When does a charity need to set up a trading company?

England and Wales: This page sets out when trustees become personally liable over a trading subsidiary, and how relief works. It does not answer when charity law requires a subsidiary — that was not established, and the page says so. Scotland: covered, and better answered — OSCR publishes a framework for deciding when a subsidiary is needed; whether Scottish trustees face the same personal liability as in England and Wales is not established. Northern Ireland: partly covered — the tax rules and the general rules on trustee liability and relief are established; there is no Northern Ireland guidance on trading subsidiaries to draw on.

The small trading exemption is a tax rule, not permission to trade

The commonest mistake in deciding whether to set up a trading subsidiary is using a tax figure to make a charity-law decision. Whether trading is worth doing at all is an income-mix question first. It is settled when you decide your income mix and set a target; this page starts once trading is on the table.

The small trading exemption is a tax concept. It decides whether profit from a charity’s own non-primary-purpose trading is taxed. Its limit is 25% of the charity's total incoming resources for the period, with a floor of £8,000 and a cap of £80,000. The detail, including what happens if you go over, is covered when you assess your corporation tax position.

Whether a charity may lawfully carry on a trade at all is a different question. That is charity law, and the two do not line up.

Staying under the tax limit does not make trading lawful. Going over it does not, by itself, make a subsidiary compulsory. Trustees who treat the tax figure as the trigger for a governance decision are answering the wrong question.

It also matters what counts as trading. A payment under a contract to provide a service is, in substance, payment for a supply. A genuine grant is not.

The test is whether there is a supply, a consideration, and a direct link between the two. Check that before you count anything towards a limit.

When does charity law require a trading subsidiary in England and Wales?

A trading subsidiary is a separate, non-charitable company owned by the charity, through which it trades instead of trading itself. In England and Wales, this guide has not established when charity law requires a charity to use a trading subsidiary rather than trading itself. The Charity Commission’s guide on the subject, CC35, was read for its rules on personal liability. Its treatment of when a subsidiary is required was not worked through.

So this page does not tell you that you must, or need not, set one up. A guessed answer here would be worse than none. If you are deciding this in England and Wales, the decision needs an accountant and a solicitor. CC35 is the document to read with them.

What the page can tell you is what happens once trading is under way, in the charity or in a subsidiary. It can also tell you where trustees become personally exposed. Forming the company itself is covered when you choose your legal structure.

Scotland: OSCR’s framework for deciding

Scotland is better served. OSCR’s “Charities and trading” guidance sets out when to use a non-charitable trading subsidiary. It points to a subsidiary where any one of these applies:

• the trading does not advance the charity’s purposes, and is not ancillary or small-scale
• the charity does not have the power to trade directly
• the activity carries significant risk to the charity — OSCR’s example is an unincorporated charity that would need to enter property, service or employment contracts
• a tax liability is likely

First, OSCR says, check that the governing document does not prevent a subsidiary, for example through a restriction on investments. If it does, OSCR says you may need advice and may need to make changes to the charity.

Once a subsidiary exists, OSCR expects the trustees to monitor it. Where the subsidiary uses the charity’s buildings, OSCR says there should be a formal lease, with rent “at a rate which is comparable to that which could be achieved on the open market”. Loans should be “provided on a commercial basis with appropriate repayment terms and a market level of interest charged”.

Where the same people sit on both boards, that is a conflict of interest. It is handled under section 66 of the Charities and Trustee Investment (Scotland) Act 2005. The policy side is covered when you adopt a conflicts of interest policy.

On a subsidiary in trouble, OSCR says, verbatim: “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 failing in their duties.” Trustees must “minimise any losses to the charity, regardless of any sense of moral obligation they may feel”.

Note what OSCR does not say. Its guidance frames this as a failure of duty. It does not use the words “personally liable” anywhere.

Whether Scots law attaches the same personal liability as the Charity Commission describes for England and Wales was not established. Do not assume it does, and do not assume it does not.

When trustees become personally liable

In England and Wales, the Charity Commission’s CC35 is explicit. Quoted, not paraphrased:

“Trustees must always put the interests of the parent charity first. This will sometimes mean liquidating, or selling, a failing trading subsidiary. If trustees keep a failing trading subsidiary going at the charity’s expense, they may be personally liable for consequential losses to the charity.” — CC35 §4.16

“If the charity’s assets are employed or put at risk for the benefit of the subsidiary, or its directors, creditors or employees then that purpose is frustrated. In such cases, the trustees of the charity may be personally liable for any loss of, or decline in value of, the charity’s assets.” — CC35, summary

The test behind this is an investment test. CC35 §4.8 says, verbatim: “The parent charity’s trustees must be able to justify financial support for a trading subsidiary as an appropriate investment of the charity’s resources.” It adds that the trustees must make “a fair comparison of this form of investment with other forms of investment”, on “an objective assessment of the trading subsidiary’s business prospects”. The instinct to save “our” project is not part of that test.

The wider position — when a trustee is liable to the charity, whatever its structure — is on are trustees personally liable?. What a trustee takes on in general is covered when you understand what you are personally taking on.

