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Charities can set up wholly owned subsidiary companies to carry out trading on their behalf. A wholly owned trading subsidiary is a company owned and controlled by one or more charities, and is usually set up to generate income for the charity or charities. The advantage of using subsidiary companies is that they don't have the restrictions on their trading activities that charities have.
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Your charity might want to use a subsidiary trading company to:
A subsidiary company can take advantage of the tax relief available for charitable donations. If your charity's subsidiary company gives all or part of its profits to your charity then it won't have to pay any tax on those profits.
Your charity should use a subsidiary trading company for any venture that would place its assets at significant risk if it carried on the trading activity itself. But if the tax benefits are the main reason for considering setting up a trading subsidiary it's worth weighing up the advantages and disadvantages carefully. It might turn out that the advantages are not enough to justify all the extra costs of setting up and running the subsidiary.
If your charity is considering setting up a trading company it would be wise to get professional accountancy and legal advice.
Find out how to choose and manage an accountant on the Business Link website (Opens new window)
Find out how to choose and manage a solicitor on the Business Link website (Opens new window)
If your charity sets up a subsidiary trading company to generate income, the trading company itself isn't a charity. It's an ordinary limited company and has to pay Corporation Tax on its profits.
But, like any other company, it can get tax relief on charitable donations it makes. So if your charity's trading subsidiary makes payments in the form of donations to your charity it can reduce the amount of Corporation Tax it pays. If it donates all its taxable profits to your charity it will pay no Corporation Tax at all.
Your charity's trading subsidiary pays the donations to your charity without taking off any tax. It gets tax relief for these donations. Your charity doesn't pay tax on the amounts it receives provided it uses the money for its charitable purposes.
Your charity's wholly owned trading subsidiary can get tax relief on donations made to your charity at any time from the start of a relevant accounting period until nine months after the end of that period. It's up to the directors of the trading company when to make the payments. Putting them off for a while may make sound commercial sense and could help with the company's cash flow.
The company can choose to treat a donation that is made to its parent charity within nine months of the end of a particular accounting period, as if it was paid in that earlier accounting period. A claim to carry back a gift in this way must be made within two years of the end of the accounting period to which the gift relates.
Find out about claiming Corporation Tax relief on gifts to charities
Get more information about Corporation Tax
HM Revenue & Customs (HMRC) treats subsidiary trading companies owned by charities as normal commercial enterprises for VAT purposes. So your charity's trading subsidiary won't get most of the VAT reliefs that your charity benefits from. But there are two exceptions that apply to trading subsidiaries:
Find out more about VAT on the sale of donated goods
Read about when charitable fundraising events are exempt from VAT
If your charity sets up a subsidiary trading company it's likely that you'll have to invest some money in the company at the outset. Your charity may need to give the company regular cash injections too - for example to expand or develop the business.
There are special rules that apply to charities when they invest their funds in a trading company. Any charity investments or loans that aren't 'qualifying' investments or loans are treated as non-charitable expenditure, and a charity that incurs non-charitable expenditure will lose some or all of its tax exemptions.
'Qualifying' investments must be made:
HMRC considers that an investment is made for the benefit of the charity if it is 'commercially sound'. This means that your charity needs to make sure that any investment it makes is:
If the charity makes a loan to a subsidiary company, it must be clear that the amount of the loan will be repaid in due course.
Find out more about non-charitable expenditure
Charity law says that a charity must bear certain things in mind when it's thinking of making investments. A charity is required to:
Your charity needs to keep proper records of all the investments it makes, as well as details of why it decided to choose those particular investments. Depending on the amount of money your charity invests it may base its decisions on the information contained in:
At regular intervals your charity should look critically at the investments it's made, to make sure they're performing as expected.
Read more about investing in your subsidiary trading company in the detailed guidance notes
For more help you can contact the Charities Helpline.
Contact the Charities Helpline
Read more about using a subsidiary trading company in the detailed guidance notes
Find out more about using a subsidiary company on the Charity Commission website (Opens new window)
Read about Gift Aid and using a trading company to sell goods on behalf of individuals
