Specific deductions: entertainment: gifts: exceptions: gifts to charities
S47 Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005), S1300 Corporation Tax Act 2009 (CTA 2009) (see also s.189 CTA2010).
The cost of providing gifts to charity is not disallowed by the general rule that prohibits a deduction for business entertaining and gifts, and such gifts will therefore be deductible from trading profits so long as the expenditure is not disallowed for any other reason, such as the wholly and exclusively rule (see BIM37000 onwards). For donations by companies, the mechanism for allowing relief changed from 1 April 2010, see below.
As well as gifts to charities, the legislation also allows deductions for gifts made to the Historical Buildings and Monuments Commission and the National Heritage Memorial Fund.
See BIM45150 for further guidance on other types of charitable gift, including gifts of trading stock and plant and machinery.
Wholly and exclusively
Donations to charity made by businesses that are claimed as a deduction against trading income must be made wholly and exclusively for the purposes of the business in order for a deduction to be due. Indications that such donations may not be incurred wholly and exclusively for business purposes might be:
- that the voluntary body has no local connection to the business, thus making any quid pro quo for the trader less likely.
- a personal connection with the donee.
- a lack of publicity surrounding the making of the donation.
It should be noted however that these points are not definitive, nor is the above list exhaustive. Each case must be considered on its own facts.
In the same way, you should allow the ordinary annual subscription to a local trade association paid in the normal course of trade by a non-member.
Meaning of ‘charity’ and ‘charitable purposes’
The definition of the term ‘charity’ depends on the provision under consideration and the tax year/accounting period. The definition of charity was revised by Sch6 Finance Act 2010 (FA 2010), however the definition was phased in over time.
FA 2010 definition of charity
Under Sch 6 Para 1 FA 2010 a charity is a body of persons or trust that:
- is established for ‘charitable purposes’ only (see below)
- meets the jurisdiction condition (i.e. is subject to the jurisdiction of a relevant UK court or the courts of a relevant territory)
- meets the registration condition (i.e. has complied with any requirement under the applicable law to be registered), and
- meets the management condition (i.e. the managers are fit and proper persons).
This definition of charity allows charities of relevant territories to qualify as charities for the purposes of UK legislation (provided the conditions above are met). Relevant territories are those in EU Member States, Iceland and Norway
Previous definition of charity
Prior to the FA 2010 definition coming into force, ‘charity’ was defined for the Income Taxes Acts under S989 Income Tax Act 2007 and for Corporation Taxes Acts by S1119 Corporation Tax Act 2010 (CTA 2010).
A ‘charity’ was defined as a body of persons or trust established for ‘charitable purposes’ only and it did not require the charity to be a registered charity.
Definition of charitable purposes
For charities established in England and Wales, the definition of ‘charitable purposes’ is given in S2 Charities Act 2011 (CA 2011) (previously the definition was in S2 Charities Act 2006 (CA 2006)). The two definitions are broadly the same. The CA 2011 definition came into force on 14 March 2012.
For Scottish charities, the equivalent definition of ‘charitable purposes’ is given in S7 Charities and Trustee Investment (Scotland) Act 2005.
Date on which the FA 2010 definition of charity came into force
The FA 2010 definition of charity applies to:
- accounting periods beginning on or after 1 April 2012 for companies
- tax years 2012/13 onwards for unincorporated businesses
Gifts to charities by businesses subject to income tax
For businesses subject to income tax, tax relief is potentially available via a deduction from trading profits (see above) or, if it is a cash gift, and the cost is not deductible against trading profits, the individual trader or partner(s) maybe able to obtain tax relief via Gift Aid instead (see RE1830+).
Gifts to charities by companies - mechanism of relief
The mechanism by which the costs of gifts to charity are deducted from trading profits of companies changed on 1 April 2010.
For accounting periods ending prior to this date the costs of these gifts were treated as charges on income.
For accounting periods ending on or after this date, the new qualifying charitable donations regime applies under Part 6 CTA 2010.
Under this regime, the cost of the gifts are deducted from total profits after all other reliefs except for group relief. It is not possible to create a loss as the deduction can only take the trading profits to nil (see S189 CTA 2010). In order to prevent a double deduction for the same donation, a deduction from trading profits higher up in the computation is prevented by S1301B CTA 2009.
For guidance on charitable giving by companies, see http://www.hmrc.gov.uk/businesses/giving/companies.htm.