Annex 1: Minor changes in the law Change 34: Charitable companies: limit on exemption for profits etc of small-scale trades and certain miscellaneous income: sections 480, 481 and 482
This change rewrites the limit on the level of a charitable company’s income for the purposes of the exemption for profits etc of small-scale trades in section 480 and certain miscellaneous income in section 481 by reference to the charitable company’s incoming resources rather than in terms of its gross income. It also removes the requirement that the exemption for profits etc of a small-scale trade can apply only if the trade is carried on wholly or partly in the United Kingdom.
Section 46 of FA 2000 provides for an exemption from corporation tax for certain profits or other income or gains of a charitable company which are chargeable to corporation tax. The exemption applies in respect of a trade or to miscellaneous charges included in section 843A of ICTA.
ITA collects together a list of miscellaneous income charges in section 1016. This forms the list of those charges to which exemption under section 527 of ITA applies for income tax. The same approach is taken for corporation tax. Schedule 1 to CTA 2009 inserts a list as section 834A of ICTA, which is rewritten in this Act in section 1173.
Section 46(3) of FA 2000 provides that one of the requirements for the exemption to apply is that the charitable company’s “gross income” must not exceed the “requisite limit”. The “requisite limit” is defined in section 46(4) of that Act and depends on the charitable company’s incoming resources for the chargeable period.
Section 482 sets out the condition about the level of the trading and miscellaneous income that has to be met if the exemptions in sections 480 and 481 are to apply.
The condition operates by reference to the incoming resources associated with the trading activity and miscellaneous transactions whose profits are not exempt under other provisions. Tax law brings into account receipts that would not normally feature as incoming resources for accounting purposes – for example balancing charges under the capital allowances rules. The new definition ensures that all potentially taxable receipts are brought within its compass.
The source legislation aimed to bring in turnover for trading activity and gross receipts for miscellaneous transactions within section 843A of ICTA. But these terms are not used in charity accounting. “Incoming resources” is familiar to those involved in preparing or working with charity accounts. And since charity accounting does not allow offset between income and expenditure in determining disclosure (in contrast with the disclosure in the accounts of commercial organisations), it is relatively easy to check the limits.
It is not clear in section 46 of FA 2000 whether “gross income” includes incoming resources from an activity which gives rise to a loss, in cases where a profit would be taxable. But incoming resources from an activity are included irrespective of whether there is a profit or a loss.
This change aligns the rewritten legislation with the way it is considered section 46 of FA 2000 is operated in practice.
This change is in taxpayers’ favour in principle. But it is expected to have no practical effect as it is in line with generally accepted practice.