Trading subsidiaries: A strategic move or an administrative burden?

In recent months, I’ve noticed a growing trend among charities exploring the idea of setting up trading subsidiaries. With rising operational costs and the impact of increased Employer National Insurance contributions, many organisations are understandably seeking new ways to generate income. A trading subsidiary can seem like an attractive solution to the commercial risks and tax implications – but is it always the right one?

Why consider a trading subsidiary?

A trading subsidiary enables a charity to carry out non-primary purpose trading activities without exposing the charity itself to commercial risks or jeopardising its charitable tax status. By gift-aiding profits back to the parent charity, the subsidiary can significantly reduce or eliminate its corporation tax liability. For charities with substantial commercial operations, this structure can offer clear financial advantages and strategic flexibility.

Common pitfalls and misconceptions

However, I often see charities diving straight into setting up a subsidiary without fully assessing whether it’s the best route. In some cases, the anticipated tax savings are outweighed by the additional administrative burden and costs. These include:

Accounting complexity: Subsidiaries require separate accounts, audits, and governance structures. This can be time-consuming and costly.

Gifted items: In a charity, donated goods sold for fundraising purposes don’t need to be valued if it’s unreasonable to do so. In a trading subsidiary, however, these items must be accounted for at fair value, adding complexity to financial reporting.

VAT and tax implications: Trading activities may trigger VAT registration or other tax obligations that charities are otherwise exempt from.

When is it worth it?

A trading subsidiary can be a powerful tool when:

• The charity is engaging in substantial non-charitable trading.
• There is a clear commercial opportunity with scalable income.
• The governance and financial infrastructure are in place to support it.

But for smaller or occasional trading activities, simpler alternatives such as using the charity’s own exemption thresholds or reviewing the nature of the trading might be more appropriate. At times it could even be worthwhile paying a small amount of tax as oppose to the administrative burden of setting up and running a subsidiary.

It’s worth noting that even if the trading activity is entirely unrelated to the charity’s primary purpose, the subsidiary can still donate its profits to the parent charity via Gift Aid provided it has sufficient distributable reserves and the payment is made in cash within nine months of the year-end. This can eliminate the subsidiary’s corporation tax liability. However, care must be taken to ensure the donation is legally and financially viable, as over-distribution can breach company law and create risk for directors.

Final thoughts

Setting up a trading subsidiary should be a strategic decision, not a reactive one. It’s essential to weigh the potential benefits against the costs and complexities. At Ensors, we’re here to help charities navigate these decisions with clarity and confidence.

The information contained within this publication is given by way of general guidance. Specialist advice should always be sought in relation to your particular circumstances. No liability is accepted by Ensors for any actions taken without seeking appropriate professional advice.