What does section 554 of the Income Tax Act 2007 do?

Section 554 sets out specific exceptions to the substantial donor rules that impose tax charges on charities entering transactions with significant donors. It carves out certain transactions so that charities are not penalised for legitimate commercial dealings simply because the other party is a substantial donor to the charity.

What is the key exception under section 554 for transactions with substantial donors?

The most important exception applies to transactions of an ordinary commercial nature. If a charity transacts with a substantial donor on arm's length terms identical to those between independent unconnected parties, the transaction falls outside the anti-avoidance provisions, preserving the charity's favourable tax treatment of its income and gains.

What role does HMRC play in determining whether the exceptions under section 554 apply?

An officer of Revenue and Customs is responsible for considering whether a particular transaction qualifies for an exception. If a charity believes a transaction falls within an exception, it may need to demonstrate this to HMRC's satisfaction, providing a safeguard that the exceptions are not used to circumvent the substantial donor rules.

Can you give an example of a transaction that qualifies as an exception under section 554?

If a substantial donor runs a stationery business and the charity purchases office supplies at the same prices and credit terms offered to all other customers, this qualifies as a transaction of an ordinary commercial nature. Because it is on normal market terms, it is exempt from the substantial donor tax charges under section 554.

Income Tax Act 2007 section 554

Transactions: exceptions

Section 554 sets out the exceptions to the types of transactions between charities and substantial donors that would otherwise be caught by the anti-avoidance rules.

Certain transactions between a charity and a substantial donor are exempt from the tax charges that normally apply under the substantial donor rules.
The key exception is for transactions that are of an ordinary commercial nature — that is, transactions carried out on normal arm's length terms that would typically occur between unconnected parties.
Where a transaction qualifies as an exception, the charity will not face a tax charge and the favourable tax treatment of the charity's income and gains is preserved.
An officer of Revenue and Customs has a role in determining whether the exceptions apply in practice.

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