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Part 11: Charitable companies etc
Overview
1429. This Part contains rules specific to charitable companies. It follows to a large extent the structure of Part 10 of ITA, and, like those provisions, is based on sections 505 to 506C of, and Schedule 20 to, ICTA, section 25 of FA 1990 and section 46 of FA 2000. It also rewrites certain provisions which have only ever applied for corporation tax purposes such as sections 507 and 508 of ICTA.
Chapter 1: Introduction
Overview
1430. This Chapter gives an overview of the Part and provides certain important definitions.
Clause 466: Overview of Part
1431. This clause sets out the scope of the Part.
Clause 467: Meaning of “charitable company”
1432. This clause defines “charitable company” for the purposes of this Part and is based on section 506(1) of ICTA, section 25(12) of FA 1990, section 46(6) of FA 2000 and section 83(5) of FA 2004.
1433. The effect of splitting the source legislation between income tax and corporation tax is that the income tax rules apply to charities constituted in the form of charitable trusts while the corporation tax rules apply to charitable companies.
1434. The definition of charitable company therefore includes charities constituted as unincorporated associations and charities incorporated by Royal Charter.
1435. A definition of a “charity” is included in clause 1119 of this Bill. The definition for income tax is in section 989 of ITA.
Clause 468: Meaning of “eligible body”
1436. This clause lists the institutions which are referred to in this Part as “eligible bodies”. It is based on section 507(1) of ICTA.
Clause 469: Conditions for qualifying as a scientific research association
1437. This clause sets out the conditions necessary for a company to qualify as a scientific research association (SRA) for the purposes of this Part. It is based on section 508(1) to (3) of ICTA.
Clause 470: Meaning of “research and development” in section 469.
1438. This clause applies the definition of “research and development” in clause 1138. It is based on section 508(3) and (4).
1439. Subsection (2) follows the approach taken in clause 1138 which draws on the regulatory power in section 1006 of ITA.
Chapter 2: Gifts and other payments
Overview
1440. This Chapter provides the rules on grossing up and exemptions for gifts and other payments paid by individuals and companies to charities and other bodies within this Part.
Clause 471: Gifts qualifying for gift aid relief: income tax treated as paid
1441. This clause deals with the income tax treated as paid when a charitable company receives gift aid donations from individuals. It is based on section 25(10) and (12) of FA 1990. The corresponding rule for income tax is in sections 520 of ITA.
1442. The company is treated as receiving a grossed up amount, and the tax treated as deducted from the gift is treated as paid by the charitable company.
Clause 472: Gifts qualifying for gift aid relief: corporation tax liability and exemption
1443. This clause sets out the charge to tax and exemption that can arise on gift aid payments received by a charitable company. It is based on section 505(1) of ICTA, section 25(10) and (12) of FA 1990 and section 83(4) of FA 2004. The corresponding rule for income tax is in section 521 of ITA save that this clause incorporates the requirement to make a claim.
1444. The clause imposes a freestanding charge to corporation tax on gift aid payments, unlike the source legislation which operates by treating the gifts as annual payments. The charge is on the grossed up amount. The clause also sets out the exemption which normally applies if the charitable company uses the gifts for charitable purposes.
1445. Subsection (4) provides that a claim is necessary for an exemption.
1446. Claims are made either as required during the accounting period, for example to secure repayments of income tax treated as paid in relation to gift aid payments, or in a corporation tax self-assessment return. The need to make a claim ensures that there is a mechanism for appeals in the event of any dispute about the availability or amount of any exemption.
1447. The corporation tax self-assessment procedure means that a charitable company only need complete a tax return, and make the associated claims, if the charitable company is chargeable to tax or is required to do so by HMRC.
1448. The reference in section 505(1) of ICTA to claims being to the Board of Inland Revenue has been changed. Claims are simply to an officer of Revenue and Customs. See Change 5 in Annex 1.
1449. Subsection (5) provides that if an individual makes a direction in a self-assessment return for a tax repayment to be paid as a gift to a charitable company, the company is treated as having made a claim.
Clause 473: Gifts of money from companies: corporation tax liability and exemption
1450. This clause sets out the charge to tax that can arise on gifts received by a charitable company from other companies which are not charities. It is based on section 339(4) and 505(1) of ICTA. The corresponding rule for income tax is in section 522 of ITA save that the requirement to make a claim has been incorporated into the clause.
1451. As with clause 472, this clause imposes a freestanding charge to corporation tax on gifts.
Clause 474: Payments from other charities: corporation tax liability and exemption
1452. This clause prevents avoidance by charities of the restrictions on exemptions by routing non-charitable expenditure through other charities. It is based on section 505(1) and (2) of ICTA. The corresponding rule for income tax is in section 523 of ITA save that the requirement to make a claim has been incorporated into the clause.
