Should my charity set up a subsidiary company?

While charities may trade freely in pursuit of their charitable objectives, there are charity law restrictions on engaging in non-charitable activities where a there is a significant risk to the charity’s assets. Similar guidance is issued by OSCR, the Scottish charities regulator.

Whilst some charities do undertake low risk non-charitable activities, other charities set up one or more trading subsidiaries to undertake non-charitable activities.

These subsidiaries do not benefit from the charity corporation tax exemptions, and any profits or losses are subject to the normal corporation tax rules. However, most trading subsidiaries of charities choose to Gift Aid their profits to the parent charity – this must be done within 9 months of the year end. This serves a dual purpose of returning surpluses to the parent charity, where it is exempt from tax, and the Gift Aid payment reduces the subsidiary company’s taxable profits.

However, the costs and administrative burdens of operating a subsidiary company are significant, including but not limited to audit and finance costs, legal fees, and duplicate governance procedures such as board meetings.

Charities should consider the implications of running a subsidiary company carefully. If the purpose of a subsidiary company is to shelter profits from corporation tax, then this would only be beneficial if the tax saved was in excess of the internal and external costs of operating the company.