This change is in principle adverse to some taxpayers and favourable to others. But it is expected to have no practical effect as it is in line with current practice.

Change 92: Charitable trusts: exemption for adjustment income and post-cessation receipts of certain trades and property businesses: clauses 524, 525, 526, 531 and 539

This change introduces an exemption from income tax, in the case of charitable trusts, for the adjustment income and post-cessation receipts of trades whose profits are exempt, or would be exempt if the trade had not ceased. It also introduces an exemption for the adjustment income and post-cessation receipts of property businesses, and of trades in cases where such income or receipts arise from land.

The general rule for calculating the profits of a trade for tax purposes is that the profits must be calculated on the basis of accounts drawn up in accordance with generally accepted accounting practice (see section 25 of ITTOIA). But an adjustment will be required if there is a change of basis in circumstances where the "old basis" accorded with law or practice in one period of account and the "new basis" accords with law and practice in the next period of account (see section 227 of ITTOIA). If the adjustment is positive, it is called adjustment income.

Adjustment income is charged to tax as trading income under section 228 of ITTOIA. There is no exemption for adjustment income in the source legislation for charitable trusts. But HMRC practice is to treat adjustment income in the same way as other trading income. That is, to treat it as exempt if it arises from a trade that benefits from the exemption in section 505(1)(e) of ICTA (rewritten as clause 524), or if it arises in a small-scale trade where the income limits in section 46 of FA 2000 (rewritten as clause 528) are not breached.

This change provides an exemption for adjustment income of a charitable trade or a small-scale trade. If a trade is treated as two separate trades in accordance with clause 525(2) any adjustment income will be apportioned to the two parts (and this could mean completely apportioned to just one part if relating only to that part) and an exemption will then be available for the adjustment income apportioned to the charitable part.

Post-cessation receipts are taxed under Chapter 18 of Part 2 of ITTOIA. There is no exemption for post-cessation receipts in the source legislation for charitable trusts, other than the exemption in section 46 of FA 2000 (rewritten in clauses 526 to 528) which applies only if the receipts are below a certain level. But HMRC practice is to treat post-cessation receipts as exempt from income tax if they arise from a trade that benefited from the exemption in section 505(1)(e) of ICTA (rewritten as clause 524).

This change provides an exemption for post-cessation receipts from a charitable trade. If a trade is treated as two separate trades in accordance with clause 525(2) any post-cessation receipts will be apportioned to the two parts (and this could mean completely apportioned to just one part if relating only to that part) and an exemption will then be available for the receipts apportioned to the charitable part.

The source legislation (section 505(1)(a) of ICTA, rewritten in clause 531) provides an exemption from tax under Parts 2 and 3 of ITTOIA in respect of any profits or gains arising in respect of rents or other receipts from an estate, interest or right in or over any land. The exemption is available only to the extent that the profits or gains arise from land vested for charitable purposes and the profits or gains are applied for charitable purposes. HMRC practice is to treat associated adjustment income and post cessation receipts as eligible for exemption. This change provides such an exemption.

This change is in taxpayers' favour in principle. But it is expected to have no practical effect as it is in line with current practice.

Change 93: Charitable trusts: mixed trades: requiring an apportionment to be just and reasonable: clause 525

This change requires apportionment of expenses etc of a "mixed trade", between the deemed charitable trade and the deemed other trade, be "just" as well as "reasonable".

The source legislation in section 505(1B) of ICTA, as inserted by section 56 of FA 2006, requires such apportionments to be "reasonable". All other apportionments in this Act are required to be "just and reasonable". There is no reason why an apportionment should not be on a just and reasonable basis. And it is desirable that all apportionments should be made on the same basis.

Accordingly, clause 525(4) requires a just and reasonable apportionment to be made where the source legislation requires the apportionment to be made on a reasonable basis.

The same change was made in ITTOIA, to provide a uniform expression of the basis on which apportionments are to be made.

This change makes a minor amendment to the basis of apportionment for "mixed trades", but is expected to have no practical effect as it is in line with current practice.

