A new tax to be introduced in the next Finance Bill would make using trading subsidiaries "impossible" for many charities, but the sector could win a last-minute exemption in tomorrow's Budget, the Charity Tax Group has said.

In last year’s Autumn Statement the government announced that it would introduce a Diverted Profits Tax to tackle complicated arrangements used by large groups of companies to reduce the amount of tax paid in the UK.

When it was announced charities were not excluded, meaning that charities with a corporate subsidiary and foundations that are attached to a large corporate, such as the Vodafone Foundation, could be affected by the proposed legislation.

If these companies made donations to their parent charities under gift aid, that could lead to a tax bill, because any action which leads to a "tax reduction" will be caught, irrespective of motive.

John Hemming, chair of CTG, said: “While the Diverted Profits Tax was not designed to target charities, this is a classic example of charities being unwittingly penalised by wider tax legislation.

“Following discussions with HMRC, we are hopeful that our call for a specific charity exemption will be heeded.  If it is not, there is danger that this tax will make it impossible for charities to use charity trading subsidiaries, which would be a real blow for the sector.”