But a loss is not automatically a breach. Publishing the liability without this would overstate the risk. CC35 §3.14 says a loss in trading carried on by the charity itself “would only amount to a breach of trust if the loss had been incurred irresponsibly”. In the Commission’s view there is no breach of trust if all three of these hold:

1. “there was a rational expectation that the trading would be successful”
2. “it was reasonable for the charity to have carried on the trading itself, rather than use a trading subsidiary”
3. “the expenditure which gave rise to the loss was within the powers available to the trustees”

The same paragraph warns that trading losses can put the charity’s tax exemptions on its other income at risk. CC35 cites a tax provision for that which has since been repealed and rewritten. This page does not repeat that citation, and does not give a replacement.

Guarantees are the sharpest trap. A bank lending to a subsidiary will often ask the parent charity to guarantee the debt. CC35 §4.19 says, verbatim: “Such guarantees, if given, will often be unenforceable against the charity and may expose trustees to personal liability.”

Relief: three routes, and what none of them reach

A trustee who has acted properly but still faces liability can ask to be relieved. England and Wales has three routes. All three use the same core test, in closely similar words. In section 191 it is that the trustee “has acted honestly and reasonably and ought fairly to be excused for the breach of trust or duty”:

• The Charity Commission, under section 191 of the Charities Act 2011 (England and Wales).
• The court, for trustees, under section 61 of the Trustee Act 1925 (England and Wales).
• The court, for company officers, under section 1157 of the Companies Act 2006, which applies across the UK.

Section 191(4) of the Charities Act 2011 (England and Wales) says, verbatim: “Subsection (2) does not apply in relation to any personal contractual liability of a charity trustee or trustee for a charity.” A debt a trustee has signed for personally — a guarantee included — is outside the Commission’s power to relieve.

Northern Ireland: no dedicated guidance, the same underlying law

The Charity Commission for Northern Ireland has no guidance equivalent to CC35. This guide searched CCNI’s full list of published guidance and found none on trading subsidiaries. No section of the Charities Act (Northern Ireland) 2008 governs non-primary-purpose trading either.

That is not a gap peculiar to Northern Ireland. It is the same structure as England and Wales, where CC35 itself rests on general trust law rather than a trading statute. The tax rules are UK-wide, so the small trading exemption applies unchanged.

The Charities Act (Northern Ireland) 2008 does not list trustees’ general duties. They come from general law: the Trustee Acts (Northern Ireland) for unincorporated charities and the Companies Act 2006 for charitable companies.

Relief is available under section 91 of the 2008 Act (Northern Ireland). It applies where a trustee “acted honestly and reasonably and ought fairly to be excused for the breach”. As in England and Wales, it does not reach a trustee’s personal contractual liability (s.91(4)). The court’s own powers under section 61 of the Trustee Act (Northern Ireland) 1958 and section 1157 of the Companies Act 2006 sit alongside it.

What Northern Ireland lacks is CC35’s trading-specific wording. The general logic applies: putting charity assets at risk for a subsidiary can be a breach. But no Northern Ireland source says it in those terms.

Minuting the trading decision

Whatever you decide, record it. The minute should show:

1. What the trading is, and whether it is primary purpose or not.
2. The tax position, from the tax part of this guide and your accountant.
3. The charity-law reasons — in Scotland, against OSCR’s framework; in England and Wales and Northern Ireland, on the advice you took.
4. The power the trustees are relying on to invest in or lend to a subsidiary, from the governing document or the general law.
5. How you will review it, and what would make you close or sell the subsidiary.

The last item is the one that protects the trustees later. Compare two boards. One set its own exit test in advance, and applied it. The other kept lending because stopping felt like failure. Their positions are far apart.

With the trading decision minuted, the next step is to register with the Fundraising Regulator and adopt the Code.

Common mistake: treating the small trading exemption as a charity-law permission

Trustees use the tax figure as the trigger for a governance decision. It is a tax concept.

Whether a charity may lawfully carry on a trade at all is charity law, and the two framings diverge. This guide has not resolved where charity law draws the line in England and Wales. That is a reason to take advice, not to fall back on the tax figure.

Worked example

Saltmarsh Trust is a charitable company with a trading subsidiary. The subsidiary has made losses for a sustained period. Its bank now asks Saltmarsh to guarantee the subsidiary’s overdraft, and the subsidiary’s directors — two of whom are also Saltmarsh trustees — want to say yes.

The trustees take the decision as the charity’s board, and the two dual-role trustees declare the conflict. They ask CC35’s question: whether they can justify the support as an appropriate investment of the charity’s resources, on an objective assessment of the subsidiary’s prospects. The honest answer is no.

They then read CC35 §4.19. A guarantee “will often be unenforceable against the charity and may expose trustees to personal liability”. If any of them signed a guarantee personally, section 191(4) would stop the Commission relieving that personal contractual liability.

They decline the guarantee. They set a date to decide whether to close or sell the subsidiary, with their accountant and a solicitor, and they minute the reasons. If they had kept funding it regardless, CC35 §4.16 is the paragraph a later inquiry would have read to them.