction is treated for the
purposes of section 543 as non-charitable expenditure.
(2)
If the terms of a substantial donor transaction are less beneficial to the
30
charitable trust than terms which might be expected in a transaction at arm’s
length, the charitable trust is treated for the purposes of section 543 as
incurring non-charitable expenditure.
(3)
The amount of the non-charitable expenditure that the charitable trust is
treated as incurring under subsection (2) is equal to the amount which an
35
officer of Revenue and Customs determines as the cost to the charitable trust
of the difference in terms.
(4)
A charity is treated as incurring non-charitable expenditure under subsection
(2) at such time (or times) as an officer of Revenue and Customs may
determine.
40
(5)
A payment by a charitable trust of remuneration to a substantial donor is
treated for the purposes of section 543 as non-charitable expenditure unless it
is remuneration, for services as a trustee, which is approved by—
(a)
the Charity Commission,

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(b)
another body with responsibility for regulating charities by virtue of
legislation having effect in respect of any part of the United Kingdom,
or
(c)
a court.
(6)
If remuneration is paid otherwise than in money, subsection (5) applies as if it
5
had been paid in money of an amount that would, under Part 3 of ITEPA 2003,
be the cash equivalent of the remuneration as a benefit.
552
Adjustment if section 551(1) and (2) applied to single transaction
(1)
Either or both of subsections (1) and (2) of section 551 may be applied to a
single transaction between a charitable trust and a substantial donor.
10
(2)
But if they are both applied, the amount of non-charitable expenditure that the
charitable trust would, apart from this subsection, be treated as incurring
under section 551(2) in respect of the transaction, is reduced by the section
551(1) amount (but is not to be reduced below nil).
(3)
The “section 551(1) amount” means the amount of any payment made by the
15
charitable trust, in the course of, or for the purposes of, the transaction, that is
treated as non-charitable expenditure under section 551(1).
553
Section 551: certain payments and benefits to be ignored
(1)
In the application of section 551, payments by a charitable trust, or benefits
arising to a substantial donor from a transaction, are to be ignored so far as—
20
(a)
they relate to a donation by the donor, and
(b)
either condition A or condition B is met.
(2)
Condition A is that—
(a)
the donation is made by an individual, and
(b)
the payments or benefits do not prevent the donation being a
25
qualifying donation for the purposes of section 416 because of
subsection (7)(b) of that section (restrictions on associated benefits).
(3)
Condition B is that—
(a)
the donation is made by a company, and
(b)
the payments or benefits do not prevent the donation being a
30
qualifying donation for the purposes of section 339 of ICTA because of
subsection (3B)(b) of that section (restrictions on associated benefits).
554
Transactions: exceptions
(1)
A transaction within section 549(1)(b) or (d) is not a substantial donor
transaction if an officer of Revenue and Customs determines that the
35
transaction—
(a)
takes place in the course of a business carried on by the substantial
donor,
(b)
is on terms which are no less beneficial to the charitable trust than those
which might be expected in a transaction at arm’s length, and
40
(c)
is not part of an arrangement for the avoidance of any tax.