Charities and funding a trading subsidiary
Charities and funding a trading subsidiary

The following Private Client guidance note provides comprehensive and up to date legal information covering:

  • Charities and funding a trading subsidiary
  • Funding the company

There may come a time in the life of a charity when all prospects of avoiding a profit on fundraising have been exhausted. Patently a profit is not a bad thing but the attendant tax liability is not good. However, there are means by which the position can be alleviated if not eradicated. The traditional route is to establish a trading company wholly owned by the charity. In essence the trading company will be liable on its profits to corporation tax but by paying those profits to its parent charity that tax liability can be eliminated. The effect is that there is no tax paid by the company and the charity receives an income not caught by the trading regime. Consequently they receive the proceeds of trade exempt from tax.

In order to achieve this aim the income must be paid in the form of a share dividend, interest on, and repayments of, loan capital, or as Gift Aid.

The question is therefore why every charity doesn't do this. It is probably because there are a number of questions that the trustees will have to ask themselves. In particular:

  1. is the company a viable trading entity

  2. what will be the legal structure and how will it be administered

  3. from where will the company get its start up funding

  4. how will the company be