Many charities generate income through trading activities to support their charitable aims. For some, this is straightforward and can be carried out within the charity itself. For others, particularly as trading grows, establishing a trading subsidiary may become worth considering. Trustees therefore need to understand when that point is reached. This article is written for charities in England and Wales.
What is a trading subsidiary?
A trading subsidiary is a separate limited company, usually wholly owned by the charity. It carries out trading activities in its own right and can pass its profits to the parent charity through a Gift Aid donation. Where the relevant conditions are met, this reduces the subsidiary’s taxable profits, and therefore its corporation tax bill, to nil.
Because it is a separate legal entity, a trading subsidiary also helps limit the charity’s exposure to the financial risks of trading. In general, the charity’s exposure is limited to what it has invested in or lent to the subsidiary, provided the two are run genuinely separately and the charity does not guarantee the subsidiary’s debts.
When might a subsidiary be appropriate?
A charity does not pay tax on profits from trading that forms part of its primary purpose, or that is ancillary to it. An example is a theatre charity selling tickets to its own productions. Trading that is not linked to the charity’s primary purpose, such as selling Christmas cards to raise funds, is taxable unless an exemption applies. The main exemption for smaller-scale activity is the small trading exemption, which depends on the charity’s gross annual income:
| Charity’s gross annual income | Maximum non-primary purpose trading turnover |
| Under £32,000 | £8,000 |
| £32,000 to £320,000 | 25% of the charity’s total income |
| Over £320,000 | £80,000 |
These limits apply to turnover, not profit. They are also a threshold rather than a tax-free allowance: if a charity’s non-primary purpose trading turnover exceeds the limit, tax is due on all of the profits from that trade, not just the excess.
A trading subsidiary may be worth considering where a charity:
- Carries out non-primary purpose trading (trading that does not directly further its charitable purposes) at or above the small trading limits.
- Runs a café, shop or online retail business that is not part of its charitable activities. Selling donated goods is generally not taxable trading, but selling bought goods often is.
- Runs commercial events or training that are not linked to its charitable purposes.
- Licenses its intellectual property or takes commercial sponsorship in a way that amounts to taxable trading, rather than a donation or investment income.
- Is planning higher-risk commercial activities where trading losses could put charitable assets at risk.
For many smaller charities, a subsidiary will not be necessary. Where trading falls within the small trading exemption, the administrative costs and additional reporting requirements may outweigh the benefits.
How does Gift Aid work between a subsidiary and its parent charity?
A trading subsidiary is taxed in the same way as any other company, so it reduces its corporation tax bill by paying its profits to the charity as a Gift Aid donation, made without deducting tax. The main conditions are:
- Timing – The payment must be made in the year the profits arise or, where the subsidiary is wholly owned by the charity, within nine months of the year end.
- Source – The donation must come from the subsidiary’s distributable reserves, so it cannot exceed what the company is legally able to distribute.
- Cash – There must be an actual transfer of cash from the subsidiary to the charity. An accounting entry or intercompany offset is not enough.
- Losses – If the subsidiary makes a loss, there are no profits to donate. Trustees should then consider whether continuing to support the subsidiary is consistent with the charity’s objects and their duties.
What are the advantages?
A well-managed trading subsidiary can:
- Limit the charity’s exposure to commercial risk.
- Improve tax efficiency where profits are paid to the charity under Gift Aid.
- Keep charitable activities separate from commercial operations.
- Provide greater clarity over the financial performance of trading activities.
What should trustees consider?
Before establishing a subsidiary, trustees should consider:
- Whether the level of trading justifies the additional administration.
- The costs of company accounts, tax returns and ongoing compliance. The subsidiary must file accounts with Companies House and a corporation tax return, and the charity may need to prepare consolidated group accounts.
- Governance arrangements, including how conflicts of interest will be managed where trustees also act as directors of the subsidiary.
- VAT implications, and how transactions between the charity and the subsidiary will operate. These should be on commercial, arm’s-length terms.
- Whether the charity has the resources to manage another legal entity effectively.
Professional advice should always be sought before setting up a trading subsidiary, as the right structure will depend on the charity’s activities, objectives and level of risk.
The key takeaway
A trading subsidiary is not the right solution for every charity. However, where non-primary purpose trading is likely to exceed the small trading limits, or carries real commercial risk, it can provide valuable protection, improve tax efficiency and support good governance.
Trustees should review their charity’s trading activities at least annually to ensure the current structure remains appropriate as the charity grows.
If you need any further guidance on trading subsidiaries or charity trading more generally, please contact us.
This article is for general information only and does not constitute legal or tax advice.
