A trading subsidiary is a company owned by a charity that carries on trading the charity cannot do tax-free itself, such as a shop, cafe or events business. It normally donates its profits to the charity, which removes its Corporation Tax bill.
Why charities use one
- Tax. Profits from trading that is not primary purpose trading, and is too large for the small trading exemption, would be taxed in the charity.
- Risk. A commercial venture is kept apart from the charity’s assets.
How the tax works
The trading subsidiary is an ordinary company. It gets no charitable exemption and pays Corporation Tax on its profits. But a payment of its profits to the parent charity is a qualifying charitable donation, deducted from its taxable profits:
- the payment can be made up to nine months after the end of the accounting period and still be deducted in that period;
- the company can only pay out what it has in distributable reserves;
- the charity receives the donation tax-free, as long as it uses it for charitable purposes.
What it files
Its own annual accounts at Companies House, and its own CT600 with the donation shown as a deduction. The charity’s accounts usually consolidate the subsidiary’s results.
In Tax Optimiser
Set the subsidiary’s Corporation Tax company type to Owned by a charity (not itself a charity), not Charity. The return still shows HMRC’s company type 8, but no CT600E is filed and no exemption is claimed, so the profits are taxed normally and the donation to the parent is what reduces them.
See also Gift Aid.
