The amount of non-charitable expenditure incurred by a charity in a chargeable period may be greater than the attributable income and gains in that period. If this is the case, the excess non-charitable expenditure’s set against the total income and gains of the charity, that is, the sum of the charity’s attributable income and gains plus all other sources of income or gains, whether chargeable to tax or not (for example, non-taxable grants and other gifts and legacies received etc). If there’s still an excess of non-charitable expenditure then this excess is carried back to the previous chargeable period, where it’s treated as non-charitable expenditure of that period, and so on until either:
there’s no longer any excess non-charitable expenditure
the chargeable period to which the excess is carried back ended more than 6 years before the end of the period in which the non-charitable expenditure was actually incurred
6.2 Where excess non-charitable expenditure is carried back to earlier chargeable periods, an assessment may be made to disallow the appropriate amount of tax relief and adjust the tax liability of that earlier period. Example A charity has gross Gift Aid income of £25,000, and gross bank interest of £5,400 in a chargeable period. It would be entitled to tax exemption on those sources of attributable income, totalling £30,400. The charity also has other non-taxable grant income of £1,600. The charity spends £10,000 on charitable grants and administration. The charity makes a non-charitable loan of £35,000.
Income and expenditureAmounts Attributable income£30,400 Less: non-charitable expenditure£35,000 Income on which relief allowed:£0 The charity’s tax exemptions are lost on all of its attributable income. The charity has excess non-charitable expenditure of £4,600. This can be carried back only to the extent that non-charitable expenditure exceeds its total income and gains.
Income and expenditureAmounts Total income and gains£32,000 Less: non-charitable expenditure£35,000 Excess non-charitable expenditure£3,000 6.3 The excess non-charitable expenditure of £3,000 is carried back first to the previous chargeable period and the charity exemptions restricted in that period. If there continues to be an amount of unapplied excess the balance is carried back to the period before that, and so on.