Charities are only permitted to undertake certain types of trading that are considered ‘primary purpose trading’ or ‘ancillary trading’, or a limited amount of ‘non-primary purpose trading’.
If your charity carries out non-primary purpose trading over the small-scale exemption limit permitted, or trading that is considered high risk, the trustees should consider undertaking those trading activities within a separate trading subsidiary company.
We can advise you on the different types of trading and what your charity is permitted to do within the charity itself, as well as advising on the trading exemptions and options available.
A trading subsidiary is a non-charitable company, usually a company limited by shares, with the charity being the sole shareholder and rights to appoint directors etc. The profits from the trading subsidiary can usually then be donated to the charity using Gift Aid. By operating the trading activities within a trading subsidiary, the risk is contained within the trading company, and is ring-fenced from the charity’s assets.
Trading subsidiaries must be operated on an arm’s length basis and if any funding is provided from the charity this should be in the form of a loan (with appropriate loan documentation in place), and if any resources are provided there should be a shared resources agreement in place documenting how it will work in practice and ensuring that the charity is not subsidising the trading company.
We can advise on the formation of and advice on the governance of trading subsidiary companies, as well as drafting the necessary documentation (including trading agreements, shared resources and loan agreements etc.)
Why choose Trethowans?
Our charity lawyers have the experience and knowledge to help you with your legal needs. Our wider charities practice means that we have charity experts in different teams which enables us to advise charities on a wide spectrum of legal matters with the knowledge and understanding of a charity’s specific legal needs.
We can advise you on what trading a charity is permitted to do, and the options available. Please do get in touch if you have any queries around charities and trading and/or arrangements with a trading subsidiary.