For many charities, trading has become more than a sideline. From cafés and shops to consultancy and venue hire, commercial ventures are increasingly vital to sustaining impact.  

Yet the line between charitable activity and trading is a thin one – and stepping over it without care, risks tax exposure, reputational damage and even regulatory challenge. 

Understanding when and how to use a subsidiary has never been more important. 

Why Charities Use Trading Subsidiaries 

Charities are granted special tax treatment but that privilege comes with restrictions.  

While income directly tied to charitable purposes is usually exempt, profits from non-charitable trading are not.  

A trading subsidiary provides a legally separate company to carry out those activities, shielding the parent charity from both tax liabilities and financial risk. 

This structure is particularly useful where commercial activity sits at arm’s length from mission delivery.  

For example, a health charity running a chain of coffee shops, a housing association offering property management services or a heritage trust hiring out its venue for weddings.  

In each case, the trading income supports the mission but the activities themselves fall outside “primary purpose” trading. 

Subsidiaries also help charities take a more entrepreneurial approach without endangering their charitable status. They create space for innovation, attract different forms of investment and allow commercial ventures to be run on business terms rather than charity terms.  

With the right governance, they ensure risk and reward are appropriately ring-fenced, keeping the parent charity compliant and mission-focused. 

Not every commercial venture requires a separate trading company. Many charities can undertake small-scale activity within their main structure. The challenge lies in knowing when those activities tip into territory that makes a subsidiary advisable. 

Key indicators that a subsidiary is needed: 

• Beyond primary purpose trading – Income from activities not directly furthering the charity’s objects can be taxable if kept within the charity. For example, a museum café serving the general public is treated as non-primary trading, whereas a café limited to visitors may be ancillary to the primary purpose and exempt. A trading subsidiary ring-fences the non-primary element. 
   

• Exceeding the small trading exemption – HMRC allows limited non-primary trading before tax applies. The limit is £8,000 or 25% of the charity’s total income, capped at £80,000. Once non-primary trading exceeds this threshold, profits become taxable if run in the charity. At that point, setting up a subsidiary is usually the most tax-efficient route. 
   

• Managing financial or reputational risk – Where commercial activity carries higher risk — such as property development or retail operations — a separate company helps shield the parent charity from liabilities. 
   

• Scaling commercial ventures – As trading grows, operating within the charity can create confusion and inefficiency. A subsidiary allows activities to be run on business terms while keeping the charity’s accounts focused on mission. 

In practice: A community organisation hiring out its hall may stay within the exemption at first. But once bookings increase beyond the threshold or involve significant additional services, (such as catering or event management) trustees should consider establishing a trading company to avoid tax exposure and safeguard compliance. 

Setting Up a Trading Subsidiary 

If your charity is ready to create a trading company, taking a careful, step-by-step approach will save governance headaches and unnecessary tax down the line. 

1. Choose the legal structure 

Almost all subsidiaries are set up as a company limited by shares, with the parent charity holding all the shares. This keeps liability limited and ensures trading profits can be returned to the charity in a straightforward way. Keep the initial share capital nominal — often just £1 — since ownership, not capital, is the key point. 

2. Draft suitable articles of association 

Avoid using standard articles. Tailor them to reflect the charity’s role as sole shareholder, set out reserved matters, (such as borrowing, major contracts or brand use) and ensure the subsidiary can lawfully make charitable donations of profit.  

Include provisions for managing conflicts of interest where trustees also serve as company directors and support the Articles with a group Gift Aid policy or tax deed to govern profit transfers. 

3. Appoint directors with care 

Select directors who bring commercial and financial skills, not just trustee representation. A mix of trustees and independents often works best. Record declarations of interest, issue clear letters of role expectations and consider Directors’ and Officers’ insurance in line with Charity Commission guidance (CC49). 

4. Incorporate and register 

Form the company at Companies House. Depending on activities, you may also need to register for VAT, (threshold currently £90,000 taxable turnover from April 2024) or PAYE, (before the first payday, no earlier than two months in advance). Align the accounting reference date with the charity’s year end for smoother group reporting. 