1453. The clause operates by imposing a charge to tax on certain payments made by a charity to a charitable company. It also sets out the exemption which normally applies if the charitable company uses the payments for charitable purposes.
1454. Earlier drafts of subsection (1) added to the conditions (now paragraphs (a) to (c)) a further condition (paragraph (d)) that payment should not arise from a source outside the United Kingdom. This requirement has now been removed. It was unnecessary and subsection (1) now rewrites the law accurately as it stands. CTA 2009 replaced the reference to Schedule D Case III in section 505(2) of ICTA with a reference to the charge to corporation tax on income. The amendment made it clearer that the charge under section 505(2) is not limited to payments from a source in the United Kingdom.
1455. Subsection (4) makes it clear that section 494 of ITA, which deals with the grossing up of discretionary payments from trusts, takes precedence over this clause where applicable.
Clause 475: Gifts qualifying for gift aid relief: income tax treated as paid and exemption
1456. This clause gives the treatment that applies when an eligible body receives gift aid donations from individuals. It is based on section 25(10) and (12) of FA 1990 and sections 505(1) and 507(1) of ICTA. The corresponding rule for income tax is in section 520 of ITA save that the exemption and the requirement to make a claim has been incorporated into the clause.
1457. The company is treated as receiving a grossed up amount, and the tax treated as deducted from the gift is treated as paid by the charitable company.
1458. Subsection (7) treats eligible bodies as having made a claim for exemption in respect of gifts made under section 429(2) of ITA which are treated as qualifying donations under that Act. See Change 31 in Annex 1.
Clause 476: Gifts of money from companies: exemption
1459. This clause gives the exemption that applies where an eligible body receives a gift of money from a company. It is based on sections 339(4), 505(1) and 507(1) of ICTA.
Clause 477: Gifts of money from companies: exemption
1460. This clause gives the exemption that applies where a scientific research association receives a gift of money from a company. It is based on sections 339(4), 505(1) and 508(1) of ICTA.
Chapter 3: Other exemptions
Overview
1461. This Chapter deals with exemptions other than gifts and payments dealt with in Chapter 2.
Clause 478: Exemption for profits etc of charitable trades
1462. This clause sets out the exemption for trading profits of charitable companies. It is based on section 505(1) of ICTA. The corresponding rule for income tax is in section 524 of ITA.
1463. The exemption applies only if the trade is a charitable trade. This is defined in clause 479.
1464. There is a difference between this clause and the corresponding provision in ITA. Adjustment income (arising, for example, on a change of accounting basis) is an integral part of the trading profits of a company - see section 181 of CTA 2009. Charitable companies are entitled to the exemption on adjustment income on the same basis as their trading profits. The consequence is that, in contrast to ITA, there is no need for a change in the law to establish an exemption for adjustment income.
1465. This clause does make it clear that, in the same way as the income tax legislation, post-cessation receipts (arising from what was a charitable trade) are exempt, in line with practice. Post-cessation receipt is defined by reference to Chapter 15 of Part 3 of CTA 2009. See Change 32 in Annex 1.
1466. Exemptions for small-scale trades are dealt with separately in clause 480.
Clause 479: Meaning of “charitable trade”
1467. This clause defines “charitable trade” for the purposes of the Part. It is based on section 505(1) and (1B) of ICTA. The corresponding rule for income tax is in section 525 of ITA.
1468. The source legislation in section 505(1)(e) of ICTA refers to the trade being carried on “in the United Kingdom or elsewhere”, and section 505(1)(e)(i) refers to it being exercised in the “actual” carrying out of a primary purpose. The words in inverted commas are omitted as they add nothing.
1469. The clause differs slightly from its income tax counterpart in section 525 of ITA. For income tax the conditions must be met throughout the basis period for the relevant tax year to reflect the fact that the two time periods are not usually the same, and it clearly makes sense to test the condition by reference to the period in which the activity was being carried on. This is not necessary for corporation tax as the accounting period is both the basis period and the chargeable period.
1470. Subsection (4), about making apportionments where different parts of a trade are treated as separate trades, makes specific mention of post-cessation receipts, but unlike the equivalent income tax provision there is no need for a specific apportionment for adjustment income. See Change 32 in Annex 1 and the commentary on clause 478.
1471. Any apportionments must be “just” as well as “reasonable”. Only the latter term appeared in the source legislation. See Change 33 in Annex 1.
Clause 480: Exemption for profits of small-scale trades
1472. This clause provides an exemption for trading income, related adjustment income and post-cessation receipts in circumstances where the amount of income to be exempted under this clause and the next is small, and provided the income is applied to the purposes of the charitable company. It is based on section 46 of FA 2000. The corresponding rule for income tax is in section 526 of ITA.
