Chancellor Osborne announces tax exemption for charities

As one of a raft of announcements in the Chancellor's spending review and autumn statement, charities have now been partially exempted from rules surrounding "close companies" charges.

The costs occur when trustees extract funds and section 455 of the Corporation Tax Act 2010 comes into play.

Temporary tax

The law creates a temporary tax charge that is designed to discourage those trying to extract funds from close companies – this is a type of organisation that is usually controlled by a small number of directors. 

This comes into effect for any withdrawal apart from remuneration or dividends and dictates that an amount equal to 25% of the advance or loan amount must be paid in tax.

Under the new changes, loans or advances made by close companies to charity trustees for charitable purposes will now be exempt.

However, HMRC made it clear that the law will still apply to charities in cases where advances or loans are made in any other relevant circumstances.

Massive deal

Partner and head of not-for-profit tax at the accountancy firm BDO Paul Knight described the change as "a massive deal."

Meanwhile, Chairman of the Charity Tax Group John Hemming 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."

He added that he was disappointed the change would not apply to loans that are already in place.