Change 94: Charitable trusts: limit on exemption for profits etc of small-scale trades and certain miscellaneous income: clauses 526 and 528

This change rewrites the limit on the level of a charitable trust's income for the purposes of the exemption for profits etc of small-scale trades in clauses 526 and certain miscellaneous income in clause 527 by reference to the charitable trust's incoming resources rather than in terms of its gross income. It also removes the requirement that the exemption for profits etc of a small-scale trade can apply only if the trade is carried on wholly or partly in the United Kingdom.

Section 46 of FA 2000 provides for an exemption from income tax for certain profits or other income or gains of a charitable trust which are chargeable to income tax. The exemption applies in respect of a trade carried on wholly or partly in the United Kingdom or under or by virtue of any provision to which clause 950 of this Bill (based on section 836B of ICTA) applies.

Section 46(3) of FA 2000 provides that one of the requirements for the exemption to apply is that the charitable trust's "gross income" must not exceed the "requisite limit". The "requisite limit" is defined in section 46(4) of that Act and depends on the charitable trust's incoming resources for the chargeable period.

Clause 528 sets out the condition about the level of the trading and miscellaneous income that has to be met if the exemptions in clauses 526 or 527 are to be available.

The condition operates by reference to the incoming resources associated with the trading activity and miscellaneous transactions whose profits are not exempt under other provisions 536. The expression "incoming resources" is used instead of "gross income" because this accounting term is a more direct and accessible way of capturing the meaning of "gross income" as defined in the source legislation.

The source legislation aimed to bring in "turnover" for trading activity and gross receipts for Schedule D Case VI transactions. But these terms are not used in charity accounting. "Incoming resources" is familiar to those involved in preparing or working with charity accounts. And since charity accounting does not allow offset between income and expenditure in determining disclosure (in contrast with the disclosure in the accounts of commercial organisations), it is relatively easy to check the limits.

It is not clear in section 46 of FA 2000 whether "gross income" includes incoming resources from an activity which gives rise to a loss, in cases where a profit would be taxable. But incoming resources from an activity are included irrespective of whether there is a profit or a loss.

Charitable trusts do not in practice include balancing charges in "gross income". And balancing charges do not come within the meaning of incoming resources.

The requirement in section 46(1)(a) of FA 2000 that the trade is carried on wholly or partly in the United Kingdom reflects the pre-ITTOIA requirement that the trade be subject to tax under Schedule D Case I (rather than Case V). In practice a charitable trust established in the United Kingdom will not carry on a trade wholly outside the United Kingdom, given the oversight exercised from its "head office". And HMRC practice has been to accept that the profits of a small-scale trade are exempt, without considering where the trade is carried on. So the requirement has been dropped.

This change aligns the rewritten legislation with the way it is considered section 46 of FA 2000 is operated in practice.

This change is in taxpayers' favour in principle. But it is expected to have no practical effect as it is in line with current practice.

Change 95: Charitable trusts: exemption for profits of fund raising events: clauses 529 and 539

This change gives statutory effect to ESC C4 (trading activities for charitable purposes).

The concession provides an exemption for the profits of various fund-raising activities which amount to a trade, but which are only undertaken to raise money for charity. The concession does not apply in circumstances where an attempt is made to use it for tax avoidance, and to reflect this the new statutory exemption is subject to the restrictions in clause 539.

The fund-raising event has to be of a kind that falls within the exemption from VAT under Group 12 of Schedule 9 to the Value Added Tax Act 1994. This Schedule provides an exemption from VAT for the supply by a charity of goods and services in connection with an event that is organised primarily to raise money for itself or other charities. The Schedule defines "event" and places certain limits on the number of events that a charity can hold in the same location in any given year.

Clause 529, in line with the extra-statutory concession, is linked to the VAT legislation to provide consistency in tax treatment.

This change is in taxpayers' favour in principle. But it is expected to have no practical effect as it is in line with current practice.

Change 96: Charitable trusts: exemption for income from intellectual property etc: clause 536

This change provides an exemption from income tax for certain royalties and other income from intellectual property and certain income derived from a relevant telecommunication right, whether or not the income is annual in nature.

Section 505(1)(c)(ii) of ICTA provides for an exemption from tax in respect of (among other things) income chargeable under section 579 of ITTOIA and income chargeable under Chapter 4 of Part 5 of ITTOIA. But only, in each case, to the extent that the income relates to annual payments.

