This change makes minor amendments to a number of existing rules, but is expected to have no practical effect as it is in line with generally accepted practice.

Change 34: Charitable companies: limit on exemption for profits etc of small-scale trades and certain miscellaneous income: clauses 480, 481 and 482

This change rewrites the limit on the level of a charitable company’s income for the purposes of the exemption for profits etc of small-scale trades in clause 480 and certain miscellaneous income in clause 481 by reference to the charitable company’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 corporation tax for certain profits or other income or gains of a charitable company which are chargeable to corporation tax. The exemption applies in respect of a trade or to miscellaneous charges included in section 843A of ICTA.

ITA collects together a list of miscellaneous income charges in section 1016. This forms the list of those charges to which exemption under section 527 of ITA applies for income tax. The same approach is taken for corporation tax. Schedule 1 to CTA 2009 inserts a list as section 834A of ICTA, which is rewritten in this Bill in clause 1173.

Section 46(3) of FA 2000 provides that one of the requirements for the exemption to apply is that the charitable company’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 company’s incoming resources for the chargeable period.

Clause 482 sets out the condition about the level of the trading and miscellaneous income that has to be met if the exemptions in clauses 480 and 481 are to apply.

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. Tax law brings into account receipts that would not normally feature as incoming resources for accounting purposes - for example balancing charges under the capital allowances rules. The new definition ensures that all potentially taxable receipts are brought within its compass.

The source legislation aimed to bring in turnover for trading activity and gross receipts for miscellaneous transactions within section 843A of ICTA. 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.

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 generally accepted practice.

Change 35: Charitable companies: exemption for profits from fund-raising events: clauses 483, 490, 491, 492 and Schedule 1

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. To reflect this, the new statutory exemption is subject to the restrictions in clause 492.

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

This exemption is also extended to the bodies listed in clause 490 and to scientific research associations (see clause 491).

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

Change 36: Charitable companies: exemption for income from intellectual property etc: clauses 488, 490, 491 and Schedule 1

This change provides an exemption from corporation tax for certain income from intangible assets, whether or not the income is annual in nature.

Schedule 29 to FA 2002 introduced a comprehensive regime for corporation tax for income and gains arising from intangible fixed assets, rewritten as Part 8 of CTA 2009. Those rules apply in general only to certain assets (principally, but not exclusively, those created or acquired on or after 1 April 2002). But all income from royalties and certain telecommunication rights falls within the regime - see sections 896 and 897 of CTA 2009. These are all covered by the existing exemption in section 505(1)(c)(iic) of ICTA, rewritten as clause 488(3)(a).

Assets that do not fall within the rules of Part 8 of CTA 2009 are referred to in that Act as “pre FA 2002 assets”. Any chargeable gains arising from those assets will be exempt in the hands of a charitable company under section 256 of TCGA, provided the necessary conditions are met. But any income from those assets that does not fall within Part 8 of CTA 2009 is only exempt if it falls to be treated as an annual payment and is thus exempt under section 505(1)(c)(iizb) of ICTA.

In practice HMRC allow an exemption for income from pre-FA 2002 intangible assets, whether or not it is annual in nature. This change is in line with that practice, and mirrors the change made for income tax in section 536 of ITA. The rewritten legislation adopts the concept of a non-trading gain on an intangible fixed asset, and is written in terms that assume that the income in question would be such a gain, even though the assets fall outside Part 8 of CTA 2009.

Note that this extension only applies in the case of what would be a non-trading gain if Part 8 of CTA 2009 were to apply. If a gain arises in respect of a pre-FA 2002 asset in the course of a non-charitable trade the exemption in this clause does not apply.

This change also affects the exemptions available to the bodies listed in clause 490 and to scientific research associations under clause 491 and is relevant to a number of entries in Schedule 1.

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

Change 37: Charitable companies: exemption for income from estates in administration: clauses 489, 490, 491, 492 and Schedule 1

This change provides an exemption to charitable companies which are liable to corporation tax on estate income charged under Chapter 3 of Part 10 of CTA 2009, to the extent that the income is applied to the purposes of the charitable company.

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.

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 exemption is also extended to the bodies listed in clause 490 and to scientific research associations (see clause 491) and is relevant to a number of entries in Schedule 1.

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

Change 38: Charitable companies: meaning of non-charitable expenditure: clauses 496 to 498

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) of ICTA treats certain payments, investments or loans as amounts of non-charitable expenditure.

Section 505(4) of ICTA restricts a charitable company’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 496, 497 and 498 set out the definition of “non-charitable expenditure” in some detail, to reflect practice and HMRC guidance.

Clause 496(1)(a) to (d), supported by clause 497, provides 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 496(1)(a) to (d) also ensures 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 480, 483, 484 and 485. And clause 496(1)(a)(i) makes it clear that losses made in a charitable trade do not count as non-charitable expenditure.

