Home » CTG secures charity exemption to 45% tax on restitution interest

CTG secures charity exemption to 45% tax on restitution interest

In Autumn Statement 2015 the Government announced new rules introducing a special 45% rate of Corporation Tax to be applied, from October 2015, to payments made by HMRC of certain awards of restitution interest.

The new rules were introduced because the interest element of any restitution award to a company would be liable to the prevailing rate of Corporation Tax (which was at a historic low) and HMRC wished to reflect both the (generally higher) rates of Corporation Tax over the period to which typical awards relate, and the effect of compounding interest not taxed in the year to which it related.

CTG highlights adverse impact for charities

Having identified possible unintended consequences for charitable companies (charitable trusts are not affected), CTG held discussions with officials from HM Treasury and HMRC. CTG’s original policy paper to HMRC made clear that because charities are able claim a charity exemption on interest (under s486 CTA 2010 and s532 ITA 2007 respectively) they would not have benefited from a windfall if any award of restitution interest were to be taxed at the current prevailing Corporation Tax rate.

Discussions with Government officials and Treasury Ministers over the last 18 months have resulted in a change in the law so that charitable companies are removed from the scope of the 45% rate.  The Corporation Tax Act 2010 (Part 8C) (Amendment) Regulations 2017 were laid before the House of Commons on 13 March 2017 and have now been scrutinised and approved.

A claim brought by a charitable company will now be outside the scope of the special 45% corporation tax rate on restitution interest. This will affect charities who have made a claim against HMRC for, or who have received restitution interest from, HMRC.

Responding to the confirmation that the new Regulations had been laid, CTG Chairman, John Hemming commented:

“This was a classic case of charities being unintentionally disadvantaged by the tax system. I am delighted that once CTG highlighted the potential adverse and inappropriate impact on the sector, officials and Treasury Ministers resolved to work with us to protect charities. Subject to the outcome of forthcoming litigation this exemption could save charities many millions of pounds.”

What does this mean for charities?

The Court of Justice of the European Union (CJEU) has held that an interest mechanism needs to provide adequate indemnity to the taxpayer, but left it to the national courts to decide whether this applied to the particular situation. The High Court decided that for Littlewoods this had not been the case and the Court of Appeal agreed, indicating that compound interest rather than simple interest was appropriate.   While the Government will appeal the Littlewoods decision in the Supreme Court in July 2017 the introducing of the restitution tax was a pre-emptive move to limit the potential impact if the Court were to uphold the decisions of the lower courts by introducing a 45% corporation tax charge on such repayments.

This exemption will benefit all charities and universities that have protected/stayed High Court compound interest claims in respect of Fleming/Conde Nast claims on which compound interest may yet be payable going back as far as the inception of VAT in 1973. Estimates of the affected compound interest range from thousands to millions depending on the size of the charities involved with the total amount of charities that have contacted CTG approximately £50m.

Notes for editors

The Charity Tax Group (CTG) has over 500 members of all sizes representing all types of charitable activity. It was set up in 1982 to make representations to Government on charity taxation and it has since become the leading voice for the sector on this issue. CTG has persuaded successive Governments to introduce a range of tax reliefs and has also campaigned successfully to protect existing concessions, saving charities a considerable amount of money in the process.

Background documents