ANNEX 1:: MINOR CHANGES IN THE LAW MADE BY THE BILL 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 current practice.
Change 92: Charitable trusts: exemption for adjustment income and post-cessation receipts of certain trades and property businesses: sections 524, 525, 526, 531 and 539
This change introduces an exemption from income tax, in the case of charitable trusts, for the adjustment income and post-cessation receipts of trades whose profits are exempt, or would be exempt if the trade had not ceased. It also introduces an exemption for the adjustment income and post-cessation receipts of property businesses, and of trades in cases where such income or receipts arise from land.
The general rule for calculating the profits of a trade for tax purposes is that the profits must be calculated on the basis of accounts drawn up in accordance with generally accepted accounting practice (see section 25 of ITTOIA). But an adjustment will be required if there is a change of basis in circumstances where the old basis accorded with law or practice in one period of account and the new basis accords with law and practice in the next period of account (see section 227 of ITTOIA). If the adjustment is positive, it is called adjustment income.
Adjustment income is charged to tax as trading income under section 228 of ITTOIA. There is no exemption for adjustment income in the source legislation for charitable trusts. But HMRC practice is to treat adjustment income in the same way as other trading income. That is, to treat it as exempt if it arises from a trade that benefits from the exemption in section 505(1)(e) of ICTA (rewritten as section 524), or if it arises in a small-scale trade where the income limits in section 46 of FA 2000 (rewritten as section 528) are not breached.
This change provides an exemption for adjustment income of a charitable trade or a small-scale trade. If a trade is treated as two separate trades in accordance with section 525(2) any adjustment income will be apportioned to the two parts (and this could mean completely apportioned to just one part if relating only to that part) and an exemption will then be available for the adjustment income apportioned to the charitable part.
Post-cessation receipts are taxed under Chapter 18 of Part 2 of ITTOIA. There is no exemption for post-cessation receipts in the source legislation for charitable trusts, other than the exemption in section 46 of FA 2000 (rewritten in sections 526 to 528) which applies only if the receipts are below a certain level. But HMRC practice is to treat post-cessation receipts as exempt from income tax if they arise from a trade that benefited from the exemption in section 505(1)(e) of ICTA (rewritten as section 524).
This change provides an exemption for post-cessation receipts from a charitable trade. If a trade is treated as two separate trades in accordance with section 525(2) any post-cessation receipts will be apportioned to the two parts (and this could mean completely apportioned to just one part if relating only to that part) and an exemption will then be available for the receipts apportioned to the charitable part.
The source legislation (section 505(1)(a) of ICTA, rewritten in section 531) provides an exemption from tax under Parts 2 and 3 of ITTOIA in respect of any profits or gains arising in respect of rents or other receipts from an estate, interest or right in or over any land. The exemption is available only to the extent that the profits or gains arise from land vested for charitable purposes and the profits or gains are applied for charitable purposes. HMRC practice is to treat associated adjustment income and post cessation receipts as eligible for exemption. This change provides such an exemption.