If you’re planning to set up a trading subsidiary, check your charity has the powers to do this in its governing document.
If it doesn’t have these powers, it may be possible to amend it. This is possible without Charity Commission consent, but depends on the circumstances.
A trading subsidiary can offer several benefits including:
- flexibility to do things the charity may not be able to do. For example, sell goods to raise funds for the parent charity
- limited liability may protect the parent charity and its assets from the risks involved in trading
- a trading subsidiary can donate its distributable profits to its parent charity and treat this as a deductible expense – this often achieves a good degree of tax efficiency, known as 'corporate Gift Aid.’
- it can be useful for VAT recoverability.
There are some disadvantages that should be considered:
- it means a second organisation to administer and additional compliance requirements.
- the company must operate at arm’s length. Conflicts of interests can be difficult to manage.
- the charity may not subsidise the trading company resulting in practical implications, such as infrastructure for shared staff/assets
- the subsidiary won’t get business rates relief on its premise.