More importantly the question for trustees should be, ‘Is it your duty to the charity to get rid of the subsidiary?’
Many charitable organisations operate with a trading subsidiary which undertakes the trading element of their income streams. This has long been a planning tool used by the charity sector to segregate the non-primary purpose income from the charity’s primary purpose income.
However, in the new world, which has lasted a lot longer than we perhaps expected this may no longer be appropriate. As charity shops have been forced to close, and various normal charitable activities are unable to go ahead, such a galas and balls, runs and walks, the income streams of a charity have also necessarily changed.
This poses many problems for the charity, ultimately whether they are able to continue to operate with reduced funding and different sources of income. The trading subsidiary might now be making losses and trustees need to consider whether this is an appropriate use of charitable funds to prop up the subsidiary in the short term, or whether in fact they need to be cutting it loose.
If the subsidiary is short of income and profits, it may be necessary for the charity to lend money to it to support the ongoing operation, but is this appropriate? Trustees have a duty to put charitable money to best use for the charity and if the trading subsidiary is loss making, does it have a prospect of returning to profitability and repaying that loan? Or based on the current climate is there any certainty for the trading to be profitable in the short term? Could the money lent to the trading subsidiary actually be put to better use for the benefit of the charity and the trustees have a duty to do so?
Charities have an exemption from corporation tax for a small amount of trading income. The small trading exemption limit allows charities with gross trading income under the threshold to treat their non-primary purpose trading profit as exempt for income and corporation tax purposes.
Currently the maximum gross non-primary purpose trading income a charity can receive without paying tax is £80,000 (where the charity’s income is over £320,000) and it may be that as the activity of subsidiary falls, the level of income from this part drops to below the threshold for exemption and would be more appropriate to be within the charity itself where corporation tax would not apply.
It may be that ultimately the trading subsidiary has to be wound up or become dormant. This may be a difficult decision, but if it is in the best interests of the charity then the trustees have a duty to do so. Of course, should the trading activity increase again in the future, the charity can form a new trading subsidiary to undertake that part of the activities.
If your charity has a subsidiary and you would like to speak to one of our specialist charity advisors about whether you should be considering a change, then please do get in touch.