5. Put agreements in place 

Agree service charges if the charity provides staff or office space, license the charity’s brand if relevant and document any loans. All agreements must be on arm’s-length terms to avoid subsidy concerns and protect against regulatory challenge. 

6. Keep finances separate 

Open a dedicated bank account, use separate accounting systems and keep a clear record of all intercompany balances. HMRC explicitly advises against sharing a bank account, as it can complicate Gift Aid payments and obscure audit trails. 

Funding the Subsidiary 

Once incorporated, your trading company will need working capital. How you fund it at the outset matters both for tax compliance and for avoiding scrutiny from the regulator. 

1. Share capital 

The simplest option is to subscribe for shares. In practice, most charities issue a nominal number — often one or 100 £1 shares — which the charity owns in full. This establishes ownership and voting rights but rarely provides enough cash to trade. 

2. Loan funding 

Where more substantial funds are needed, the parent charity can provide a loan. This should be set out in a written agreement covering: 

• interest rate, (reasonable and at a commercial level) 

• repayment terms and 

• security, if appropriate. 

Loans must always be approved by the trustee board, with the decision minuted to show proper management of charity assets. A loan that is interest-free or below market terms risks being viewed as a subsidy, so ensure conditions are consistent with arm’s-length principles. 

3. Arm’s-length arrangements 

If the charity provides staff, office space or administrative support to the subsidiary, these costs must be recharged on an arm’s-length basis.  

In some cases, this means applying an appropriate mark-up, particularly where the charity itself operates commercially in the same space.  

Failing to recharge costs fairly risks accusations of subsidy, regulator concern or unintended tax consequences. 

Gift Aid and Profit Transfer 

One of the main reasons for setting up a trading subsidiary is the ability to pass profits back to the parent charity in a tax-efficient way. The mechanism for doing this is straightforward in principle but requires careful handling in practice. 

A trading subsidiary is subject to corporation tax like any other company. To avoid tax becoming payable, profits can be donated to the parent charity as a qualifying charitable donation, (often referred to as a Gift Aid payment).  

For this to work, the subsidiary must have sufficient distributable reserves, and the payment must be made within nine months of the company’s year-end.  

This ensures the donation is deductible in the correct accounting period, reducing taxable profits to nil, while the parent charity receives the cash free of corporation tax. 

Governance and Oversight 

Even when set up carefully, a trading subsidiary only delivers value when its governance is robust. Your oversight must be clear, proportionate and focused on purpose. 

It’s crucial to recognise how prevalent these structures have become: in 2023, 5% of registered charities reported having a trading subsidiary, with larger organisations (those with incomes over £1 million) far more likely to use one. This reality underlines the importance of navigating governance issues well—not least because these structures introduce complexity and potential conflict. 

As trustees, you should ensure: 

• Board distinction: The boards of charity and subsidiary must remain separate. Trustees retain ultimate oversight, even where some also act as directors. 

• Conflict management: Put in place robust declarations of interest and issue letters of role expectations for trustee-directors. 

• Clear delegations: Document what decisions lie within the subsidiary’s autonomy and which matters must be referred back to the charity. 

• Regular reporting: Ensure board packs include KPIs, risk registers, and assessments of mission alignment. Keep them succinct and consistent. 

• Strategic review: Each year, assess whether the subsidiary’s purpose and operations remain justified. Consider whether it should continue, restructure, merge or be wound up. 

In essence, you must treat the subsidiary as both a business and an extension of the charity’s responsibility.  

A trading subsidiary can be a powerful tool for charities, protecting assets, managing risk and unlocking new sources of income. The benefits, however, only emerge when the company is established with care, governed with clarity and reviewed with rigour.  

From incorporation and funding to profit transfers and oversight, each stage matters in safeguarding both compliance and mission. 

For trustees, the goal is straightforward: ensure commercial activity strengthens the charity rather than distracting from it. Managed well, a subsidiary provides financial resilience while keeping purpose and values at the forefront. 

If your board is considering a trading subsidiary, book a call with our team at Charity Accounting Partners. We’ll help you design the right structure and put the safeguards in place so your charity can grow with confidence.