Over the past month, we’ve been inviting readers to shape our editorial agenda by telling us the questions that matter most to them. In this feature, Steve Harper responds directly to the question: When should a charity prepare group accounts – and what is best practice with a trading subsidiary?
It is common in the charity sector to establish one or more trading subsidiaries, usually to carry out non-primary purpose trading in a way which protects the parent charity from corporation tax, with the profits gift-aided back to the parent charity.
I’m commonly asked: “At what point should a charity prepare group accounts?” The starting point is to understand whether the charity has control. If it does, a group has been created with the charity as the parent and the company as a subsidiary. A wholly-owned trading subsidiary where the charity can appoint/remove directors will always meet this definition.
Thresholds
Control does not immediately translate into the need to prepare group accounts, as there are exemptions provided under company and charity law for small groups. Under Companies Act 2006, a group is “small” if it meets at least two of the following criteria on a consolidated basis:
- Gross income not more than £15m (previously £10.2m).
- Gross assets not more than £7.5m (previously £5.1m).
- Average number of employees not more than 50.
If the exemption is met, group accounts are not legally required; however, the charity must still disclose the existence and nature of the subsidiary in its own accounts.
Furthermore, some charities below the threshold will still choose to prepare group accounts to show a more accurate picture of the activities in total. Doing so can help the charity to better explain its structure, activities and financial performance.
For unincorporated charities and charitable incorporated organisations (CIOs) the need for group accounts is driven by charity law. In England, group accounts must be produced where income exceeds £1m for the reporting period (this will rise to £1.5m later in 2026). For charities registered in Scotland, the threshold is lower (£500,000, rising to £1m as of 1 January 2026).
Where the thresholds are breached, and a group is not considered “small”, a charity may choose not to prepare group accounts if the inclusion of the subsidiary or subsidiaries would be immaterial. This requires considering all of the subsidiaries together – that is, if there are multiple subsidiaries they need to be immaterial collectively in order to avoid preparing group accounts.
Regardless of whether or not group accounts are prepared, it is important that there is an appropriate relationship between the charity and its subsidiaries. The trading subsidiary is a legal entity in its own right, and boards must be clear about their respective legal duties, manage conflicts of interest and document decisions carefully.
Some trading subsidiaries require investment or financing up-front, for example where they are selling physical goods. Where this is required, careful consideration needs to be given to the investment. A charity can only make such an investment where it is to benefit the charity, with clearly documented meeting minutes of reasons noted.
All arrangements between the charity and the subsidiary should be documented, including management charges, property use, use of staff and trademarks. If you are in any doubt as to the appropriateness of the arrangements, I would strongly recommend taking appropriate tax and legal advice.
Appropriate oversight arrangements should also be put in place. This includes regular monitoring of the subsidiary’s performance to ensure it is effectively delivering for the charity. Furthermore, the charity should continue to check on any financial support provided and this support must be justified.
When managed appropriately, trading subsidiaries allow the charity to undertake activities it couldn’t undertake itself without tax consequences, and in some instances they also allow a charity to manage risk by ringfencing activities into a separate legal entity. However, there are various factors which should be managed including the relationship between the charity and the subsidiary and conflicts of interest.
There are also accounting implications for the parent charity which can include the preparation of group accounts in line with the above thresholds. This can be a complex area, so I would recommend taking advice from your accounting or legal advisers.
Steve Harper is partner and head of social purpose at HaysMac
