Charity trading profits: tax obligations and reliefs

In this section:

Trading and business activities: the basics
Tax exemptions on charity trading profits
Tax and charity subsidiary trading companies
Contrasting Tax and VAT treatment of some activities

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Tax and charity subsidiary trading companies

Tax and charity subsidiary trading companies

Charities can set up subsidiary companies to carry out trading on their behalf. A trading subsidiary is a company owned and controlled by one or more charities, and is usually set up to generate income for the charity. The advantage of using subsidiary companies is that they don't have the restrictions on their trading activities that charities have.

The subsidiary company can donate part or all of its profits to its parent charity and get relief from Corporation Tax for the payments. As long as the charity uses the income for charitable purposes, it doesn't have to pay tax on it.

On this page:

Why use a subsidiary trading company?
Tax and tax relief for your subsidiary trading company
VAT and your subsidiary trading company
Investing in your subsidiary trading company
Contacting the HMRC Charities Helpline
More useful links

Why use a subsidiary trading company?

Your charity might want to use a subsidiary trading company to:

carry out non-primary purpose trading on a much bigger scale than your charity would be allowed to
protect your charity's assets from the risks of trading - in case the turnover from the business venture wasn't enough to cover the costs of carrying on the trade
set up a separate administrative unit for accounting or management purposes

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)

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Tax and tax relief for your subsidiary trading company

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.

When can the trading subsidiary make donations?

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

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VAT and your subsidiary trading company

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:

selling donated goods can be zero-rated in most circumstances, as long as your trading subsidiary is donating its profits to your charity
certain charitable fundraising events are exempt from VAT when they're undertaken by your charity's subsidiary trading company on behalf of your charity

Find out more about VAT on the sale of donated goods

Read about when charitable fundraising events are exempt from VAT

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Investing in your subsidiary trading company

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:

for charitable purposes only
for your charity's benefit - and not to avoid tax

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:

secure
gets a fair rate of return that's actually paid

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

Things to consider when deciding to make an investment

Charity law says that a charity must bear certain things in mind when it's thinking of making investments. A charity is required to:

be objective when it's choosing which investments to make
make sure that an investment won't be too risky and that it's got a reasonable chance of success
make sure that funds are spread between a number of investments, so that the risk is spread if things go wrong

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:

business plans
cash flow forecasts
projections of future profits

At regular intervals your charity should look critically at the investments it's made, to make sure they're performing as expected.

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Contacting the HMRC Charities Helpline

For more help you can contact the Charities Helpline on Tel 0845 302 0203 (open from 8.00 am to 5.00 pm, Monday to Friday).

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