In an attempt to diversify income and generate much needed unrestricted reserves, an increasing number of organisations are forming trading subsidiaries to operate alongside their charity and allow them more freedom in the activities they pursue.
When successful, profits generated by the subsidiary can be passed to the charity which allows the charity to increase their support to its beneficiaries and further fulfil their charitable objectives.
Regrettably it tends to be the unsuccessful attempts at diversification that appear in the headlines.
If you make investments and loans to prop up a failing trading company, this might not meet your investment duties. It can also result in tax liabilities. In certain circumstances HMRC can decide that the funding was not given for the benefit of the charity and is therefore non-charitable expenditure.
Charity trustees must be clear that if they use the charity’s assets to support a failing trading subsidiary then they are putting those assets at risk and potentially failing in their duties.
Charity trustees must minimise any losses to the charity, regardless of any sense of moral obligation they may feel towards the trading subsidiary, its directors and employees.
The documents below provide further informative guidance on what you need to think about when operating a trading subsidiary:
See also a useful article authored by our colleagues in Baldwins:
If you would like to discuss any of the issues raised, or for further information, please speak with your usual Wilkins Kennedy contact or a member of our specialist Not for Profit team.
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