David Kirby

Jan 17, 2019, 8:00 AM

Trading Subsidiaries: Using one, or think you should be?

Recent developments have affected the way in which payments from a trading subsidiary to its parent charity must be shown in the accounts.  If your charity has a trading subsidiary you should read on, then speak to your accountant - sooner rather than later - about what this means for you.  If you don’t have a trading subsidiary but think that perhaps you should, the final section of this article is for you.

FRS what?

If you are not a qualified accountant, the term ‘FRS 102’ may not mean that much to you.  But if your charity has a trading subsidiary, you should note that there have been some clarifications to this financial reporting standard that will probably be relevant to you.
Commonly, a donation of a subsidiary’s distributable profits to its parent charity is shown in the accounts for the year in which the profit was made (i.e. so that the donation is shown to off-set the profit).  However, this will now only be possible if certain conditions are met.  In particular, where a subsidiary makes a donation to its parent after the financial year-end, this payment can only be reflected in the accounts for that year if the subsidiary is under a legal obligation to make the donation.  Otherwise, the donation must be shown in the accounts for the year in which it was paid.  This should not affect the tax position (provided that everything is done correctly) but might distort the accounts.

One good deed (of covenant)

Typically, a subsidiary will not be under a legal obligation to donate its distributable profits to its parent charity unless there is a deed of covenant in place between the two entities.  The recent clarifications to FRS 102 make it clear that neither an established practice of distributing profits to the parent, nor a resolution of the subsidiary’s board to make a donation, will be sufficient to create a legal obligation.

If you have a trading subsidiary you should speak to your accountant about how this issue should be addressed.  If you are advised to put a deed of covenant in place (or think that you should) the good news is that in most cases, the deed will be a short and straightforward legal document which is inexpensive to produce and can be implemented quickly.  

Risk and reward

As the name suggests, a trading subsidiary is a company, owned and controlled by one or more charities and set up in order to trade. The purpose of a trading subsidiary is usually to generate income for its parent charity.  In practice, most charities use a trading subsidiary for one of two reasons: tax or risk.

The tax rules here can be complicated to navigate but it is important to be aware that charities do not have a general exemption from paying tax on trading income.  Although some forms of charity trading will be exempt (for example where the trading furthers the charity’s objectives) others will not be.  This means that in some cases it may be advantageous to utilise a trading subsidiary to manage the tax position efficiently.  If a trading subsidiary donates its distributable profits to the charity, the donation will be off-set against the tax that would otherwise be payable, thereby reducing (or potentially eliminating) any tax on the profits.    

In terms of risk, the Charity Commission’s guidance states that “trading subsidiaries must be used for non-primary purpose trades involving significant risk”.  In practice, this issue tends to require a finely balanced judgement call as to whether a subsidiary should (or must) be used for certain types of trading.  The ‘significant risk’ in issue is that the trading results in some form of loss which then has to be financed out of the assets of the charity.  Potentially this could put the charity trustees in breach of their general legal duty to manage the charity’s resources responsibly.

It is important to note that there can be drawbacks to using a trading subsidiary – not least the administrative burden of operating a separate entity with its own board and specific legal and compliance obligations.  This is particularly worth bearing in mind if neither risk nor tax are primary considerations.


If your charity has a trading subsidiary – or you think that perhaps it should – please get in touch with David Kirby and he would be happy to help.  This could range from providing a simple deed of covenant, helping you establish a new subsidiary, or advising on the appropriate contractual arrangements between the subsidiary and the charity. David can be contacted at office@actionplanning.co.uk

An Action Planning Consultant, David Kirby is a charity specialist lawyer with ten years’ experience of working as a legal advisor for charities, in charities and for the charity regulator.  David provides a broad range of legal services for charities and is particularly focused on delivering an affordable (yet high quality) service for charities that are reluctant to pay the high fees which many firms charge. 


David Kirby

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