Tax blow on loan interest

New HMRC rules could hit trading subsidiaries

Charities might have to pay extra corporation tax relating to their trading subsidiaries, tax experts have warned.

HM Revenue & Customs is considering introducing new rules for interest payments between organisations under the same umbrella. Subsidiaries of large groups, including charity trading subsidiaries, would have to pay tax on the interest payable on loans from their parent organisations.

The profits of normal companies would be unaffected because of a corresponding change saying the parent would not have to pay tax when they received the interest. But because charities are already exempt from tax, they could be hit by the charge.

The move is part of larger planned changes to the tax regime for companies receiving income from outside the UK.

The rules, set in euros, would affect charities with annual incomes of more than EUR50m (£47m) or a workforce of more than 250. At least 200 charities could be caught, experts said.

"These rules were not intended to have any effect on charities at all," said Margaret Akingbade, a tax manager for consultancy firm KPMG. "This is a totally unintended consequence of the legislation."

Helen Donoghue, director of the Charity Tax Group, said: "We and several charity representatives asked HMRC to assure us charities would not be affected. But as soon as you ask for a special exemption, the Government thinks you are looking for a loophole."

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