EXPLANATORY NOTE

1. This Clause provides for the exemption, within certain limits, of small amounts of income and gains of charities from trading and other miscellaneous sources. The changes are intended to free charities from the need to establish subsidiary companies, for tax purposes, to undertake small trading and fund-raising ventures.

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2. Subsection (1) provides that a charity can claim exemption from tax under Case I or Case VI of Schedule D on any income (as defined in subsection 6), provided it meets the requirements set out in subsection (3).

3. Subsection (2) excludes from the exemption in subsection (1) certain specified Case VI charges. It also gives the Treasury powers to add further Case VI charges to the subsection, by regulation.

4. Subsection (3) sets out the requirements, which a charity must meet to claim exemption under subsection (1). First, the income must be applied solely for the purposes of the charity. Second, the gross income (before expenses) must either be within the limit set out in subsection (4) or the charity must have had a reasonable expectation, at the beginning of the chargeable period, that it would be within that limit.

5. Subsection (4) provides that the limit for the purposes of subsection (3) is the greater of £5,000 and whichever is the lesser of £50,000 and 25% of the charity's income from all sources.

6. Subsection (5) provides that, where a chargeable period is less than 12 months, the limits of £5,000 and £50,000 set out in subsection (4) will be proportionately reduced.

7. Subsection (6) defines the terms, "charity", "gross income" and "income" for the purposes of the section.

8. Subsection (7) brings the section into effect from 6 April 2000 for charitable trusts and for accounting periods beginning on or after 1 April 2000 for charities which are companies.

9. Charity trading profits are currently exempt from income tax if:

• the trade is carried on in furtherance of the charity’s work, or

• the work of the trade is mainly carried on by beneficiaries of the charity, or

• the trade is a society lottery or a small lottery, or

• the trade is a small-scale fund-raising event (by concession).

10. Despite the statutory exemptions and the concession, ESC C4, many trades carried on by a charity to raise funds are subject to tax. In practice, charities usually set up a company to carry on such non-exempt trades. Companies owned by a charity are liable to tax on their trading income like any other company but - again like any other company - can get a tax deduction for donations that they make to charity. By making a donation to their parent charity equal to their taxable profits - known as profit-shedding - these companies pay no tax. And the donations - unlike the trading income from which they originate - are exempt from tax in the hands of the charity. Charity law prohibits charities themselves from carrying on regular, substantial trading to raise funds, but the new tax exemption allows charities to undertake small amounts of trading or fund-raising without the need to set up a subsidiary company, while respecting charity law.

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