HMRC announces tax exemption for charities over 'close companies'

The move was announced as part of the Chancellor's spending review and autumn statement

HM Revenue & Customs
HM Revenue & Customs

Charities have been partially exempted from rules that mean they must pay a charge when trustees extract funds from "close companies".

Section 455 of the Corporation Tax Act 2010 creates a temporary tax charge designed to dissuade participators and their associates from extracting funds from close companies other than as remuneration or dividends.

Close companies are a type of organisation that is typically controlled by a small number of directors.  

The act says that an amount equal to 25 per cent of the loan or advance amount must be paid in tax when funds are extracted from close companies.

In a policy document published after the Chancellor's spending review, HM Revenue & Customs says changes to section 455 will exempt loans or advances made by close companies to charity trustees for charitable purposes.

The exemption will apply where the loan or advance to the trustee is applied wholly to the purposes of the charitable trust.

Section 455 will continue to apply to charities where loans or advances are made in any other relevant circumstances, HMRC said.

The reforms to section 455 will be included in the Finance Bill 2016 and will apply to loans and advances made on or after 25 November 2015.

HMRC said charities could refrain from accounting for section 455 charges between 25 November and the day the Finance Bill receives royal assent.

But if the exemption is not approved by parliament, charities will be liable to section 455 charges.

Paul Knight, a partner and head of not-for-profit tax at the accountancy firm BDO, told Third Sector that for the small number of charitable trusts affected by close company rules, the change was "a massive deal".

In the Finance Act 2013, a loan from a charitable trust’s subsidiary to the trustees would have become liable to tax under section 455 because the amendment did not distinguish between receipt of loans by trustees for their own benefit and receipt to apply the money for the purposes of the charity.

HMRC’s policy document said the government wants to ensure charities "are not adversely impacted by rules designed to deter the extraction of value by individuals from close companies" and can instead use the money to further charitable objectives.

John Hemming, chairman of the Charity Tax Group, said: "The partial exemption for charities from the close company loans to participators rules, on which we lobbied the Treasury, is very welcome – it was a clear example of charities being caught inadvertently."

But he said it was disappointing that it only applied from yesterday and not on loans that are already in place. 

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