Chapter 4: Restrictions on exemptions
Overview
1515.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 section 502).
Section 492: Restrictions on exemptions
1516.This section 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.
1517.Certain exemptions have been extended or put onto a statutory footing:
post-cessation receipts. See Change 32in Annex 1 and the commentary on section 478;
profits of fund-raising events. See Change 35in Annex 1 and the commentary on section 483; and
income from estates in administration. See Change 37in Annex 1 and the commentary on section 489.
The restrictions apply to these extended exemptions.
Section 493: The non-exempt amount
1518.This section 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.
1519.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.
1520.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 Act 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 Act and the chargeable gains legislation as regards attributing income and gains to the non-exempt amount. It complements section 494. The headings to sections 256A and 256B of TCGA are amended to make it clear that they apply to charitable trusts only.
Section 494: Attributing income to the non-exempt amount
1521.This section 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.
1522.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 section 493 contains further detail about the amendments to TCGA 1992.
Section 495: How income is attributed to the non-exempt amount
1523.This section 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.
1524.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 section 493) in order to enable the charitable company to complete its tax return and self-assess its tax liability. This section 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.
1525.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.
Section 496: Meaning of “non-charitable expenditure”
1526.This section 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.
1527.Section 506(1) of ICTA contains a definition of “charitable expenditure”, but neither expenditure itself nor “non-charitable expenditure” is defined explicitly. This section sets out the definition in some detail, to reflect practice and HMRC guidance. See Change 38in Annex 1, which also affects sections 497 and 498.
1528.Schedule 2 to this Act contains a transitional provision to ensure that the pre-22 March 2006 rules continue to operate where appropriate.
Section 497: Section 496: supplementary
1529.This section 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.
1530.Change 38 in Annex 1 affects this section.
Section 498: Section 496(1)(d): meaning of expenditure
1531.This section provides interpretative material about the meaning of “expenditure”. It is new. The corresponding rule for income tax is in section 545 of ITA.
1532.Change 38 in Annex 1 affects this section.
1533.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 section 496(1)(d).
Section 499: Section 496(1)(d): accounting period in which certain expenditure treated as incurred
1534.This section 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.
1535.This rule is rewritten in terms which make explicit reference to UK GAAP. See Change 39 in Annex 1.
Section 500: Section 496(1)(d): payment to body outside the UK
1536.This section 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.
1537.The section 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”.
Section 501: Section 496(1)(g) and (h): investments and loans
1538.This section 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.
1539.The section 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.
Section 502: Transactions with substantial donors
1540.This section 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.
1541.References to a charitable company include connected charities (see section 509) and references to a substantial donor include persons connected with the donor (see section 510(1)(a)).
Section 503: Meaning of “relievable gift”
1542.This section includes details of the sources of gifts that are “relievable gifts” for the purposes of the preceding section. It is based on section 506C(1) of ICTA. The corresponding rule for income tax is in section 550 of ITA.
Section 504: Non-charitable expenditure in substantial donor transactions
1543.This section 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.
1544.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 sections 507 and 510. The source legislation specifies that, on an appeal against an assessment, the tribunal may review a decision of the Commissioners, so section 510 specifies that the tribunal may affirm or replace a decision of an officer.
Section 505: Adjustment if section 504(1) and (2) applied to single transaction
1545.This section makes it clear that if both subsections (1) and (2) of section 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.
Section 506: Section 504: certain payments and benefits to be ignored
1546.This section 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.
1547.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 section 191(7) of this Act.
Section 507: Transactions: exceptions
1548.This section specifies exceptions to the transactions caught by section 502. It is based on section 506B of ICTA. The corresponding rule for income tax is in section 554 of ITA.
1549.In particular, the section carves out of the substantial donor provisions transactions of an ordinary commercial nature between the parties.
1550.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.
Section 508: Donors: exceptions
1551.This section 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.
1552.Subsection (1) concerns companies set up by charitable companies, for example to carry on trading activities as a means of generating funds.
1553.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 Act to apply until the amendment made by paragraph 15 has effect.
Section 509: Connected charities
1554.This section extends, for the purposes of sections 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.
1555.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.
1556.Note that the term “connected” in this section applies to charities and charitable companies and is different from the use of the term in section 510 where it refers to substantial donors and other persons.
1557.Subsection (2) gives the definition of “connected” for subsection (1). The definition of “connected persons” in section 1122 does not apply for this purpose.
Section 510: Substantial donor transactions: supplementary
1558.This section provides interpretation for sections 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.
1559.The use of the term “connected” relates to substantial donors and other persons and is different from the use of the term in section 509, where it refers to charities and charitable companies that are connected.
1560.The definition of “connected person” for the purposes of this section is in section 1122 (applied by section 1176).
1561.References to “the Commissioners” are replaced with references to “an officer of Revenue and Customs”. See Change 5 in Annex 1.
Section 511: Approved charitable investments
1562.This section 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.
1563.The label “approved charitable investment” replaces the label “qualifying investment” in section 506(4) of ICTA.
1564.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 sections 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 section 512 and section 513.
1565.The reference to securities traded on the Unlisted Securities Market has not been reproduced as the Unlisted Securities Market ceased trading in December 1996.
1566.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.
1567.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.
1568.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.
1569.The reference to an “Act” in Type 4 is extended to include references to Northern Ireland legislation by section 1119, and to Acts of the Scottish Parliament. See Change6 in Annex 1.
1570.Paragraph 9(2) of Schedule 20 to ICTA, which explains that a loan in sub-paragraph (1) (rewritten as Type 12 in this section) 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”.
1571.References to “the Board” have been replaced with “an officer of Revenue and Customs”. See Change 5 in Annex 1.
Section 512: Securities which are approved charitable investments
1572.This section 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.
1573.The details of investments covered by Schedule 1 to TIA 1961 are incorporated into these sections in an updated form. See Change 40 in Annex 1 and the commentary on section 511.
Section 513: Conditions to be met for some securities
1574.This section sets out details of certain conditions which some of the securities specified in the previous section 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.
1575.The detail of the investments covered by Schedule 1 to TIA 1961 is incorporated into these sections in an updated form. See Change 40 in Annex 1 and the commentary on section 511.
1576.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.
Section 514: Approved charitable loans
1577.This section 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.
1578.The label “approved charitable loan” replaces the label “qualifying loan” in section 506(4) of ICTA.
1579.References to “the Board” are replaced with references to “an officer of Revenue and Customs”. See Change 5 in Annex 1.
Section 515: Excess expenditure treated as non-charitable expenditure of earlier periods
1580.This section 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.
1581.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.
1582.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.
Section 516: Rules for attributing excess expenditure to earlier periods
1583.This section 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.
1584.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.
Section 517: Adjustments in consequence of section 515
1585.This section 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.
