The Finance Act,19 July 2006, contains several clauses concerning charities.
Non-charitable Expenditure
The tax concept of ‘non-qualifying’ expenditure has been replaced with a new definition of ‘non-charitable’ expenditure which is expenditure not incurred exclusively for charitable purposes. The effect of this is that any non-charitable expenditure will now be treated as taxable income. This applies to expenditure incurred on or after 22 March 2006 and the de minimis level of £10,000 has been removed.
Trading
New rules apply to accounting periods commencing on or after 22 March 2006 whereby a charity’s trade is split into two separate areas: that exercised in the course of the charity’s primary purpose and that which has a non-primary purpose. The primary purpose will continue to benefit from tax relief. The non-primary purpose will only benefit if the trade is carried out mainly by the beneficiaries. Charities may however still benefit from the charitable exemption for ‘small trades’.
Substantial donors
Provisions were introduced restricting relief on transactions with ‘substantial donors’, defined as donors who make a ‘relievable gift’ (benefiting from tax relief) of:
- £25,000 in one 12 month period, or
- £100,000 over a six year period.
Records will now have to be maintained to monitor the level of gifts. Once a substantial donor has been identified, they will remain one for a period of five years after the year of the gift.
Transactions include the sale or letting of property by either party to the other, providing services by either party to each other or providing financial assistance. Transactions in the normal course of business should not be affected nor should transactions carried out at arm’s length. Excluded from the definition of ‘substantial donor’ are wholly owned subsidiaries and Registered Social Landlords connected with a charity. The effect of the restrictions is that expenditure with a substantial donor on or after 22 March 2006 could be treated as non-charitable expenditure.
Distributions/gift aid
The Noved Investment Co v HMRC decision created some confusion in the charities sector. The case related to gift aid donations made by a trading subsidiary to the parent charity and the interaction with the distribution legislation. HMRC sought to disallow the gift aid as a deduction for corporation tax purposes and treat the payment to the charity shareholders as a dividend. This could have affected trading subsidiaries owned by more than one charity. The Finance Bill introduced proposals to clarify that payments made by wholly owned subsidiaries are treated as ‘gift-aid’. Amendments to the original proposals have now ensured that equivalent treatment applies to subsidiaries owned by more than one charity.
Corporate donations
With effect from 1 April 2006, charities will have to monitor the level of benefits granted in exchange for donations from corporate donors, the rules are now the same as those applied to individuals and close companies. Broadly if the benefit exceeds 2.5% of the payment, the payment will not be treated as a qualifying donation by the company making the donation. This may, for instance, impact upon corporate sponsorship of charitable events.
Abolition of the nil rate band
Unfortunately some charities will suffer from the abolition of the nil rate corporation tax band from 1 April 2006. This affects trading subsidiaries where profits are donated by gift aid to the charity with the aim to reduce the taxable profit to the £10,000 nil rate band and building up working capital in the subsidiary. If your accounting period straddles 1 April 2006, you can still benefit from the nil rate band proportion up to that date so you could consider restricting any gift aid declarations to that level.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
