Scotland's arts funding body is to lose its charitable status at a cost to the arts world of around £300,000 a year, it has emerged.

Mike Russell, the culture minister, said it was a "shame" and a disappointment that Creative Scotland, which will have an annual budget of more than £60m when it takes over from the Scottish Arts Council next year, will not be a charity like its predecessor.

Although an approach for charitable status has yet to be made by Creative Scotland - which will see the merger of SAC and Scottish Screen - it was made clear yesterday that the new body would not to be designated a charity by the official charities regulator, leading to a significant loss of financial benefits.

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Ewan Brown, chair of the interim Creative Scotland Ltd, which is setting up the new quango, said it was a "nutty" situation.

Scottish Screen, the national film agency based in Glasgow, has already lost its charitable status, a move that it estimates could cost it £50,000 this year in lost rates relief and other benefits.

Addressing the artistic community in Edinburgh, the minister said he would engage in further talks with the Office of the Scottish Charity Regulator (OSCR) about the issue.

"It is a shame, the Scottish Arts Council is a charity but the new body will not be, but that is their reading of the legislation," the minister said.

"I am intending to speak to OSCR about the situation, but Scottish Screen have already had to manage it and take the financial hit. This is not new to us, but it will reduce the amount of resources available to Creative Scotland."

However, yesterday he did announce details of a new £5m Innovation Fund, which will allow Creative Scotland to run a series of projects that will "bring to life new partnerships that cross traditional boundaries, supporting and sustaining the artistic and creative community during this economic downturn."

The new funds include a £1.5m digital media fund, a £1m support programme for entrepreneurs, a £750,000 rural innovation fund and a £1m "odd fellows" award to bring together two or more Scottish artists of different disciplines.

There will also be £500,000 to support artist residencies and a further £250,000 for Own Art, the interest- free art credit scheme.

The digital media fund is match by a further £1.5m from Scottish Enterprise and will be managed by Scottish Screen.

The rules in the Charities and Trustee Investment (Scotland) Act 2005 do not allow charities to have a direct link to government - and Creative Scotland will have board members appointed by ministers.

Mr Brown said: "It is nutty that we are in this position and it is a totally unintended consequence of the legislation."

He added: "Charitable status is helpful in what we want to do and it's not a small amount of money.

"It will be a disappointment to those who want to give to the sector."

A spokesman for OSCR said that the body had not yet received an official application from Creative Scotland and therefore had not made a decision.

Speaking to a packed Royal Lyceum Theatre filled with members of Scotland's artistic community, Mr Russell earlier said that funds for the arts in the future would be tighter because of the economic recession, saying: "My hope is for a stand-still budget, but it may not be as good as that."