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HMRC internal manual

Company Taxation Manual

Corporation Tax: charitable donations relief: formerly charges on income: introduction

Background to charges

Charges on income were originally a highly important concept, developed very early in the scheme of income tax as a means of securing revenue by using the deduction at source and the ‘alienation’ principle. 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. Different rules applied depending on whther the payment was out of profits brought into the charge to income tax on the payer.

This scheme lasted in substance for income tax until Tax Law Rewrite. See ICTA88/S348 and S349. But it never applied in this form 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 approach the company received relief for allowable charges as deductions against total profits. Any charges allowable in the trading income calculation were added back 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 (thus the payment was out of profits brought into 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.

Restriction to qualifying charitable donations

Charges were originally a category of wide scope, comprising annual interest, annuities and other annual payments including roylties, but the charges relief is now limited just 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the definition of charges in S388A (now CTA10/S190) and S388B (which dealt with annuities and annual payments) was repealed.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 charges on income from a company’s total profits (as reduced by any other relief except group relief) in computing CT chargeable for an accounting period.

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.