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HMRC internal manual

Company Taxation Manual

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HM Revenue & Customs
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Corporation Tax: charitable donations relief: formerly charges on income: computation

Charges on income, limited now to charitable donations, are allowed as deductions against the profits of the accounting period in which they are paid.

The general rule at CTA10/S189 (formerlyICTA88/S338) is that the deduction for charges is allowed against total profits as reduced by any other relief except group relief. But this is subject to two further rules.

The first rule is that under CTA10/S137 (formerly ICTA88/S407 (1)) group relief is given after all other reliefs against profits, except for reliefs brought back from a subsequent accounting period.

Trade charges - payments made before 16 March 2005

The second rule was that under ICTA88/S393A (8), where there are charges paid which are:

  • wholly and exclusively for the purposes of a trade (‘trade charges’), and
  • allowed against total profits,

the charges are not disturbed by trading losses brought back from a subsequent accounting period.

The result is that:

  • charges of any description are always allowed before group relief,
  • trade charges are always allowed before trading losses brought back from a later accounting period (CTM04510),
  • subject to the two previous rules, charges of any description are allowed after other reliefs against profits.

Trade charges will not be relevant to payments made on or after 16 March 2005 - see CTM09010.

Example

Company M has subsidiary companies in the year ended 31 December 1995. It’s results for the year ended 31 December 1995 are profits of £450,000 and charges of £850,000 (including trade charges of £350,000).

There are trading losses of £400,000 incurred in the year ended 31 December 1996 to carry back to the year ended 31 December 1995.

Company M wants to set off against the profits of £450,000 the losses carried back of £400,000 and charges of £50,000. It then wants to surrender the remaining charges of £800,000 as group relief to its subsidiaries. But it cannot do this, because the order of set-off from profits before charges and loss relief must be as follows:

  • trade charges,
  • trading losses carried back,
  • non trade charges.

So Company M must set off the trade charges of £350,000 and £100,000 of the trading losses against the profits of £450,000. The charges which it can surrender as group relief to its subsidiaries are then limited to the non trade charges of £500,000.

The deduction is a ‘deduction against the total profits’. So it is not a deduction made in computing any particular component of the assessment (see CTM01140). Where the assessment has become final and conclusive, do not admit any subsequent claim to deduct charges from the assessment, unless there is a valid claim to error or mistake relief. The interaction of charges on income and double taxation relief is dealt with at DT1241 to DT1243.