Clause 490: Eligible bodies

1509.     This clause extends certain of the exemptions to the five specified bodies defined as “eligible bodies” in clause 468. It is based on section 507 of ICTA.

1510.     Section 507 of ICTA grants to these bodies the exemptions under section 505 that would fall to be allowed to a charitable company if the whole of the charitable company’s income is applied to charitable purposes.

1511.     The exemptions are listed in subsection (3). The list includes exemption under clause 483 and clause 489. These are not part of the source legislation, which refers only to the exemptions under section 505 of ICTA, but they are brought into the purview of the exemptions for these bodies - see Changes 35 and 37 in Annex 1. The broadening of the exemptions under clause 478 in respect of post-cessation receipts, and under clause 488 in respect of intangible fixed assets also has an effect - see Changes 32 and 36 in Annex 1.

1512.     The list does not include the exemption under section 487 as the conditions for this exemption are structured in a different way.

Clause 491: Scientific research associations

1513.     This clause brings scientific research associations (SRAs) within most of the exemptions in this Part. It is based on section 508(1) of ICTA.

1514.     Like the bodies named in clause 490, SRAs are assumed to have met the test regarding the purpose of their expenditure. The relevant exemptions are listed in subsection (3). An SRA may itself be charitable and able to qualify under its own charitable status by meeting the necessary tests. Exemption under this clause does not preclude that possibility, and equally a charitable SRA may still benefit from clause 491.

1515.     The broadening of the exemptions under clause 478 in respect of post-cessation receipts, and under clause 488 in respect of intangible fixed assets also has an effect - see Change 32 and Change 36 in Annex 1. See also Changes 36 and 37 in Annex 1 in respect of the exemptions in subsection (3).

Chapter 4: Restrictions on exemptions

Overview

1516.     This Chapter sets out the restrictions that may apply to the exemptions under Chapters 2 and 3. Restrictions arise where a charitable company incurs non-charitable expenditure. Non-charitable expenditure may also arise where a company makes payments to “substantial donors” (defined in clause 502).

Clause 492: Restrictions on exemptions

1517.     This clause restricts exemptions if income of a charitable company is attributed to non-charitable expenditure. It is based on section 505(3) and (4) of ICTA. The corresponding rule for income tax is in section 539 of ITA.

1518.     Certain exemptions have been extended or put onto a statutory footing:

• post-cessation receipts. See Change 32 in Annex 1 and the commentary on clause 478;

• profits of fund-raising events. See Change 35 in Annex 1 and the commentary on clause 483; and

• income from estates in administration. See Change 37 in Annex 1 and the commentary on clause 489.

The restrictions apply to these extended exemptions.

Clause 493: The non-exempt amount

1519.     This clause specifies how the non-exempt amount is calculated. It is based on section 505(3) and (4) of ICTA. The corresponding rule for income tax is in section 540 of ITA.

1520.     The term “attributable income and gains” is defined in subsection (3). This label replaces “relievable income and gains” as defined in section 505(3) of ICTA.

1521.     Subsection (5) specifies that section 256(4) of TCGA is to be ignored in applying subsection (3)(b). Section 256 of TCGA provides the exemption from capital gains tax for certain gains accruing to a charity. Schedule 1 to this Bill amends section 256 of TCGA, adding subsections (3A), (7) and (8), and amending subsection (4) so that it applies to charitable companies as well as to charitable trusts. Schedule 1 also inserts sections 256C and 256D of TCGA, to deal with the interaction of this Bill and the chargeable gains legislation as regards attributing income and gains to the non-exempt amount. It complements clause 494. The headings to sections 256A and 256B of TCGA are amended to make it clear that they apply to charitable trusts only.

Clause 494: Attributing income to the non-exempt amount

1522.     This clause sets out how income is attributed to the non-exempt amount. It is based on section 505(4) of ICTA. The corresponding rule for income tax is in section 541 of ITA.

