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HMRC internal manual

Company Taxation Manual

Corporation Tax: charitable donations relief: introduction

Historical note

Charitable donations relief is what mostly remains of what was once a highly important concept known as ‘charges on income’.  This was developed early in the scheme of Income Tax as a means of securing revenue by using the deduction at source and ‘alienation’ principles.  Where income represented pure income profit in the hands of a recipient, the payer deducted and retained tax and the recipient suffered tax by deduction.  In order to ensure the tax reached the exchequer, different rules applied depending on whether or not the payment was made out of profits brought into the charge to Income Tax on the payer.  See ICTA88/S348 and S349.  Of particular significance was that annual interest fell within the scheme, which also covered annual payments such as annuities and royalties.

The ‘charges on income’ scheme lasted in substance for Income Tax until the Tax Law Rewrite exercise, but it never applied in the form described above to CT.

When CT was introduced by FA65, the aim was to create a scheme for a comprehensive new tax on companies, which had formerly paid Income Tax and Profits Tax.  In place of the alienation/deduction at source approach, the company received relief for ‘allowable charges’ as deductions against total profits.  Any charges that would otherwise have been allowable in the trading income calculation were added back to trading profits and were then allowed against total profits.  FA65 reproduced some of the alienation rules, however.  No relief was given where the payment was charged to capital, or it was not ultimately borne by the company, since in these cases the payment was not ‘made out of profits brought into the charge to tax’.  There was a requirement for the payment to be for valuable and sufficient consideration, but with an exception for charitable covenants.  Surplus charges could be carried forward, but only if laid out wholly and exclusively for trade purposes (ICTA88/S387).  See CTM09100.

For CT the ‘loan relationships’ legislation introduced by FA96, now at CTA09/PART5, modernised a scheme for taxing and relieving interest payments which was described at the time as defying precise summary and one that had grown up over a century moved by a process of piecemeal change which bore little relationship to modern ideas of how corporate profits should be taxed.  As this removed annual interest from the charges regime for CT it greatly reduced the relevance of charges for CT, with the main item remaining being charitable donations.

Restriction to qualifying charitable donations

The wide scope of ‘charges’ described above is now limited solely to qualifying charitable donations: CTA10/S189.

The predecessor of CTA10/S189 was ICTA88/S338, and that section was substituted for the original S338 by FA02/S84 (2) and FA02/SCH30 with effect from 25 July 2002.  The scoping provisions ICTA88/S338A to S338B were also amended by FA02.  F(2)A05/S38 subsequently amended the definition of charges in S388A (now CTA10/S190), and S388B (which dealt with annuities and annual payments) was repealed.  The effect was to restrict charges on income for CT purposes to payments to a charity with effect for payments made on or after 16 March 2005.

ICTA88/S337A (1), which provided that in computing a company’s income from any source for CT purposes no deduction is given for charges on income, has been replaced by CTA09/S1301B which refers instead to qualifying charitable donations.

CTA10/S189 (1) and (2) allow the deduction of qualifying charitable donations from a company’s total profits (as reduced by any other relief except group relief) in computing CT chargeable for the accounting period in which they are paid.

CTA10/S189 (3) limits the deduction to the amount that reduces the company’s total profits for the period to nil.

CTA10/S189 (4) allows the deduction only in respect of payments made by the company in the accounting period concerned.