§ The Chancellor of the Exchequer (Mr. James Callaghan)
Fears have been expressed that the introduction of the Corporation Tax will prejudice the position of charities. At present, contributions by companies to charities are not in general allowable as a trade expense. But, if a company binds itself under a covenant to make annual payments for more than six years to a charity, it deducts Income Tax from the payments, and, if it makes sufficient profits, does not have to account to the Revenue for this tax. Nevertheless, the charity is able to reclaim from the Revenue the tax which it has suffered. Under the new system the Income Tax which the company deducts will not be franked because the company is not liable to Income Tax; but it will have 260 to account to the Revenue for the tax which it has deducted.
The question will then arise whether the company will be entitled to any deduction for Corporation Tax for these convenanted subscriptions. No such deduction is permitted for Profits Tax, and it could well be argued that it would be wrong for any deduction to be given for Corporation Tax, for what is in essence a voluntary application of income. But, whatever the strict theory may be, the entitlement of a company to tax relief on convenanted subscriptions to charities has become so well established that I do not think that it would be right at this stage to alter it, because the effect of refusing relief might be very serious, and for some charities catastrophic. I propose, therefore, to introduce provisions under which companies will be entitled to deduct for Corporation Tax purposes contributions which they make under deeds of covenant for more than six years in favour of charities.