1523.     It specifies that the non-exempt amount is to have attributed to it amounts of attributable income or amounts of attributable gains or a combination of both, until it is used up. The commentary on clause 493 contains further detail about the amendments to TCGA 1992.

Clause 495: How income is attributed to the non-exempt amount

1524.     This clause specifies that the charitable company can decide which items of what would otherwise be exempt income or chargeable gains should be treated as taxable. It is based on section 505(7) of ICTA. The corresponding rule for income tax is in section 542 of ITA.

1525.     If the restrictions apply, an amount of income (or chargeable gains) equal to the non-exempt amount (of expenditure) must be identified (as calculated in accordance with clause 493) in order to enable the charitable company to complete its tax return and self-assess its tax liability. This clause provides the mechanism for the charitable company to specify the items or elements of income (such as trading income or investment income) which lose the benefit of exemption.

1526.     If the charitable company has not specified the details within a period of 30 days from the date of a request, an officer of Revenue and Customs can decide. References to “the Board” have been replaced with “an officer of Revenue and Customs”. See Change 5 in Annex 1.

Clause 496: Meaning of “non-charitable expenditure”

1527.     This clause defines “non-charitable expenditure”. It is based on sections 506(1) and (4) and 506A(3) to (5) of ICTA. The corresponding rule for income tax is in section 543 of ITA.

1528.     Section 506(1) of ICTA contains a definition of “charitable expenditure”, but neither expenditure itself nor “non-charitable expenditure” is defined explicitly. This clause sets out the definition in some detail, to reflect practice and HMRC guidance. See Change 38 in Annex 1, which also affects clauses 497 and 498.

1529.     Schedule 2 to this Bill contains a transitional provision to ensure that the pre-22 March 2006 rules continue to operate where appropriate.

Clause 497: Section 496: supplementary

1530.     This clause applies relevant material located elsewhere to the definition of “non-charitable expenditure” (eg rules for computing trading losses) and provides interpretative material. It is new. The corresponding rule for income tax is in section 544 of ITA.

1531.     Change 38 in Annex 1 affects this clause.

Clause 498: Section 496(1)(d): meaning of expenditure

1532.     This clause provides interpretative material about the meaning of “expenditure”. It is new. The corresponding rule for income tax is in section 545 of ITA.

1533.     Change 38 in Annex 1 affects this clause.

1534.     Subsection (1) makes it clear that “expenditure” includes expenditure on the acquisition of capital assets. But expenditure on assets qualifying for capital allowances is taken account of in determining, for example, a trading loss and so is not included in expenditure within clause 496(1)(d).

Clause 499: Section 496(1)(d): accounting period in which certain expenditure treated as incurred

1535.     This clause specifies the accounting period to which expenditure relating to commitments (whether or not contractual in nature) that have been entered into is to be allocated for the purpose of operating the restrictions. It is based on section 506(2) of ICTA. The corresponding rule for income tax is in section 546 of ITA.

1536.     This rule is rewritten in terms which make explicit reference to UK GAAP. See Change 39 in Annex 1.

Clause 500: Section 496(1)(d): payment to body outside the UK

1537.     This clause provides interpretative material about payments to a body outside the United Kingdom. It is based on section 506(3) of ICTA. The corresponding rule for income tax is in section 547 of ITA.

1538.     The clause makes it clear that the onus is on the charitable company to ensure that any payments to a body outside the United Kingdom are applied for charitable purposes. Otherwise the charitable company must classify the payments as “non-charitable expenditure”.

Clause 501: Section 496(1)(g) and (h): investments and loans

1539.     This clause provides interpretation about the making of investments or loans. It is based on section 506(5) of ICTA. The corresponding rule for income tax is in section 548 of ITA.

1540.     The clause makes it clear that it is only the expenditure in the accounting period on making new investments and loans, or expenditure to fund net increases in such investments or loans, that is included in the calculation of non-charitable expenditure.

