Senscot Legal

In this blog post, our Legal Services Advisor Annie discusses charity trading, when to think about setting up a trading subsidiary and things you should take into consideration when doing so.

Can charities trade?

Activities carried out by a charity must always further its charitable purposes and be for public benefit.  However, charities are permitted to trade and sell services. Trading is often part of charitable activities to raise funds for a charity, but these must be applied toward their charitable purposes. Trading is defined as an exchange of goods and services for a fee. Grants, donations, legacies and the sale of donated goods are not classed as trading.

Primary purpose and non-primary purpose are the two types of trading activity. Primary purpose trading is when a charity conducts a trade in the course of furthering its main charitable objects. If HMRC are satisfied that the trading is primary purpose trading, and the profits are applied for the purposes of the charity only, there will be no tax paid on the profits made from this type of trading. Non-primary purposes trading is where the trading itself does not advance the charity’s purposes and is carried out to raise funds for the charity, but it is not a charitable activity.

Charity law allows non-primary purpose trading up to certain specified limits and if there is little risk to the charity.  Profits from this are always taxable unless the turnover is below the small trading tax exemption.

Charity’s gross annual income Maximum permitted small trading turnover
Under £32,000 £8,000
£32,001 to £320,000 25% of your charity’s total annual turnover
Over £320,000 £80,000

What is a trading subsidiary?

If your trading income is not derived from your primary purpose and exceeds the small scale exemptions, you may find it necessary to form a trading subsidiary.

The term ‘trading subsidiary’ refers to a wholly owned subsidiary company of a charity. The main reason a charity sets up a trading subsidiary is to undertake non-primary purpose trading in order to generate funds for the charity. If a charity engages in significant levels of non-primary purpose trading it is required to pay tax on the profits. If the activity is undertaken through a trading subsidiary, the subsidiary can donate its profits to its parent charity and claim Gift Aid tax relief on the donation, if it is liable for corporation tax. This allows all the profits to be used for charitable purposes. When deciding how much of the profit should be donated you should take great care, as the subsidiary must retain and reinvest some profit if it is to be sustainable.

Another reason a trading subsidiary may be set up is where there would be a significant risk to the assets of the charity if it were to carry on non-primary purpose trading itself; for example, where an unincorporated charity needs to enter into contracts, such as property, service or employment contracts. The trading subsidiary shields the charity from risk as it carries out activity and the contract can be in the name of the subsidiary rather than the charity. It also ensures that the charity’s assets are not at risk should the trading activity be unprofitable.

By creating a trading subsidiary a charity may be able to undertake a wider range of activities, which it may not be able to do as a charity.

Setting up

The most effective legal structure for a trading subsidiary is a Company Limited by Shares with 100% of the shares owned by the parent charity. Another option is a Company Limited by Guarantee with the charity as the single member. However, this may not be recognised as true ownership for the purposes of submitting group accounts. A Company Limited by Guarantee would be a better option if you wanted the company to be an independent social enterprise and apply for funding itself.

The relationship between a parent charity and a trading subsidiary should be organised in such a way that the governance, finances and operations of two entities are kept as distinct from one another as possible. This includes the management of any potential conflicts of interest, bank accounts, management and meetings of staff and boards. The relationship between the two must be kept commercial in order ensure the charity remains independent.

Representation for the parent charity’s interests can be preserved by having some trustees of the parent charity on the trading subsidiary’s board, but it is not advisable to completely replicate the trustee board of the parent charity. This reduces potential conflicts of interest situations and allows each entity to maintain a degree of separation.

Funding your subsidiary

Charities would not usually fund the trading company as this may put the charity’s resources at risk of being used for non-charitable purposes. Since trading subsidiaries are usually set up in order to generate funds for the charity, it is expected that they would support themselves. Charities can, however, provide start-up finance to subsidiaries in the form of a loan. This loan should be delivered on a commercial basis with formal loan repayment terms established and a market level of interest charged.

Sharing Resources

Should the subsidiary use any of the services or resources of the charity such as premises, equipment and staff, they should be charged at a fair rate and such usage should be detailed in formal agreements.


There are some factors for charity trustees to take into account when considering whether a trading subsidiary is necessary:

  • The trading subsidiary will be a completely separate entity from the charity. This will result in increased administration and cost for setting up a new company with a separate company registration, constitution and bank account.


  • The subsidiary must prepare and file statutory accounts and a corporation tax return every year.


  • You must be careful to ensure that the trading activities do not take over the charity. This could cause the charity to deviate from its charitable objects, which may result in the loss of charitable status.


  • Subsidiaries are not entitled to the mandatory business rates relief awarded to charities on their business premises. This may affect the charity’s rates if the two organisations share premises.


Advice and assistance

Good planning before commencing any trading activity is key in overcoming likely pitfalls and ultimately will help to secure success for your subsidiary. If you would like to discuss setting up a trading subsidiary in more detail, please get in touch with us to book a free initial consultation.