Annex III - Qualifying Investments and Loans

III.1 Introduction

III.1.1 When looking at the qualifying expenditure of a charity we not only consider the direct charitable payments a charity makes, but also the nature of the investments and/or loans made by the charity.

III.1.2 Schedule 20 to the Income and Corporation Taxes Act 1988 describes the types of investments and loans that the Inland Revenue accept as qualifying investments and loans. An investment or loan which is not accepted as falling within one of the definitions mentioned will be regarded as non-qualifying expenditure.

III.2 Qualifying investments

III.2.1 Part I of Schedule 20 sets out a list of investments that are accepted as qualifying investments. These can be summarised as follows:

  • any investment permitted under Schedule I of the Trustee Investment Act 1961;
  • any investment in a charity common investment fund, common deposit fund or similar scheme;
  • any interest in land (unless it is held as a security or a guarantee for a debt);
  • shares or securities of companies listed on a recognised stock exchange,
    • units etc in a Unit Trust Scheme;
    • shares in an Open-Ended Investment Company;
  • bank deposits - other than deposits made as part of an arrangement under which the bank makes a loan to somebody else (eg back to back loans);
    • certificates of deposit; and
  • any loan or other investment made for the benefit of the charity and not for the avoidance of tax (whether by the charity or any other person).

III.2.2 The final entry above relates, in part, to loans that are made by a charity by way of investment. However, a charity may make loans for purposes other than by way of investment. Paragraph 10 of Schedule 20 provides rules in respect of these other types of loan.

III.3 Qualifying loans

III.3.1 If a loan is not an investment it will be a qualifying loan if it is:

  • a loan made to another charity for charitable purposes only;
  • a loan to a beneficiary of the charity, and made in the course of carrying out the purposes of the charity;
  • money placed in a current account at a bank; or
  • any other loan made for the benefit of the charity, and not for the avoidance of tax.

III.4 For the benefit of the charity

III.4.1 An investment or loan will normally be "for the benefit of the charity" where it is made on sound commercial terms. Whether or not an investment or loan is commercially sound should be considered by reference to the circumstances prevailing at the time it was made.

III.4.2 There is no one test of commercial soundness, and each case must be viewed on its own facts. Where a loan or investment:

  • carries a commercial rate of interest; and
  • is adequately secured; and
  • is made under a formal written agreement which includes reasonable repayment term we will normally accept that the investment or loan is for the benefit of the charity.

III.4.3 Where one or more of the factors in paragraph III.4.2 is not present, we may ask the charity for full details of the investment or loan and for the reasons it was considered to be for the benefit of the charity.

III.5 Investments and loans to trading subsidiaries

III.5.1 Many charities have subsidiary companies that pass their taxable profits to the parent charity. Where an investment is made in, or loan to, such a subsidiary company, the charity is unlikely to be able to obtain normal security for the investment or loan. In such cases we may ask to see the business plans, cash-flow forecasts and other business projections which informed the charity's decision to make the investment or loan.

III.6 Probity of investments and loans

III.6.1 When deciding whether to make an investment charities should bear in mind the requirements of charity law relating to:

  • objectivity in the selection of investments
  • the need to avoid undue risk or speculation; and
  • the need for a proper spread of investments.

III.6.2 Charities should also of course bear in mind the scope of the requirements of the Trustee Investment Act 1961 as well as their own investment powers as set out in the charity's governing document

III.7 Qualifying loans and investments are not expenditure

III.7.1 An investment or loan is not an item of expenditure since it is not paid away irrevocably. A qualifying investment or loan is not an item of qualifying expenditure to be taken into account for any restriction of relief computation. But an investment or loan which is not qualifying is specifically treated as non-qualifying expenditure by Section 506(4) ICTA 1988 for the purposes of any such computation.

III.8 Loans to participators or associates of participators of close companies

III.8.1 Many of the charitable companies that are dealt with by IR Charities are close companies for tax purposes (that is under the control of five or less participators). Subsidiaries of such charities will also be close companies. In these cases liability under the provisions of Section 419 ICTA 1988 can arise when the company lends or advances money to:

  • a participator in the company (in our cases usually one of the directors/governors/guarantors), or
  • an associate of a participator (husband/wife, etc.).

III.9 Reporting requirements

Where a charity receives a tax return

If a charity is satisfied that all of its investments or loans fall within the categories listed at Sections I paragraphs 2 – 8 or Section II paragraphs 10 (1) (a) to (c) of Schedule 20 it should tick the box on their tax return as follows:

  • Company return box E26 of the charity supplementary page (CT600E);
  • Trust Return the question about qualifying investments on the charity supplementary page (SA 907).

The charity need do nothing more.

If the charity is satisfied that any other loan or investment, not falling within the relevant paragraphs of Sections I or II of Schedule 20, still qualifies because:- it is made for the benefit of the charity and not for avoidance of tax; there are two options:

  • tick the box on the appropriate return page (as above) and be prepared to make a formal claim in respect of the relevant investment if requested by HMRC Charities;
  • make a formal claim with the return, or separately .

No tax return received

A formal claim for determination of whether a loan qualifies can be made at any time after a loan or investment has been entered into. HMRC cannot make a determination about whether the loan or investment qualifies before an investment/loan arrangement is made.

Claims

Where a charity wants to make a formal claim or if a formal claim is requested by HMRC charities that claim must be in writing and must specify:-

  • the nature of the investment (loan, shares etc);
  • the amount involved;
  • the accounting period in which the loan or investment was made;
  • whether the claim is made under paragraph 9 or 10 of Schedule 20.

It is also helpful if any other relevant information is supplied at the time of the claim e.g. details of the terms of a loan.

Loans or investments outside Schedule 20

Where a charity has entered into investments or loan arrangements which do not satisfy the requirements of Schedule 20 the total of such loans or investments must be entered at:

  • box E27 of the charity supplementary pages to the CT return
    or,
  • box 7.38 of the charity supplementary page to the Trust return.