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HMRC internal manual

Corporate Finance Manual

Debt cap: particular types of company: charities

This guidance applies to worldwide group periods of account ending before or straddling 1 April 2017.

Charities and their subsidiaries

Part 7 contains no special provisions relating to companies that are established for charitable purposes only. Interest, or similar financial income, received by such a company will almost certainly not be charged to corporation tax, because of the exemptions granted by CTA10/PT11. So a charitable company will not have financing income amounts, since TIOPA10/S313 requires the income to be brought into account for CT.

Nor will a charitable company, in general, have financing expense amounts. If such a company borrows money, it is likely that the debtor loan relationship will relate to activities of the company that are not within the charge to CT. Debits on such loan relationships are therefore disallowed for tax purposes by CTA09/S442 (3) (see CFM38130).

It is not uncommon, however, for a charity - whether organised as a company, a society or a trust - to have one or more subsidiary companies that undertake trading or other ‘non-charitable’ activities. Such a subsidiary may be funded by interest-bearing loans from the charity.

Without some special provision, interest on such loans would be a financing expense amount of the payer, but could never be a financing income amount of the recipient charity. TIOPA10/S326 counters such asymmetry by providing that an amount is not a financing expense amount of the debtor company if the creditor is a charity.

Although the provision is mainly aimed at subsidiaries of charities, the exemption in section 326 applies where a company pays interest or similar financing amounts to any charity, whether or not the charity is a member of the worldwide group. ‘Charity’ is defined as any body of persons or trust established for charitable purposes only.