Subsidiaries – are they necessary?

Subsidiaries – are they necessary?

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:

• primary purpose trades, one that is undertaken in the course of carrying out the primary purpose activities of the charity. For example, admission fees to an exhibition in an art gallery
• trades that are ancillary to a primary purpose activity. For example, the sale of food and drink in a theatre restaurant open to the audience
• trades where work is mainly carried out by beneficiaries of the charity, for example a restaurant operated by students as part of a catering course
• Small scale trading activities where a charity’s activities do not fall into any of the above categories, they will still be exempt where it does not exceed the small-scale trading limit of £80,000 (where the charity’s gross annual income exceeds £320,000).

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.

Download issue three of our 'Revive, Refocus, Rebuild – The journey back to better' guide here to read our top ten qualities and behaviours that we feel help to create a truly informed and engaged trustee.

Would you like to know more?

If you have any queries regarding what we cover in our guide, please get in touch with your usual contact or email charities@azets.co.uk.