When it comes to diversifying income streams, ringfencing trading activities, protecting a charity’s assets, or expanding community engagement, legal structure is key.
Charities with trading activities commonly utilise a wholly owned trading subsidiary structure, where the parent charity is the sole shareholder of a company limited by shares. Whether your charity is venturing into trading activity for the first time or reviewing an existing arrangement, here are five ‘top tips’ to consider:
Tip 1: Know and review your trading categories
There are different tax and legal consequences depending on the category of a charity’s trading activities: primary purpose, ancillary or non-primary purpose. Depending on the level and nature of trading and the accounting and tax thresholds, primary purpose and ancillary trading can sit within the parent charity, with non-primary purpose trading carried out by the trading subsidiary.
All trading activity can be conducted by the trading subsidiary, and some charities decide to tip all trading activity into it. Regular reviews of trading activity to ensure that it is being carried out by the correct entity is essential.
Tip 2: The benefit of independent directors
The parent charity will often appoint members of its Trustee Board as directors of the trading subsidiary to get the structure up and running and for ongoing oversight. As Charity Trustees must act in the interests of the charity, actual or potential conflicts of interest can arise between the charity and trading subsidiary.
This can be mitigated and managed by the appointment of independent directors, individuals not connected to the parent charity. Thought must be given to the appropriate balance of directors for the trading subsidiary, depending on the charity’s circumstances.
Tip 3: Is the relationship at ‘arm’s length’?
The Charity Trustees cannot treat the trading subsidiary as an extension of the charity; it is a commercial company operating to make profit. As well as the need for independent directors, any shared resources between the two entities must be recorded by way of a written agreement and the trading subsidiary must pay market rates for use of such resources, such as office space, staff, or use of intellectual property.
Tip 4: Money, money, money! Financing the trading subsidiary
The parent charity can fund the initial and set up costs of the trading subsidiary, however the charity cannot continue to fund the trading subsidiary indefinitely or ‘prop it up’ on an ongoing basis. Any decision to fund the activities of the trading subsidiary must be properly considered and made on the same basis as any other charity investment.
If the trading subsidiary cannot operate without a stream of funding from the parent charity, the Charity Trustees must consider if the trading structure is in the charity’s best interests. If the Charity Trustees determine that it is in the best interests of the charity to fund the trading subsidiary in the short term, this can be done via share capital or a loan arrangement.
Tip 5: Gift Aid and tax planning
Rather than funds moving down the structure, the goal of establishing a trading subsidiary is for profits to be transferred up to the parent charity. If all goes to plan, the trading subsidiary will make a profit, and it will ’Gift Aid up’ its distributable profits back to the parent charity so the charity can use the funds to further its charitable purposes. The trading subsidiary does not then pay corporation tax on said profits.
Specialist accounting and tax advice should be taken to ensure that the timing and accounting treatment of the donation is correct. Careful consideration must also be given to the tax and VAT thresholds to ensure that the group entities are optimising their overall position.
Conclusion
Establishing and maintaining a trading subsidiary can offer real advantages for charities, from protecting core assets to supporting long‑term financial resilience.
Taking time to review governance, financial arrangements and the relationship between entities ensures the structure works effectively and in the charity’s best interests.
With the right planning and oversight, trading activity can become a valuable and sustainable part of how your charity delivers on its mission.
If you would like to speak to a member of the Charities & Third Sector Team at Lindsays in relation to your trading queries or any other charity matter, please get in touch.
Other articles in this series:
Top 5 Tips for Charity Incorporation
