For chargeable periods commencing on or after 22 March 2006 all charities that incur (or are treated as incurring) non-charitable expenditure lose tax exemption on an equivalent amount of their attributable income and gains. Charities can’t set their charitable expenditure against attributable income and gains before their non-charitable expenditure. Example A charity has gross Gift Aid income of £28,000 and gross bank interest of £3,000 in a chargeable period. It would be entitled to tax exemption on those sources of attributable income, totalling £31,000. The charity spends £10,000 in charitable grants and administration, and makes a non-charitable loan of £7,000.
Income and expenditureAmounts Attributable income£31,000 Less: non-charitable expenditure£7,000 Income on which relief is allowed£24,000 Tax relief is disallowed in respect of £7,000 of attributable income. 4.2 Where a charity has the tax exemptions on part of its attributable income and gains restricted it can choose which sources of attributable income and gains the restriction’s applied to. The charity must notify HM Revenue and Customs (HMRC) Charities of its preference within 30 days of being notified of the restriction. If the charity doesn’t specify a source then HMRC will do so for the charity. 4.3 If a charity has incurred non-charitable expenditure, it must complete and file a Self Assessment/Corporation Tax Return for the chargeable period concerned and account for any resulting tax liability. If the return shows the attributable income and gains being allocated against particular sources of income HMRC will accept this as notice being given as in paragraph 4.2.