Specific deductions: trade organisations: local enterprise organisations and urban regeneration companies
S82-S86 Income Tax (Trading and Other Income) Act 2005, S82-S86 Corporation Tax Act 2009
A trader may make donations to a local enterprise organisation or an urban regeneration company. Such donations are allowable deductions in calculating the profits of a trade (subject to the anti-avoidance provision described below). This rule applies even if the donation would ordinarily be disallowed, for example because it was made for benevolent reasons rather than wholly and exclusively for the purposes of the trade. For this purpose, a ‘local enterprise organisation’ is:
- a local enterprise agency;
- a training and enterprise council;
- a Scottish local enterprise company;
- a business link organisation.
Local Enterprise Agency (LEA)
An LEA is a body which has as its sole objective the promotion or encouragement of industrial and commercial activity or enterprise in a particular area in the UK, with particular reference to encouraging the formation and development of small businesses.
An LEA can take various forms and it will not necessarily be called a ‘local enterprise agency’. It may be a body corporate or a trust or an unincorporated association but it must have a rule preventing it from distributing income or profits to its members or those who control it.
In order for donations to be allowable under the above legislation, the LEA has to obtain approval. In England and Northern Ireland approval is given by the Secretary of State, in Scotland by the Scottish Ministers and in Wales by the National Assembly for Wales. If doubts arise as to whether a particular LEA is approved then you should ask for a copy of the LEA’s letter of approval.
Some larger bodies may have the promotion or encouragement of industrial and commercial activity or enterprise in a particular area in the UK as one of its principal objectives. In this situation approval may be given in respect of a separate fund which is maintained by the body and used wholly in pursuance of this objective.
Training and Enterprise Council (TEC)
Although the legislation still refers to TECs, they were abolished on 2 April 2001, and their functions in England transferred to the Learning and Skills Council. It is responsible for funding and planning education and training for over 16 year olds in England.
Local Enterprise Company (LEC)
LECs are private companies in Scotland with boards consisting mainly of local businessmen and women. They work under contracts entered into with Scottish Enterprise or Highlands and Islands Enterprise. Their remit covers economic development and environmental functions as well as training.
Business Link Organisations (BLOs)
Although the legislation still refers to BLOs, they have now been abolished.
BLOs provided a single point of access to all business support services provided by key local organisations in England including the LECs, LEAs, Chambers of Commerce, Local Authorities and the Employment Department. A BLO set up in, say, Anytown was referred to in practice as ‘Business Link Anytown’. The Business Link network comprised many local operators covering the whole of England and providing a range of support, information and advice for small businesses on every issue affecting their business.
A BLO was usually set up as a company limited by guarantee or, more rarely, as a company with a share capital. The board usually comprised representatives of the organisations for which the BLO provided a single point of access and local businessmen and women.
If the contributors to a BLO were to receive tax relief for their contributions, then it had to be authorised by or on behalf of the Secretary of State for Industry to use the service mark ’Business Link’.
Urban Regeneration Company (URC)
An URC is an independent arms length body intended to co-ordinate the regeneration of a designated urban area.
In order for donations to be allowable under the above legislation, the Treasury has to designate the organisation as an URC. This order can be backdated. This means that donations made before the date of the order can qualify for relief.
If there is any doubt as to whether a particular organisation qualifies as an URC, you should ask for details of the Treasury order designating the organisation as an URC.
Form of contribution
The deduction applies to expenditure incurred in making contributions ‘whether in cash or in kind’. The reference to contributions ‘in kind’ is intended to cover the situation where a trader provides services to the agency without charge, for example, by seconding an employee to work for the agency, or providing accommodation rent free. The trader may claim a deduction in computing his profits for the employee’s wages or the expenses incurred on rent, rates etc in connection with the property in so far as they are not otherwise deductible as, for example, in BIM46815.
If a trader gave one of his own assets, for example, a car, to an agency, it might be argued that he had not ‘incurred expenditure’ in making a contribution. In practice, however, a deduction should be allowed to the extent that the original expenditure has not been relieved either by a deduction or capital allowances.
Anti-avoidance provision - disqualifying benefits
As an anti-avoidance measure, the deduction for expenses incurred in making a contribution is restricted where the contributor or someone connected with them receives, or is entitled to receive, a disqualifying benefit in connection with the making of the contribution. Only the excess of the amount of the expenses over the value of the benefit is allowed. Where relief has already been given for a contribution and the contributor, or someone connected with them, receives a disqualifying benefit attributable to it, the contributor is chargeable on the value of the benefit (to the extent that it has not already been set against the contribution) as a trading receipt or a post-cessation receipt as appropriate.
A disqualifying benefit is a benefit the expenses of obtaining which would, if incurred by the contributor directly as an arm’s length transaction, not be allowable as a deduction in calculating the trade profits. Any case of doubt or difficulty should be submitted to CTISA (Technical).
See CTM15340 where the contributor is a company owned by the LEA, TEC or LEC.