ANNEX 1:: MINOR CHANGES IN THE LAW MADE BY THE BILL This change makes a minor amendment to the basis of apportionment for mixed trades, but is expected to have no practical effect as it is in line with current practice.
Change 94: Charitable trusts: limit on exemption for profits etc of small-scale trades and certain miscellaneous income: sections 526 and 528
This change rewrites the limit on the level of a charitable trust’s income for the purposes of the exemption for profits etc of small-scale trades in section 526 and certain miscellaneous income in section 527 by reference to the charitable trust’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 income tax for certain profits or other income or gains of a charitable trust which are chargeable to income tax. The exemption applies in respect of a trade carried on wholly or partly in the United Kingdom or under or by virtue of any provision to which section 1016 of this Act (based on section 836B of ICTA) applies.
Section 46(3) of FA 2000 provides that one of the requirements for the exemption to apply is that the charitable trust’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 trust’s incoming resources for the chargeable period.
Section 528 sets out the condition about the level of the trading and miscellaneous income that has to be met if the exemptions in sections 526 or 527 are to be available.
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. The expression “incoming resources” is used instead of “gross income” because this accounting term is a more direct and accessible way of capturing the meaning of “gross income” as defined in the source legislation.
The source legislation aimed to bring in turnover for trading activity and gross receipts for Schedule D Case VI transactions. 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.
Charitable trusts do not in practice include balancing charges in “gross income”. And balancing charges do not come within the meaning of incoming resources.
The requirement in section 46(1)(a) of FA 2000 that the trade is carried on wholly or partly in the United Kingdom reflects the pre-ITTOIA requirement that the trade be subject to tax under Schedule D Case I (rather than Case V). In practice a charitable trust established in the United Kingdom will not carry on a trade wholly outside the United Kingdom, given the oversight exercised from its head office. And HMRC practice has been to accept that the profits of a small-scale trade are exempt, without considering where the trade is carried on. So the requirement has been dropped.
This change aligns the rewritten legislation with the way it is considered section 46 of FA 2000 is operated in practice.