Trading subsidiaries: an income option for struggling charities?

In the current climate, charities may be looking for new income streams, and trading may well be an area they should consider.

Mark Lewis, Lodders’ charity law expert, answers some frequently asked questions when it comes to trading subsidiaries.

What is trading?

There are several types of trading that charities can make use of:

1. Primary purpose trading – this is carried out directly in the course of a charity’s primary purpose. An example of this would be ticket sales for a charitable theatre.
2. Ancillary trading – this is not carried out directly in the course of the charity’s primary purpose, but it indirectly serves the purpose. An example here would be the sale of drinks at a bar to those attending a performance at a charitable theatre.
3. Non-primary purpose trading – this is not related to carrying out a charity’s primary purpose. An example of this would be the sale of drinks to members of the general public not attending the charitable performance.

What is a trading subsidiary?

This is a company owned and controlled by the charity which is set up to trade and generate income for the parent charity. It is generally limited by shares.

There are a number of reasons to set up a trading subsidiary, for example, they can help protect a charity against risk, or assist in carrying out a particular project. They can also be more tax-efficient, as the subsidiary generates profit from the trade which is then donated to the charity as a gift aid payment, which is tax-deductible.

What issues can arise from setting up a trading subsidiary?

1. There can be difficulties when maintaining the separate identity of the charity from the trading subsidiary. Without clear separation, charities risk their reputation by causing confusion amongst the general public and their own staff.
2. Furthermore, there are potential conflicts of interest that can arise for charity trustees. It is important that charities have sufficient independent charity trustees in order to avoid conflicts of interest, and any such conflicts need to be declared.
3. How the trading subsidiary is funded is always a major issue. This can be by way of share capital or by way of a loan. There are often underlying factors that dictate which is most appropriate. Third-party funding should always be considered.

How can charities avoid these issues?

First and foremost, this can be avoided through monitoring the charity’s relationship with the trading subsidiary, and the trading subsidiary itself. Careful minute taking should reflect the separation of the charity from the trading subsidiary. These minutes also need to reflect robust discussions regarding funding.

It also needs to be considered whether to withdraw support by the charity, and third party funding should be considered, as mentioned above.

Considerations for funding with coronavirus issues

If no other sources of help are available to charities, it is important to consider whether temporary financial support can be justified. Trustees must have good grounds to believe that the subsidiary will become profitable within a reasonable timescale and that it can sustain the loss in the interim.

Lastly, the assets of the charity must not be placed at risk.

More information

Lodders’ specialist charity law team offers substantial, in-depth expertise gained through working with charitable and not for profit organisations of all shapes and sizes. For more information, or for an initial discussion, please contact Mark Lewis on 01789 206135, or via email.