ANNEX 1:: MINOR CHANGES IN THE LAW MADE BY THE BILL This change is adverse to some taxpayers and favourable to others in principle. But it is expected to have no practical effect as it is line with current practice. Change 99: Charitable trusts: tax year in which certain expenditure treated as incurred: section 546
This change makes it explicit that the time when expenditure is treated as incurred depends on UK generally accepted accounting practice (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 chargeable period properly falls to be charged against the income of that chargeable period as being referable to commitments (whether or not of a contractual nature) which the charity has entered into before or during that period, it shall be treated as incurred in that period.”
Section 506(2) was first enacted in FA 1986 and advanced the time that certain expenditure is recognised, on the basis that charitable trusts may have some flexibility in this regard. As a result of subsequent developments in accounting practice, the legislation now implicitly mirrors UK GAAP.
Section 546 is based on section 506(2) of ICTA, and makes the reference to UK GAAP explicit. Section 997(2) defines UK GAAP for the Income Tax Acts.
Section 546 is drafted in terms of the position if UK GAAP had applied because there is no legal or other obligation requiring all charitable trusts 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 trusts (with certain exceptions), is not mandatory in Scotland and Northern Ireland. Neither does it apply to charitable trusts which are able to prepare accounts on a “receipts and payments” basis rather than an “accruals” basis.
This approach ensures parity of treatment as between charitable trusts operating in different parts of the United Kingdom or adopting different bases of accounting.