1473. The exemption provided by this clause applies only if the income is not otherwise exempt. So profits from primary purpose trading (including related adjustment income and post-cessation receipts) are exempt under clause 478, whereas profits from a non-primary purpose trading activity (including related adjustment income and post-cessation receipts) may be exempt under this clause.
1474. Change 32 is not necessary here as post-cessation receipts from a “small trade” are already exempt because of the exemption in section 46 FA 2000 for income chargeable under Schedule D Case VI.
1475. The condition about the limit on the level of income for this exemption to apply is in clause 482. For Change 34 see commentary on clause 482.
Clause 481: Exemption from charges under provisions to which section 1173 applies
1476. This clause provides an exemption for certain miscellaneous income and gains arising to a charitable company and applied to the purposes of the charitable company. It is based on section 46 of FA 2000. The corresponding rule for income tax is in section 527 of ITA.
1477. Section 834A of ICTA, which lists sources of income previously charged to tax under Schedule D Case VI, was inserted by paragraph 273 of Schedule 1 to CTA 2009. It is rewritten in this Bill as clause 1173. Now that the relief is by reference to the list in clause 1173, some of the exclusions from the relief listed in the source legislation no longer need to be mentioned explicitly as they are not within the scope of clause 1173. These are sections 703, 788 and 790 of ICTA, and paragraph 52(4) of Schedule 18 to FA 1998.
1478. Subsection (2) specifies the particular types of income and gains which cannot benefit from the exemption but which are within clause 1173.
1479. The exemption provided by this clause applies only if the income or gains are not otherwise exempt. So, for example, post-cessation primary purpose trading receipts are exempt under clause 478 and post-cessation trading receipts from a non-primary purpose trading activity are exempt under clause 480.
1480. The scope of this provision is therefore narrowed slightly in that post-cessation receipts from a primary purpose trade can now be exempt under clause 478 whereas previously they could only be statutorily exempt under section 46 of FA 2000. (See Change 32 in Annex 1 and the commentary on clause 478.)
1481. The condition about the level of the income and gains is in clause 482. For Change 34 see commentary on clause 482.
Clause 482: Condition as to trading and miscellaneous incoming resources
1482. This clause sets out the condition about the limit on the level of trading and miscellaneous incoming resources that has to be met if the exemptions in clauses 480 and 481 are to apply. It is based on section 46 of FA 2000. The corresponding rule for income tax is in section 528 of ITA.
1483. The condition operates by reference to the incoming resources associated with the trading activity and miscellaneous transactions whose profits are not exempt under the other exemptions in this Part. 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 the income labelled “gross income” in the source legislation. There are also related points of clarification. See Change 34 in Annex 1. This change also affects clauses 480 and 481 (see following paragraph).
1484. Trading incoming resources and miscellaneous incoming resources are defined in subsections (2) and (4) respectively. The “requisite limit” is defined in subsection (6). The total incoming resources must not exceed the limit set out in subsection (6)(a), but subsection (6)(b) ensures that the limit is never less than £5000 or greater than £50,000. Accordingly if a charitable company’s trading and miscellaneous incoming resources relating to its non-exempt activities for an accounting period are, say, £4500 it would qualify for the exemption (provided that all other conditions are met) under clause 480 or 481, even if that amount exceeds 25% of its total incoming resources for the accounting period.
1485. Similarly if the incoming resources related to its non-exempt activities exceed £50,000 in an accounting period, the charitable company cannot benefit from the exemptions in clause 480 or 481, even if this figure does not breach the 25% limit in subsection (6)(a).
Clause 483: Exemption for profits from fund-raising events
1486. This clause gives statutory effect to ESC C4 as it applies to charitable companies and voluntary organisations provided the profits in question are applied to charitable purposes or transferred to a charity. It is new. The corresponding rule for income tax is in section 529 of ITA.
1487. The fund-raising event has to fall within the exemption from VAT under Group 12 of Schedule 9 to the Value Added Tax Act 1994. That 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.
1488. See Change 35 in Annex 1. This change also affects clauses 490, 491 and 492.
Clause 484: Exemption for profits from lotteries
1489. This clause provides an exemption for lottery income provided the income is applied to the purposes of the charitable company. It is based on section 505(1) of ICTA. The corresponding rule for income tax is in section 530 of ITA.
Clause 485: Exemption for property income etc
1490. This clause sets out the exemption from corporation tax for property income and certain trading income arising from land, provided the income is applied to charitable purposes. It is based on section 505(1) of ICTA. The corresponding rule for income tax is in section 531 of ITA.
1491. The exemption applies if the income is chargeable to tax under either Part 3 or Part 4 of CTA 2009. Subsection (1) deals with income chargeable under Part 3 of CTA 2009 and subsection (2) with income chargeable under Part 4 of CTA 2009.