Clause 498 supports clause 496(1)(d), 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 company. Clause 496(1)(g) and (h) 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 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 generally accepted practice.

Change 39: Charitable companies: accounting period in which certain expenditure treated as incurred: clause 499

This change makes it explicit that the time when expenditure is treated as incurred depends on 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 accounting period properly falls to be charged against the income of that accounting period as being referable to commitments (whether or not of a contractual nature) which the charitable company has entered into before or during that period, it shall be treated as incurred in that period.

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

Clause 499 is based on section 506(2) of ICTA, and makes the reference to UK GAAP explicit.

Clause 499 is drafted in terms of the position if UK GAAP had applied, because there is no legal or other obligation requiring all charitable companies 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 companies (with certain exceptions), is not mandatory in Scotland and Northern Ireland. Neither does it apply to charitable companies which are able to prepare accounts on a “receipts and payments” basis rather than an “accruals” basis. This could, for example, apply to unincorporated associations whose turnover and assets do not exceed the statutory limits.

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

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 generally accepted practice.

Change 40: Charitable companies: approved charitable investments: clauses 511, 512, 513 and 1176

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 1 of Schedule 20 to ICTA (qualifying investments), it does not replicate the approach taken in that Part.

Part 1 of Schedule 20 to ICTA defines qualifying investments by specifying certain investments itself, and also by referring to investments falling within Part 1, Part 2 (apart from paragraph 13) or Part 3 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 is incorporated in clauses 511 and 512 in an updated form.

This has been done by referring to the types of investment that a charitable company 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 company 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 to ICTA.

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 4 of Schedule 1 to TIA 1961 have been largely repeated.

A more detailed analysis of where the approved investments in the source legislation appear in the rewritten clauses 511 and 512 is as follows:

Paragraph 3(b) of Part 4 of Schedule 1 to TIA 1961 excludes from approved investments shares or debentures which have not paid dividends in each of the preceding five years but deems dividends to have been paid by a company where one of the reasons for its formation is to acquire the control of another company or companies. This exception to the dividend rule is rewritten in clause 513(8). “Control” in these circumstances is not defined by TIA. In practice the definition in section 840 of ICTA (rewritten in clause 1124) applies and this is now made statute. Clause 1124 therefore applies for the purposes of clause 513(8) as a result of clause 1176(2).

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 generally accepted practice.

Change 41: Non-UK companies: clauses 520, 535, 536, 541, 579 and 581

This change clarifies the basis on which non-UK companies which are members of a group UK REIT are charged to tax.

A non-UK resident company is chargeable to (corporation) tax on its chargeable gains only if they accrue on the disposal of assets in the United Kingdom that are used in a trade carried on through a permanent establishment in the United Kingdom (section 10B of TCGA). This is consistent with the limitation on the charge to corporation tax set by sections 5 and 19 of CTA 2009. Such assets cannot be “involved in property rental business”.

Section 124(3) of FA 2006 provides that:

Corporation tax shall be charged in respect of gains accruing to C (residual) at a rate determined without reference to section 13 of ICTA (small companies rate).

Paragraph 32(3) of Schedule 17 to FA 2006 provides that (in the case of a non-UK company):

The property rental business of the company in the United Kingdom shall be treated as if it were (subject to the application of this Part) chargeable to corporation tax.

It is implausible that these rules override section 10B of TCGA. So this Bill makes clear that the rules about the taxation of chargeable gains do not apply to non-UK resident companies.

But there is an important distinction between companies not resident in the United Kingdom (to which section 10B of TCGA applies) and non-UK companies (to which some clauses in Part 12 of this Bill apply). The distinction concerns dual resident companies. These are companies resident in the United Kingdom and resident in another territory (see clause 521(1)).

Dual resident companies are not affected by the rule in clause 520(3) because their world-wide profits are within the charge to corporation tax. It follows that they do not meet the condition in clause 520(2)(b). But they are within the rules about chargeable gains and assets of UK REITs (see clauses 535 to 537 and 579 to 581).

The change removes any possibility that a charge to tax on the chargeable gains of a non-UK resident company is imposed by Part 4 of FA 2006.

This change is in taxpayers’ favour in principle and may benefit some in practice. But the numbers affected and the amounts involved are likely to be small.

Change 42: UK REITs: conditions as to property rental business: exclusion of non-member’s interest: clause 529

This change excludes from a group’s property rental business the percentage of that business held by a non-member of the group.

For the purposes of the tests in clause 529 the property rental businesses of members of a group are treated as a single business. The tests are:

• whether the business involves at least three properties; and

• whether a single property represents more than 40% of the value of all the properties in the business.

The number of properties involved (the first test) is not affected by this Change.

A company in the group may have a minority shareholder. In accordance with clause 533(3) that shareholder’s interests in the company are excluded from the financial statements required by that clause. The effect of this Change on the second test is illustrated by the following examples.