Does your charity need a trading subsidiary?

For accountants advising charities, and for those volunteering in trustee roles, understanding when a trading subsidiary may be required is important. Our upcoming webinar ‘Does your charity need a trading subsidiary?,’ provides a timely opportunity to explore this topic in more depth. Before signing up, it is worth revisiting some of the core principles set out in Charity Commission and sector guidance.

A trading subsidiary is a separate legal entity, often a company, that is owned and controlled by a charity. Its primary purpose is to carry out trading activities and generate profits that can be passed back to the parent charity, often using Gift Aid to achieve tax efficiency.

The distinction between different types of trading is central to understanding when a subsidiary is required:

• Primary purpose trading (directly furthering the charity’s objects) can usually be undertaken within the charity itself without direct tax liabilities
• Small-scale non-primary purpose trading may fall within the small trading exemption
• Larger or riskier non-primary purpose trading is where a subsidiary is typically needed

A trading subsidiary should be considered where:

• The activity does not directly advance the charity’s purposes
• The level of non-primary purpose trading is significant
• There is a risk of tax liability
• There is material financial or operational risk to the charity’s assets

In some cases, using a subsidiary is not just good practice but effectively necessary to protect the charity and ensure compliance.

Deciding whether to establish a trading subsidiary is not purely a technical accounting decision. It requires careful judgement across several areas.

1. Risk and asset protection: one of the main reasons for using a subsidiary is to ring-fence risk. If a trading activity fails or incurs liabilities, the subsidiary structure helps protect the charity’s assets.
2. Tax efficiency: profits from non-primary purpose trading are generally taxable if earned directly by a charity. A subsidiary can donate its profits to the parent charity and reduce corporation tax through Gift Aid.
3. Governance and conflicts of interest: the charity and its subsidiary are separate entities with different purposes. Trustees must ensure decisions prioritise the charity’s interests, and conflicts, particularly where individuals serve on both boards, are properly managed.
4. Operational separation: clear boundaries must be maintained between the charity and the subsidiary. This includes separate accounts, arm’s-length transactions and appropriate charging for shared resources, such as staff, premises or branding.
5. Cost and complexity: a subsidiary introduces additional administrative and compliance requirements. There is a second entity to manage, with its own reporting, governance and regulatory obligations.

These factors mean that while a trading subsidiary can be highly effective, it is not always the right solution. Trustees must weigh the benefits against the added complexity.

The rules around charity trading are well established but applying them in practice can be challenging. The distinction between primary and non-primary purpose trading is not always straightforward, and the implications for tax, governance and reporting can be significant.

Our 20 May webinar, ‘Does your charity need a trading subsidiary?,’ offers a focused opportunity to explore the real-world considerations behind charity trading structures, including options for restructuring or winding up a subsidiary.

The ‘Charities and trading’ guide explains how to pay less tax as a charity and when to set up a subsidiary trading company, covering VAT considerations, primary purpose trading, the small trading exemption limits and when it is useful to set up a subsidiary trading company to trade on their behalf.