Updated: Aug 19, 2019
Charity trading subsidiaries are relatively common, but I wonder how effectively charities consider the bigger picture – what are some of the more philosophical issues surrounding trading subsidiaries? To what extent does the subsidiary fit within a charity’s overall strategy – does it enhance performance and effectiveness in serving beneficiaries, is it an operational irrelevance that produces some handy income, or act as a hindrance, distracting from pursuing the core mission?
The Charity Commission’s guidance CC35 defines them as “a company, owned and controlled by one or more charities, set up in order to trade.” Whilst Basil Fawlty would describe this as ‘stating the bleeding obvious’, the guidance does go on: “The purpose of a trading subsidiary is usually to generate income for its parent charity. Trading subsidiaries must be used for non-primary purpose trades involving significant risk.” Given that CC35 says that non-primary purpose trading is “intended to raise funds for the charity, as distinct from trading which in itself furthers the charity's objects” then it all seems pretty cut and dried. If a charity wishes to earn income by engaging in trading activity that does not further its charitable purposes, the trustees should establish a trading subsidiary, primarily to reduce risk and manage tax efficiently.
With the reduction in statutory grants and a continually increasing level of demand for services from the sector, many charities are looking at ways to diversify their income stream. I’m currently leading a Masters programme module on Social Entrepreneurship and we’ve been considering what does or doesn’t make a charity’s trading subsidiary a social enterprise…?
Whilst it isn’t difficult to find varying but similar definitions for social enterprise, most observers agree that the lines between charities, social enterprises and pure profit companies are becoming increasingly blurred, as shown in the diagram below:-
For a charity that is establishing, or has an existing, trading subsidiary considering this spectrum may help it to set objectives for the company directors. It’s easy to say that the aim is to generate maximum profit for the charity, but there are certain values that most trustees will wish to see exhibited by the company. Paying the Living Wage, environmental policies and sale of Fairtrade products are all relatively common, for example. However, there is real scope to use trading subsidiaries much more imaginatively to boost the charity’s mission.
By considering trading subsidiaries as part of the charity’s overall strategy and setting objectives for their operation that combine financial and social goals they present an opportunity for enhancing a charity’s ability to pursue its mission and maximise its impact in serving its beneficiaries.
The full article is available at: https://www.civilsociety.co.uk/finance/charity-trading-subsidiaries-seeing-the-bigger-picture.html