Clause 502: Transactions with substantial donors

1541.     This clause defines “substantial donor transaction” and explains when a person is a substantial donor to a charitable company. It is based on sections 506A(1) and (2) and 506C(3) of ICTA. The corresponding rule for income tax is in section 549 of ITA.

1542.     References to a charitable company include connected charities (see clause 509) and references to a substantial donor include persons connected with the donor (see clause 510(1)(a)).

Clause 503: Meaning of “relievable gift”

1543.     This clause includes details of the sources of gifts that are “relievable gifts” for the purposes of the preceding clause. It is based on section 506C(1) of ICTA. The corresponding rule for income tax is in section 550 of ITA.

Clause 504: Non-charitable expenditure in substantial donor transactions

1544.     This clause specifies that certain amounts relating to substantial donor transactions are to be treated as non-charitable expenditure. It is based on sections 506A(3) to (5) and 506C(2) and (6) of ICTA. The corresponding rule for income tax is in section 551 of ITA.

1545.     The source legislation specifies that certain matters are to be determined by the Commissioners for HMRC. References to “the Commissioners for Her Majesty’s Revenue and Customs” are replaced with references to “an officer of Revenue and Customs”. See Change 5 in Annex 1, which also affects clauses 507 and 510. The source legislation specifies that, on an appeal against an assessment, the tribunal may review a decision of the Commissioners, so clause 510 specifies that the tribunal may affirm or replace a decision of an officer.

Clause 505: Adjustment if section 504(1) and (2) applied to single transaction

1546.     This clause makes it clear that if both subsections (1) and (2) of clause 504 apply to an amount, the effect is not duplicated to create more “non-charitable expenditure” than the total amount in question. It is based on section 506C(4) of ICTA. The corresponding rule for income tax is in section 552 of ITA.

Clause 506: Section 504: certain payments and benefits to be ignored

1547.     This clause provides that, in determining the amount of non-charitable expenditure, payments or benefits arising from transactions relating to gift aid donations made by individuals or qualifying donations by companies are to be ignored in certain circumstances. It is based on section 506B(7) of ICTA. The corresponding rule for income tax is in section 553 of ITA.

1548.     The payments or benefits are ignored if they would not prevent the donation being a “qualifying donation” by virtue of the rules concerning associated benefits provided to donors in section 416(7)(b) of ITA and clause 191(7) of this Bill.

Clause 507: Transactions: exceptions

1549.     This clause specifies exceptions to the transactions caught by clause 502. It is based on section 506B of ICTA. The corresponding rule for income tax is in section 554 of ITA.

1550.     In particular, the clause carves out of the substantial donor provisions transactions of an ordinary commercial nature between the parties.

1551.     References to “the Commissioners for Her Majesty’s Revenue and Customs” and “the Commissioners” are replaced with references to “an officer of Revenue and Customs”. See Change 5 in Annex 1.

Clause 508: Donors: exceptions

1552.     This clause specifies exceptions to the donors caught by section 502. It is based on section 506B(8) and (9) of ICTA. The corresponding rule for income tax is in section 555 of ITA.

1553.     Subsection (1) concerns companies set up by charitable companies, for example to carry on trading activities as a means of generating funds.

1554.     Subsection (2) concerns registered social landlords and housing associations, which often share services and accommodation with charities as a means of meeting charitable and non-charitable objectives. Section 506B(9) of ICTA is prospectively amended by paragraph 15 of Schedule 9 to the Housing and Regeneration Act 2008 from a day to be appointed by Order (section 325(1) of that Act). This subsection incorporates that amendment with a saving in Schedule 2 to this Bill to apply until the amendment made by paragraph 15 has effect.

Clause 509: Connected charities

1555.     This clause extends, for the purposes of clauses 502 to 508, the meaning of “charitable company” to include charities connected with the charitable company. It is based on section 506C(5) of ICTA. The corresponding rule for income tax is in section 556 of ITA.

1556.     It covers, for example, situations where a charity decides to hold all its properties in one company and organise other charitable activities in another, or where two charities with different objects are managed by the same board of directors.

