Mark Lewis, Lodders’ charity law expert, answers some frequently asked questions when it comes to trading subsidiaries.
There are several types of trading that charities can make use of:
This is a company owned and controlled by the charity which is set up to trade and generate income for the parent charity. It is generally limited by shares.
There are a number of reasons to set up a trading subsidiary, for example, they can help protect a charity against risk, or assist in carrying out a particular project. They can also be more tax-efficient, as the subsidiary generates profit from the trade which is then donated to the charity as a gift aid payment, which is tax-deductible.
First and foremost, this can be avoided through monitoring the charity’s relationship with the trading subsidiary, and the trading subsidiary itself. Careful minute taking should reflect the separation of the charity from the trading subsidiary. These minutes also need to reflect robust discussions regarding funding.
It also needs to be considered whether to withdraw support by the charity, and third party funding should be considered, as mentioned above.
If no other sources of help are available to charities, it is important to consider whether temporary financial support can be justified. Trustees must have good grounds to believe that the subsidiary will become profitable within a reasonable timescale and that it can sustain the loss in the interim.
Lastly, the assets of the charity must not be placed at risk.
Lodders’ specialist charity law team offers substantial, in-depth expertise gained through working with charitable and not for profit organisations of all shapes and sizes. For more information, or for an initial discussion, please contact Mark Lewis on 01789 206135, or via email.Contact us
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