Income and Corporation Tax Relief for Trading Activities
For chargeable periods commencing after 21 March 2006, tax relief will be available for charities where only part of a trade is carried on for a primary (charitable) purpose or where a trade is partly (but not mainly) carried out by the beneficiaries of a charity. The new rules will legitimise the effect of the current HMRC approach. It will split a trade into two separate parts, a primary purpose part and a non-primary purpose part, with tax relief under ICTA 1988, s 505 given on the profits of the primary purpose part or on the profits of the part carried out by the beneficiaries of the charity.

Anti-avoidance Provisions
New rules will be introduced to protect charitable reliefs from misuse.

(1) After 21 March 2006, additional restrictions will be placed on transactions that can take place between a charity and its substantial donors without the charity’s tax relief being restricted. An individual or a company will be a substantial donor if they give to a charity £25,000 or more in any 12-month period or £100,000 over a 6-year period. The donor will be a substantial donor for the chargeable period in which they exceed these limits and the following five chargeable periods. The new rules will apply to the sale or letting of property; the provision of services by a charity to a substantial donor or vice versa; an exchange of property between a charity and a substantial donor; the provision of financial assistance to a charity by a substantial donor or vice versa; the payment of remuneration to a substantial donor (apart from an approved payment for services as a trustee); and investment by a charity in the business of a substantial donor as long as the business is not listed on a recognised stock exchange. Certain transactions by a substantial donor to a charity will be exempt from the new rules if HMRC are satisfied that they are undertaken for genuine commercial reasons or at arm’s length, provided the transaction is not part of an arrangement for the avoidance of tax. The new rules will not apply to a disposal at less than market value by a substantial donor to a charity to which ICTA 1988, s 587B (gifts of shares security and real property to charity, etc.) or TCGA 1992, s 257 (gifts to charities, etc.) apply.

Where a charity takes part in any of the transactions that are not otherwise exempt, any payments it makes in connection with the transaction will be treated as non-charitable expenditure. Where the transaction is not on arm’s length terms, any difference between the actual terms and arm’s length terms, so far as it favours the substantial donor, will be treated as non-charitable expenditure.

(2) In respect of non-charitable expenditure incurred in a chargeable period commencing after 21 March 2006, there will be a direct link between non-charitable expenditure incurred by a charity and loss of tax relief. The income and gains eligible for tax relief will be restricted by £1 for every £1 of non-charitable expenditure incurred.

(3) For payments to charity made after 31 March 2006, non-close companies will be subject to the same limits on benefits received as a result of a gift to charity as currently apply for individuals and close companies. They will also become subject to the same rules as close companies and individuals that apply when gifts are potentially repayable or are associated with the acquisition of property by the charity from the donor or connected persons.