1557.     Note that the term “connected” in this clause applies to charities and charitable companies and is different from the use of the term in clause 510 where it refers to substantial donors and other persons.

1558.     Subsection (2) gives the definition of “connected” for subsection (1). The definition of “connected persons” in clause 1122 does not apply for this purpose.

Clause 510: Substantial donor transactions: supplementary

1559.     This clause provides interpretation for clauses 502 to 508. It is based on section 506C(7) to (9) of ICTA. The corresponding rule for income tax is in section 557 of ITA.

1560.     The use of the term “connected” relates to substantial donors and other persons and is different from the use of the term in clause 509, where it refers to charities and charitable companies that are connected.

1561.     The definition of “connected person” for the purposes of this clause is in clause 1122 (applied by clause 1176).

1562.     References to “the Commissioners” are replaced with references to “an officer of Revenue and Customs”. See Change 5 in Annex 1.

Clause 511: Approved charitable investments

1563.     This clause sets out which investments, including loans made by way of investment, count as approved charitable investments for the purposes of the rules restricting exemptions. It is based on Schedule 20 to ICTA. The corresponding rule for income tax is in section 558 of ITA.

1564.     The label “approved charitable investment” replaces the label “qualifying investment” in section 506(4) of ICTA.

1565.     Paragraph 2 of Schedule 20 to ICTA specifies investments falling within Schedule 1 to the Trustee Investments Act 1961 (TIA 1961) as approved, with a small exception. For trust law purposes TIA 1961 has been largely superseded by the Trustee Act 2000 (TA 2000). So the detail of investments covered by Schedule 1 to TIA 1961 is incorporated into the clauses in an updated form, removing the need to refer to a Schedule to an Act (TIA 1961) that trustees no longer need to refer to for investment purposes. See Change 40 in Annex 1, which also affects clause 512 and clause 513.

1566.     The reference to securities traded on the Unlisted Securities Market has not been reproduced as the Unlisted Securities Market ceased trading in December 1996.

1567.     Investments can qualify as approved charitable investments if, despite not falling into any of the specified types not requiring a claim, a claim is made and it is accepted by HMRC. In order to be accepted, the claimant must show that the investment is made for the benefit of the charitable company and is not made for the avoidance of tax.

1568.     The source legislation includes a reference in paragraph 7(2) of Schedule 20 to ICTA to an “authorised institution” - which in the context of that paragraph clearly means a “bank”. “Authorised institution” was amended to read “bank” in paragraph 7(1) by Schedule 37 to FA 1996, but was not amended in paragraph 7(2) of Schedule 20 to ICTA. This was an oversight and is corrected here.

1569.     Type 2 refers to common investment funds established under section 25 of the Charities Act (Northern Ireland) 1964. This section has been prospectively repealed by Schedule 29 of the Charities Act (Northern Ireland) 2008.

1570.     The reference to an “Act” in Type 4 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.

1571.     Paragraph 9(2) of Schedule 20 to ICTA, which explains that a loan in sub-paragraph (1) (rewritten as Type 12 in this clause) includes a loan which is secured by a mortgage or charge of any kind over land, has not been rewritten as unnecessary. It adds nothing to the meaning of “loan”.

1572.     References to “the Board” have been replaced with “an officer of Revenue and Customs”. See Change 5 in Annex 1.

Clause 512: Securities which are approved charitable investments

1573.     This clause sets out details of which investments in securities count as approved charitable investments for the purposes of the rules restricting exemptions. It is based on Schedule 20 to ICTA and Schedule 1 to TIA 1961. The corresponding rule for income tax is in section 559 of ITA.

1574.     The details of investments covered by Schedule 1 to TIA 1961 are incorporated into these clauses in an updated form. See Change 40 in Annex 1 and the commentary on clause 511.

Clause 513: Conditions to be met for some securities

1575.     This clause sets out details of certain conditions which some of the securities specified in the previous clause have to meet to count as approved charitable investments for the purposes of the rules restricting exemptions. It is based on Schedule 1 to TIA 1961. The corresponding rule for income tax is in section 560 of ITA.

