CFM97620 - Interest restriction: charities: companies with exempt charitable trade profits

This guidance applies for accounting periods beginning before 1 April 2023. For accounting periods beginning on or after 1 April 2023, TIOPA10/S382(1A) applies to exclude finance costs incurred by charities from the scope of tax-interest expense amounts.

CTA10/S478 and TIOPA/S382, S385, S406

This guidance is relevant to companies that have trading profits to which a charitable exemption applies, for instance, universities. For basic guidance on charitable trading, see Annex iv to the HMRC Charities Guidance Notes.

The CIR may have the effect of denying a deduction for tax-interest expense that would otherwise be taken into account in computing profits or losses for the purposes of corporation tax. In particular, the net amount of financing costs that a group can deduct for the purposes of corporation tax may be limited by reference to the net amount of non-financing profits that the a group brings into account.

Where profits are exempted from corporation tax, or associated funding costs cannot be deducted in computing amounts actually subject to corporation tax, it is not appropriate that they should be taken into account in the calculation of tax-EBITDA or tax-interest.

Calculation of tax-EBITDA in respect of charitable trades

Where a charitable company carries on a charitable trade, CTA10/S478 has the effect that the profits from the trade will not form part of the calculation of the amount of profits to which corporation tax is applied (CTA10/S4). As this is the starting point for calculating the company’s tax-EBITDA (TIOPA10/S406), the profits of an exempt charitable trade are not included in tax-EBITDA. In the absence of any other non-exempt income, the company’s tax-EBITDA would be zero.

Calculation of tax-interest in respect of charitable trades

The profits of a company’s trade exempted by CTA10/S478 will be reduced by expenses, which will include tax-interest expense amounts, even if they arise in respect of loan relationships or derivative contracts to which it is a party for the purposes of the trade (CTA09/S49, S297, S573). It follows that CTA10/S478 also applies to exclude any financing amounts that form part of the trading profits.

TIOPA10/S382(1)(a) requires a tax-interest expense amount to be an amount that, but for the CIR, would be taken into account for corporation tax. TIOPA10/S385(1)(a) applies the same requirement to tax-interest income amounts.

S382 and S385 will not apply to amounts taken into account in computing the amounts exempted by CTA10/S478, i.e. they are not tax-interest expense or income amounts. In this sense, the charitable exemption takes priority over the CIR. It does not necessarily follow that for the purposes of applying other corporation tax rules that loan relationship debits and credits have not been taken into account for the purposes of corporation tax, or that the profits exempted by CTA10/S478 are not within the charge to corporation tax.

In the absence of any other non-exempt financing amounts, the company’s net tax-interest expense would be zero. It is not necessary to calculate a theoretical restriction of the deduction for trading loan relationship debits that are a component of exempted profits because the amounts are not tax-interest.

Group-EBITDA and group-interest

Amounts that are not taken into account for corporation tax may still be components of group-EBITDA and group-interest, whose calculation is based on amounts in a worldwide group’s accounts.

CFM97640 provides details of how the CIR rules work in the context of a group which includes a company carrying charitable activities and there is an example at CFM97650.