Date04 Mar 2022
Charities often use trading subsidiaries to operate their non-primary purpose trading activities. This has long been a structure commonly used by charities to shelter from tax of any profits arising from non-exempt trades.
Contrary to popular belief, charities are not exempt from all taxes, and when they engage in non-primary purpose trades, the profits are subject to corporation tax. To avoid paying tax, many charities carry out trading activities through a subsidiary company.
Charities themselves can engage in some trading activities which are exempt from tax, these typically include:
Where trades don’t fall into one of the above tax exemptions, they can be operated by a trading subsidiary to avoid paying corporation tax. The subsidiary company will not itself be a charity, and its profits will be chargeable to corporation tax.
However, profits can be donated to the charity, thus reducing the company’s taxable profits to nil, and because the donation is exempt in the charity, no corporation tax is payable by either party.
Providing the trading company is a wholly owned subsidiary, the charitable donation can be made up to nine months after the end of the accounting period and the payment made will be allowed as a deductible expense by the subsidiary company. This normally allows the trading company to finalise their accounts and tax position before having to make a charitable donation.
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