Making investments is not generally regarded as expenditure. Consequently, investments will not usually be caught as non-charitable expenditure. However, if a charity makes a ‘non-qualifying’ investment or loan, it will be treated as non-charitable expenditure.

Qualifying investments include:

• Government securities issued or guaranteed by the government of a member State of the EU (subject to conditions)
• authorised trustee investments including wider-range investments (but, for example, excluding mortgages of freehold and leasehold property). These include National Savings Certificates and deposits or shares in a designated building society
• investments in common investment funds and similar funds established for the exclusive benefit of charities or any class of charities
• investments in common deposit funds or similar funds established for the exclusive benefit of charities or any class of charities
• an interest in land (other than one held as security for a debt)
• shares or securities listed on a recognised stock exchange
• investments in unit trusts, or shares in open-ended investment companies
• bank deposits on which a commercial rate of interest is paid (unless this forms part of an arrangement under which the bank makes a loan to another person, such as back-to-back loans)
• a loan (by way of an investment) or other investment (including a mortgage) which HMRC is satisfied that it is made for the benefit of the charity and not for the avoidance of tax by the charity or some other person. The charity must make a claim to this effect, generally accepted to be satisfied by submitting the charity tax return in the normal way.

In the case of an investment in a company, certain conditions must be met in order to qualify, as above: for example, that throughout the last business day before the date of the investment, the company has issued and paid up share capital of at least £1 million (or its equivalent in some other currency).

A loan that is not made by way of an investment does not fall into the category of non-qualifying expenditure if it comprises the following:

• a loan made to another charity for charitable purposes only
• a loan to a beneficiary of the charity in the course of carrying out the charity’s purposes
• money placed on current account with a bank (unless this forms part of an arrangement under which the bank makes a loan to another person, such as back to back loans) and
• any other loan as to which HMRC is satisfied that it is made for the benefit of the charity and not for the avoidance of tax by the charity or some other person.

Therefore, the basic rule for investments and/or loans by charities (excluding such items listed above, for example land and normal stock exchange investments) is that, in order to avoid a tax liability in the charity on the amount of the investment/loan, it must be for the benefit of the charity and not for the avoidance of tax by the charity or some other person.

It is not possible to apply to HMRC for advance clearance that any particular investment or loan will satisfy the above conditions. Therefore, in the first instance the charity must decide for itself whether or not the particular investment or loan qualifies. Where a charity has been requested to complete a tax return it must self-assess (by ticking/not ticking the relevant box in the return) whether or not the investment and/or loan in question meets the qualifying conditions. However, even if the investment/loan is thought to meet the necessary conditions HMRC may still request a formal claim to be made (see further below).

In the absence of a tax return, a formal claim can be made at any time after the investment or loan has been entered into. According to HMRC guidance, claims 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 and
• whether the claim is in respect of approved charitable investments (section 511 Corporation Tax Act 2010 or section 558 Income Tax Act 2007) or charitable loans (section 514 (3)(d) Corporation Tax Act 2010 or section 561 (3)(d) Income Tax Act 2007).

It is also helpful if any other relevant information is supplied at the time of the claim, for example, details of the terms of a loan, copy of any loan agreement or prospectus.

According to HMRC’s published guidelines, investments will be regarded as made for the benefit of the charity if they are commercially sound and meet the requirements of English charity law (even if the charity is based in Scotland or Northern Ireland). However, HMRC also accepts that in considering whether an investment or loan has been made for the benefit of the charity a broad view should be taken of how the charity benefits.

HMRC adds that there is no single test of commercial soundness; and each case must be viewed on its own facts. However, if the loan is an investment loan, HMRC will normally accept it is for the financial benefit of the charity where it:

• carries a commercial rate of interest which is paid and actively pursued
• is adequately secured and
• is made under a formal written agreement which includes reasonable repayment terms.

Where one or more of the three factors above is not present, HMRC may ask the charity for full details of the investment or loan and for the reasons why it was considered to be for the benefit of the charity. For example, a charity lending to its wholly-owned subsidiary may not be able to obtain normal security. In that case, HMRC may ask to see the borrower’s business plans, cash-flow forecasts and other business projections which informed the charity’s decision to make the investment or loan.