HMRC grants exemption for charities on restitution interest

The Charity Tax Group says the move could save the voluntary sector millions of pounds

HM Revenue & Customs
HM Revenue & Customs

Charities have been given an exemption that could be worth millions of pounds from a 45 per cent tax on restitution that was introduced by the 2015 Autumn Statement, HM Revenue & Customs has said.

Restitution covers instances when a taxpayer wins a claim against HMRC that they paid too much tax, for example on VAT.

A successful claim results in the taxpayer being paid the disputed amount – the restitution – plus interest, which was previously calculated on a simple interest basis.

The 45 per cent tax was introduced because restitution interest at the time followed corporation tax, but the latter had fallen to a record low of 20 per cent. HMRC wanted restitution tax to reflect the higher rates of corporation tax that existed over the period to which most claims relate.

The government also wanted to mitigate the potential effects of a case brought by the retailer Littlewoods: the court decided that restitution interest should be paid on a compound interest basis, which would make it more expensive for the government to pay.

The government is appealing the Littlewoods case, which is expected before the Supreme Court later this year.

But the Charity Tax Group said the tax had unintended consequences for charitable companies because charities are able to claim a charity exemption on interest.

After the CTG had discussions with the Treasury, section 8C of the Corporation Tax Act 2010 has been amended to remove charitable companies from the scope of the 45 per cent tax rules.

HMRC’s guidance on the exemption says that "the rules are not applied to claimants who, disregarding available reliefs, deductions and allowances, would not have benefited from a windfall if any award of restitution interest was taxed at the current prevailing corporation tax rate".

John Hemming, chairman of the CTG, said: "This was a classic case of charities being unintentionally disadvantaged by the tax system. I am delighted that once CTG highlighted the potential adverse and inappropriate impact on the sector, officials and Treasury ministers resolved to work with us to protect charities.

"Subject to the outcome of forthcoming litigation, this exemption could save charities many millions of pounds."

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