Annex 1: Minor changes in the law Change 38: Charitable companies: meaning of non-charitable expenditure: sections 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.
Sections 496, 497 and 498 set out the definition of “non-charitable expenditure” in some detail, to reflect practice and HMRC guidance.
Section 496(1)(a) to (d), supported by section 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.
Section 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 sections 480, 483, 484 and 485. And section 496(1)(a)(i) makes it clear that losses made in a charitable trade do not count as non-charitable expenditure.
Section 498 supports section 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. Section 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.