1576.     The detail of the investments covered by Schedule 1 to TIA 1961 is incorporated into these clauses in an updated form. See Change 40 in Annex 1 and the commentary on clause 511.

1577.     Subsection (8) specifies (among other things) that a company acquiring control of another company or other companies is treated as having paid a dividend or dividends paid by the other company or companies. See Change 40 in Annex 1.

Clause 514: Approved charitable loans

1578.     This clause sets out which loans (not being made by way of investment) count as approved charitable loans for the purposes of the rules restricting exemptions. It is based on Schedule 20 to ICTA. The corresponding rule for income tax is in section 561 of ITA.

1579.     The label “approved charitable loan” replaces the label “qualifying loan” in section 506(4) of ICTA.

1580.     References to “the Board” are replaced with references to “an officer of Revenue and Customs”. See Change 5 in Annex 1.

Clause 515: Excess expenditure treated as non-charitable expenditure of earlier periods

1581.     This clause treats “excess expenditure” in an accounting period as non-charitable expenditure for earlier accounting periods. It is based on section 505(3) and (5) of ICTA. The corresponding rule for income tax is in section 562 of ITA.

1582.     The “excess expenditure” is the amount of the non-charitable expenditure of the year in excess of the available income and gains of the accounting period.

1583.     The term “available income and gains” is defined in subsection (4). This label replaces “total income and gains” as defined in section 505(3) of ICTA.

Clause 516: Rules for attributing excess expenditure to earlier periods

1584.     This clause specifies the earlier accounting periods to which the excess expenditure is to be attributed, later periods taking priority over earlier ones. It is based on section 505(5) and (6) of ICTA. The corresponding rule for income tax is in section 563 of ITA.

1585.     The amount of excess expenditure that can be attributed to an accounting period commencing before 22 March 2006 or earlier periods cannot exceed the amount that would have been attributed if the change in the method of calculating excess expenditure resulting from section 55 of FA 2006 had not been introduced. See the transitional provision in Part 12 of Schedule 2.

Clause 517: Adjustments in consequence of section 515

1586.     This clause specifies that any necessary adjustments (eg to tax, interest etc) for earlier years may be made. It is based on section 505(5) of ICTA. The corresponding rule for income tax is in section 564 of ITA.

Part 12: Real Estate Investment Trusts

Overview

1587.     This Part sets out the rules applicable to UK REITs.

1588.     A UK REIT is:

• a group of companies (a “group UK REIT”) the principal company of which gives a notice under clause 523; or

• a single company (a “company UK REIT”) which gives a notice under clause 524.

1589.     In either case, the company must not have ceased to be a UK REIT in accordance with clause 571, 572 or 578.

1590.     Provided that a UK REIT meets certain conditions (see Chapter 2 of this Part and clauses 538 (entry charge), and 548 (distributions), there is no charge to corporation tax (or income tax in the case of certain non-UK companies) on profits or gains of “property rental business” (or “UK property rental business” in the case of non-UK companies). “Property rental business” is defined in clause 519(1), “UK property rental business” is defined in clause 520 and “non-UK company” is defined in clause 521(2).

1591.     Distributions made by the principal company of a group UK REIT or company UK REIT of profits and gains of property rental business are subject to deduction of tax at source under regulations made under section 973 of ITA (SI 2009/2036). In the hands of a shareholder, the distribution is treated as if it is UK property business income and is taxed accordingly with a credit for tax which has already been deducted at source.

1592.     This Bill enacts certain regulations which modify the primary legislation through layers of cross-references. In particular the Bill enacts the regulations dealing with joint venture companies (SI 2006/2866) and breach of conditions (SI 2006/2864 and SI 2007/3540), except for regulation 11 of SI 2006/2864.

1593.     The Bill also enacts the regulations on joint venture groups (SI 2007/3425).