Charity Trading Subsidiaries and Gift Aid: How the Structure Works 2026/27

Why Charities Use a Trading Subsidiary

Registered charities benefit from significant tax exemptions, but those exemptions are generally limited to income applied for charitable purposes and to primary-purpose trading -- commercial activity that directly furthers the charity's objects. Where a charity wants to carry out commercial activity that falls outside its primary purpose, it risks losing tax exemption on the profits of that activity, and potentially exposing its charitable assets to commercial risk and liability.

The standard solution is to set up a wholly owned trading subsidiary: a normal limited company, owned by the charity, which carries out the non-primary-purpose trading. This achieves two things:

1. Ring-fences commercial risk away from the charity's core assets, since the subsidiary is a separate legal entity
2. Preserves the charity's tax-exempt status, because the trading income sits in the taxable subsidiary rather than directly in the charity

Primary-Purpose vs Non-Primary-Purpose Trading

This distinction determines whether a charity needs a subsidiary at all.

Primary-purpose trading directly furthers the charity's charitable objects -- for example:

• A charity that runs training courses related to its cause charging course fees
• An arts charity selling tickets to its own performances
• A charity providing care services and charging local authorities for that care

Profits from primary-purpose trading are usually exempt from tax within the charity itself, so no subsidiary is needed.

Non-primary-purpose trading is commercial activity not directly related to the charity's objects -- for example:

• A charity shop selling significant amounts of new, bought-in stock (rather than only donated goods)
• Mail order or online retail of branded merchandise
• Corporate sponsorship and advertising income
• Renting out charity property for commercial (non-charitable) use

Profits from this kind of trading are not automatically tax exempt in the charity's hands, which is why the trading subsidiary structure exists.

How Gift Aid Reduces the Subsidiary's Corporation Tax to Nil

The trading subsidiary is not itself exempt from tax -- it is an ordinary limited company and calculates its taxable profits and Corporation Tax liability in the normal way, at the standard 2026/27 rates (19% on profits up to £50,000, 25% above £250,000, with marginal relief between).

The key mechanism is that qualifying charitable donations are deductible against the subsidiary's taxable profits. If the subsidiary donates its distributable profits to its parent charity under Gift Aid, that donation reduces (or eliminates) the profit on which Corporation Tax is charged.

Worked example:

A trading subsidiary makes £80,000 of taxable profit in the year. It donates £80,000 to its parent charity under Gift Aid (assuming this is within its distributable reserves). The Gift Aid donation is deducted from taxable profit, reducing the chargeable profit to nil, and the subsidiary's Corporation Tax bill is nil.

For this to work cleanly, the donation should generally be paid within nine months of the end of the accounting period, so it can be treated as paid in that period for Corporation Tax purposes -- a common and well-established planning approach for charity trading subsidiaries.

to check how much needs to be donated to bring the liability down.

Company Law Limits on the Gift Aid Donation

The subsidiary cannot simply donate whatever figure eliminates its tax bill -- company law requires that dividends and donations of this kind only be made out of distributable reserves. If the subsidiary has accumulated losses from earlier years, those losses generally need to be made good before current-year profits are treated as distributable, unless specific adjustments apply.

This means the subsidiary's directors need to check both:

1. The Corporation Tax position (how much profit needs to be donated to minimise tax)
2. The company law position (how much can lawfully be donated given the company's accumulated reserves)

Charity trustees who also sit on the subsidiary's board should take care to treat these as genuinely separate decisions, given their different duties to the charity and to the subsidiary company.

VAT Considerations

The trading subsidiary is a separate taxable person for VAT purposes and must register for VAT if its taxable turnover exceeds the standard VAT registration threshold, in the same way as any other business. It charges and reclaims VAT under normal rules for its type of activity.

Some VAT reliefs specific to charities can flow through to structures involving a subsidiary -- for example, the zero rating available for the sale of donated goods in charity shops can sometimes apply where a subsidiary operates the shop on the charity's behalf, depending on the exact arrangement. Sponsorship income, by contrast, is normally standard-rated, since the sponsor typically receives something of value (branding, advertising) in return.

Because VAT treatment depends heavily on the exact structure and the nature of income, charities operating a trading subsidiary should get specific advice on which supplies are standard-rated, zero-rated, or outside the scope of VAT.

Business Rates

Registered charities are entitled to mandatory 80% business rates relief on premises they occupy and use for charitable purposes, with local authorities able to grant further discretionary relief on the remainder.

A trading subsidiary, as a separate legal entity, does not automatically inherit this mandatory relief for premises it occupies in its own right, such as a standalone retail unit or warehouse. Arrangements can vary depending on who is the rated occupier and how the premises are used, so this is worth checking with the local authority for each property involved.

Common Structures in Practice

• Charity shops: donated-goods shops often run directly through the charity; shops mixing in significant bought-in stock typically sit in the trading subsidiary
• Mail order and e-commerce: branded merchandise and catalogue sales are almost always routed through a trading subsidiary
• Sponsorship and corporate partnerships: income where the charity provides branding, advertising space or naming rights in return for payment is generally non-primary-purpose trading, handled via the subsidiary
• Event and venue hire: commercial hire of charity premises for non-charitable purposes is often run through the subsidiary

Sources

• HMRC: Trading subsidiaries and Gift Aid: Charities detailed guidance notes
• gov.uk: Charity trading and tax
• HMRC: Corporation Tax rates and reliefs
• gov.uk: Business rates relief for charities