Bn 29 - Charities: Income and Corporation Tax Relief for Trading Activities Undertaken by a Charity
Who is likely to be affected?
1. Charities that undertake a trade that is only partly carried on for a primary (charitable) purpose, or which is partly (but not mainly) carried out by the beneficiaries of the charity.
General description of the measure
2. This measure will provide tax relief for charities where only part of a trade is carried on for a primary purpose, or where a trade is partly (but not mainly) carried out by the beneficiaries of a charity. Relief will be availableon the profits that can reasonably be attributed to the part of the trade that is carried on for a primary purpose, or that is carried out by the beneficiaries of the charity. Operative date
3. Chargeable periods commencing on or after 22 March 2006. Current law and proposed revisions
4. Section 505 of the Income and Corporation Taxes Act 1988 (ICTA) provides
charities with an exemption from income tax or corporation tax on profits
attributable to a trade, carried on in the UK or abroad, so long as the
profits are applied solely to charitable purposes. The relief applies in
two situations:
- where the trade is exercised in the course of carrying out a primary purpose, such as the provision of residential care for the elderly; or
- where the work of the trade is mainly carried out by the beneficiaries of the charity.
5. In some cases a trade may amount, in part, to a primary purpose trade but may not be wholly a primary purpose trade. For instance, the trade might deal in a range of goods or services some of which are within a primary purpose and some of which are not. Where this is the case, there is a risk that the trade as a whole will become tainted, resulting in the loss of tax relief on the primary purpose part of the trade. Tainting occurs where the non-primary purpose element of the trade is substantial - typically more than 10% of the turnover of the trade, or more than £50,000.
6. Alternatively the trade may be partly (but not mainly) carried on by beneficiaries of the charity. Where this is the case the trade could also be tainted, leading to a loss of tax relief on the whole of the trade.
7. HM Revenue and Customs (HMRC) have traditionally mitigated the risk of tainting a charity's trade by taking the view that a charity may have more than one trade. Where we could identify distinct activities, we would treat those activities as separate trades. However, case law does not support such an approach and it is likely that for most charities they will have only a single trade (control and management of activities being conducted by the same persons).
8. The new rules will legitimise the effect of the current HMRC approach in relation to charities with primary and non-primary purpose trading activities, or with trading activities that are partly (but not mainly) carried on by the beneficiaries of the charity. It will split a trade into two separate parts, a primary purpose part and a non-primary purpose part, with tax relief under section 505 ICTA given on the profits of the primary purpose part, or on the profits of the part carried out by the beneficiaries of the charity.
9. Where tax relief is not available under section 505 ICTA it is still possible that a charity may be granted tax relief by virtue of Section 46 Finance Act 2000 (the "exemption for small trades").
10. The exemption for small trades provides relief from income or corporation tax for charities where they conduct a small non-primary purpose trade within the charity.
Further advice
11. If you have any questions about this change, please contact Adrian Cooper on 020 7147 2782 or John Kington on 0151 472 6019.
