Tax and charity subsidiary trading companies

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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Why use a subsidiary trading company?

Under charity law, a charity is not allowed to carry out non-charitable trading. That is because non-charitable trading could put the assets of the charity at risk.

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

  • carry out non-charitable purpose trading on a much bigger scale than your charity would be allowed to under charity and tax law
  • 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 the profits it donates.

Your charity might use a subsidiary trading company for ventures that place its assets at risk if it carried on the trading activity itself. If the tax benefits are the main reason for considering setting up a trading subsidiary. it might be wise to get professional accountancy and legal advice. It might turn out that the advantages are not enough to justify the costs of setting up and running the subsidiary.

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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?

It's up to the directors of the trading company when to make the payments. Putting them off for a while could help with the company's cash flow. The relief is normally given for the relevant accounting period when paid. But provided a donation is made to its parent company within nine months of the end of a particular accounting period, a company wholly owned by one or more charities can choose to treat the donation 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 gifts to charity made by companies

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 in Charities Notice 701/1

Find out more about how VAT applies to fundraising events

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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 want to invest some money in the company at the outset. Your charity may also want to give the company regular cash injections - 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 'approved charitable' 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.

'Approved charitable' 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. There is a difference between making a sound investment and injecting funds to keep the company in business. Where a company donates all its profits so as to pay no Corporation Tax it should not rely on funds passed back from the charity to keep it in business. This would put both the charity's and the company's reliefs at risk. Where a company needs to retain some profits it should do so - even if this means paying some tax.

Find out more about tax and charitable or 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.

Read more about investing in your subsidiary trading company in the detailed guidance notes

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Contacting the HMRC Charities Helpline

For more help you can contact the Charities Helpline.

Contact the Charities Helpline

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More useful links

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 selling goods on behalf of individuals

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