1492. There is no requirement for the trade to be exercised in the course of carrying on a primary purpose of the charitable company. Instead, the exemption applies if the income derives from land vested for charitable purposes. But if some of the land is vested for charitable purposes and some vested or held for other purposes (for example, as an investment to generate income for non-charitable purposes) it is necessary to allocate the profits of the single property business between the two parts. This reflects the approach of the exemption in the source legislation that looks to particular interests in land, rather than to one overall property business.
1493. This makes the effect of the source legislation in section 505(1)(a) of ICTA explicit. There is no other income arising from land and chargeable to tax under Part 3 of CTA 2009 which is exempt under that provision.
1494. Subsection (3) provides an exemption from corporation tax for distributions from a United Kingdom REIT. The corresponding income tax exemption for this subsection is in section 531(2A) of ITA.
1495. The source legislation in section 505(1)(aa) of ICTA refers to exemption under Part 3 of CTA in respect of distributions to which section 121 of FA 2006 (rewritten in clause 548) applies. Distributions to which section 121 of FA 2006 applies cannot be taxed as trading income and the reference to Part 3 of CTA has not therefore been rewritten.
1496. Section 505(1)(aa) of ICTA also refers to charging provisions in ITTOIA. These are not necessary for corporation tax and are not included in the rewritten legislation.
1497. The United Kingdom REIT rules are rewritten in Part 12 of this Bill.
Clause 486: Exemption for investment income and non-trading profits from loan relationships
1498. This clause sets out the various categories of savings and investment income that qualify for exemption from corporation tax, provided the income is applied to charitable purposes. It is based on section 505(1) of ICTA. The corresponding rule for income tax is in section 532 of ITA.
1499. Interest and related amounts are exempted by reference to the loan relationships regime, and the reference to a non-trading profit on a loan relationship also encompasses income from derivative contracts.
1500. The reference to an “Act” in subsection (1) is extended to include references to Northern Ireland legislation by clause 1119, and to Acts of the Scottish Parliament. See Change 6 in Annex 1.
1501. Section 56(3)(c) of ICTA disapplies the charge to corporation tax on the disposal of rights to receive amounts under a certificate of deposit where profits or gains (other than trading profits) on the disposal arise to a charitable company and are applied for charitable purposes. But section 56(4A) provides that section 56 does not apply for corporation tax purposes except in relation to rights in existence before 1 April 1996. This is necessary because rights arising in or after April 1996 fall within the loan relationships legislation, now rewritten in Part 5 of CTA 2009. Section 56(3)(c) has been retained as a saving in Schedule 2 so that the disposal of pre-1996 rights will still be exempt so far as they are applied to charitable purposes although subsequent rights will fall within subsection (2)(a) of this clause.
Clause 487: Exemption for public revenue dividends
1502. This clause provides an exemption for public revenue dividends used for the repair of certain places of worship. It is based on section 505(1) and (1A) of ICTA. The corresponding rule for income tax is in section 533 of ITA.
Clause 488: Exemption for certain miscellaneous income
1503. This clause provides an exemption from corporation tax for certain categories of miscellaneous income, provided the income is applied to charitable purposes. It is based on section 505(1) of ICTA. The corresponding rule for income tax is in section 536 of ITA.
1504. The reference to an “Act” in subsection (1)(b) is extended to include references to Northern Ireland legislation by clause 1119, and to Acts of the Scottish Parliament. See Change 6 in Annex 1.
1505. Subsection (3)(c) deals with income from intangible fixed assets that does not fall within Part 8 of CTA 2009 because the assets involved are “pre-FA 2002 assets”. Previously the only exemption that covered this type of income was the exemption for annual payments. This clause broadens the exemption to encompass income that is not covered by another exemption (for example, as a trading receipt) and is not exempted by this clause as an annual payment, in the same way as for income tax in section 536 ITA. See Change 36 in Annex 1. This change also affects clauses 490 and 491.
1506. Note that this extension to pre-FA 2002 assets only applies to what would be regarded as non-trading gains under Part 8 of CTA 2009. If the gains arise in respect of a pre-FA 2002 asset in the course of a non-charitable trade the exemption does not apply.
Clause 489: Exemption for income from estates in administration
1507. This clause provides an exemption for estate income received by a charitable company provided the income is applied to the purposes of the charitable company. It is new. The corresponding rule for income tax is in section 537.
1508. Estate income is income from property held by the personal representatives of the estate of a deceased person on behalf of the beneficiaries of the estate. The personal representatives are liable to income tax on the income. The exemption provided by this clause allows a charitable company to recover any income tax suffered by the personal representatives. See Change 37 in Annex 1.
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