Trading subsidiaries of charities

By Tolley in association with Speechly Bircham LLP

The following Trusts and Inheritance Tax guidance note by Tolley in association with Speechly Bircham LLP provides comprehensive and up to date tax information covering:

  • Trading subsidiaries of charities
  • Introduction to trading subsidiaries
  • Setting up a trading subsidiary
  • Financing the trading subsidiary
  • Use of the charity’s assets
  • Payments from the subsidiary to the charity
  • Monitoring the trading subsidiary
  • Should charity trustees and employees also work for the subsidiary?
  • Can the charity guarantee the liabilities of the subsidiary?
  • VAT

Introduction to trading subsidiaries

A 'trading subsidiary' is a company owned and controlled by a charity, or occasionally several charities, which has been incorporated in order to carry on a trade or business which:

  • the charity cannot itself carry on due to constitutional restrictions or concerns about business risk and potential liabilities, and / or
  • the charity cannot carry on in a tax-efficient manner

A trading subsidiary is usually set up to generate income for the charity or charities, as the subsidiary does not have the restrictions to its trading activities that charities have.

A trading subsidiary can be used to:

  • carry out non-primary purposes trading beyond the limits of the small scale exemption (see the Tax treatment of the charity guidance note)
  • protect a charity’s assets from the risks of trading

If the subsidiary company gives all or part of its profits to the charity (in place of a dividend) then it will not pay tax on those profits, see the Gifting cash and assets to charity guidance note.

Trading subsidiaries are not cheap to run and generate additional bureaucracy and complexity and so should not be created without proper consideration of their merits and disadvantages.

Setting up a trading subsidiary

If a charity wants to set up a trading subsidiary it will need to:

  • create a company
  • provide it with trading capital (see below)
  • consider how the charity's assets can be made available to the company (see below)
  • ensure that the

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