Section 579 of ITTOIA charges royalties etc from intellectual property and Chapter 4 of Part 5 charges certain telecommunication rights. In each case the charge to tax is on income that does not arise from the carrying on of a trade. So the income chargeable under the provisions referred to can be annual in nature, but need not be so. Prior to ITTOIA, income of this sort was chargeable under Schedule D Case III if annual in nature, and under Schedule D Case VI if not. So the exemption applied only to Case III income.

But in practice HMRC allow an exemption for income chargeable under section 579 or under Chapter 4 of Part 5 whether or not it is annual in nature. This change is in line with that practice, and reflects the unity of the charging provisions post-ITTOIA.

This change is in taxpayers' favour in principle. But it is expected to have no practical effect as it is in line with current practice.

Change 97: Charitable trusts: exemption for income from estates in administration: clauses 537 and 539

This change provides an exemption to trustees of charitable trusts who are liable to income tax under section 659 of ITTOIA on estate income charged under section 649 of that Act, to the extent that the income is applied to the purposes of the charitable trust.

Estate income is income from property held by the personal representatives or administrators of the estate of a deceased person on behalf of the beneficiaries of the estate. The administrators are liable to income tax on the income.

Income of United Kingdom estates and United Kingdom source income of foreign estates is chargeable under section 649 of ITTOIA.

Foreign income of foreign estates (see section 651 of ITTOIA) is treated as arising from sources outside the United Kingdom (see section 658(2) of that Act) and is not chargeable under section 649 of that Act but falls to be dealt with in accordance with the rules applying to income from the particular source. And any relevant exemptions provided by Part 10 of this Bill apply accordingly.

There is a long-standing HMRC practice of treating United Kingdom estate income received by charities as exempt, and of allowing repayment claims in such cases. This change puts this on an explicit statutory basis.

This change is in taxpayers' favour in principle. But it is expected to have no practical effect as it is in line with current practice.

Change 98: Charitable trusts: meaning of non-charitable expenditure: clauses 543, 544 and 545

This change clarifies the meaning of "non-charitable expenditure".

Section 506(1) of ICTA defines "charitable expenditure" as:

(subject to subsections (3) to (5) below) expenditure which is exclusively for charitable purposes.

Section 506(3) to (5) treats certain payments, investments or loans as amounts of non-charitable expenditure.

Section 505(4) of ICTA restricts a charity's tax exemption by reference to non-charitable expenditure. "Non-charitable expenditure" is not defined but, by implication, it is expenditure which is not charitable expenditure.

Clauses 543, 544 and 545 set out the definition of "non-charitable expenditure" in some detail, to reflect practice and HMRC guidance.

Clause 543(1)(a) to (f), supported by clause 544, provide in relation to trades, property businesses and miscellaneous transactions, that it is losses which may count as non-charitable expenditure, rather than those expenses which are required to be taken into account in calculating the profits or losses concerned.

Clause 543(1)(a) to (f) also ensure that such losses do not count as non-charitable expenditure if corresponding profits would have been exempt under the provisions about small-scale trades, fund-raising events, lotteries or property income in clauses 526, 529, 530 and 531. And clause 543(1)(a)(i) makes it clear that losses made in a charitable trade do not count as non-charitable expenditure.

Clause 545 supports clause 543(1)(f), making it clear that expenditure (which is not itself defined in the source legislation) includes capital expenditure, but not the making of investments or loans or the repayment of loans made to the charitable trust. Clause 543(1)(i) and (j) then make specific provision about investments or loans that are not approved charitable investments or loans, reflecting section 506(4) of ICTA.

This change is adverse to some taxpayers and favourable to others in principle. But it is expected to have no practical effect as it is line with current practice.

Change 99: Charitable trusts: tax year in which certain expenditure treated as incurred: clause 546

This change makes it explicit that the time when expenditure is treated as incurred depends on UK generally accepted accounting practice (UK GAAP).

Section 506(2) of ICTA provides that, for the purposes of section 505 of ICTA:

where expenditure which is not actually incurred in a particular chargeable period properly falls to be charged against the income of that chargeable period as being referable to commitments (whether or not of a contractual nature) which the charity has entered into before or during that period, it shall be treated as incurred in that period.

Section 506(2) was first enacted in FA 1986 and advanced the time that certain expenditure is recognised, on the basis that charitable trusts may have some flexibility in this regard. As a result of subsequent developments in accounting practice, the legislation now implicitly mirrors UK GAAP.

Clause 546 is based on section 506(2), and makes the reference to UK GAAP explicit. Clause 931(2) defines UK GAAP for the Income Tax Acts.

Clause 546 is drafted in terms of the position if UK GAAP had applied because there is no legal or other obligation requiring all charitable trusts to prepare their accounts in accordance with UK GAAP. In particular "Accounting and Reporting for Charities: Statement of Recommended Practice (revised 2005)", which imposes a requirement to account in accordance with UK GAAP on charitable trusts (with certain exceptions), is not mandatory in Scotland and Northern Ireland. Neither does it apply to charitable trusts which are able to prepare accounts on a "receipts and payments" basis rather than an "accruals" basis.

This approach ensures parity of treatment as between charitable trusts operating in different parts of the United Kingdom or adopting different bases of accounting.

This change is adverse to some taxpayers and favourable to others in principle. But it is expected to have no practical effect as it is in line with current practice.

Change 100: Charitable trusts: approved charitable investments: clauses 558, 559, 560 and 955

This change modernises the list of investments qualifying as approved charitable investments for the purposes of the rules restricting exemptions.

Although the list is based on Part I of Schedule 20 to ICTA (qualifying investments), it does not replicate the approach taken in that Part.

Part I of Schedule 20 defines qualifying investments by specifying certain investments itself, and also by referring to investments falling within Part I, Part II (apart from paragraph 13) or Part III of Schedule 1 to the Trustee Investment Act 1961 (TIA 1961).

For trust law purposes TIA 1961 has been largely superseded by the Trustee Act 2000 (TA 2000). TA 2000 increased significantly the range of investments trustees can invest in, and it would be a significant change in the law to allow any investment in accordance with TA 2000 to be treated as an approved charitable investment. But it would be unhelpful to continue to refer for tax purposes to a Schedule to an Act (TIA 1961) that trustees no longer need to refer to for investment purposes.

So the detail of investments covered by Schedule 1 to TIA 1961 are incorporated in clauses 558 and 559 in a more succinct and updated form.

This has been done by referring to the types of investment that a charitable trust can hold on "an approved basis". So investment in, for example, fixed or variable interest securities issued by any of Her Majesty's Government, the government of any overseas territory within the Commonwealth and the government of any state within (broadly) the European Union (EU) is reduced to securities issued by the government of any state in the EU and of any other state. This is wider, and so (strictly) is a taxpayer-favourable change. And rather than list the large number of individual entities in whose securities a charitable trust can hold an approved investment, reference is made to the international entities listed in the directive on the taxation of interest payments. Again, this is a taxpayer-favourable change.

This approach tends to broaden the scope of possible investments, but in a way that is in keeping with HMRC practice in relation to claims that an individual investment should be regarded as qualifying, as set out in paragraph 9(1) of Schedule 20.

When it comes to the ability to hold an approved investment in the securities of (broadly) a non-listed company, the anti-avoidance provisions in Part IV of Schedule 1 to TIA have been largely repeated.

A more detailed analysis of where the approved investments in the source legislation appear in the rewritten clauses 558 and 559 is as follows:

This change is adverse to some taxpayers and favourable to others in principle. But it is expected to have no practical effect as it is in line with current practice.

Change 101: Transactions in securities, transfer of assets abroad: power to obtain information: minimum time to respond: clauses 636 and 681

This change provides that the recipient of a notice to provide information relevant to the legislation on transactions in securities or transfers of assets abroad must have at least 30 days to reply, rather than at least 28 days.

Sections 708 and 745 of ICTA enable HMRC to serve notices requiring the recipient to provide information relevant to the legislation on, respectively, transactions in securities and transfers of assets abroad.

Section 708 and 745 require that the recipient must be given at least 28 days in which to reply. In other similar provisions, such as section 778 of ICTA, which is rewritten in clauses 704 and 721, the statutory minimum is 30 days.

Clauses 636 and 681 rewrite sections 708 and 745 respectively. They harmonise the time limits by setting the statutory minimum at 30 days.