Charities must take care when supporting trading subsidiaries, expert warns

Charities must meet certain conditions when directing additional funding to commercial subsidiaries, such as trading operations, that have been affected by pandemic restrictions

Charities should think carefully about how they support loss-making trading subsidiaries during the Covid-19 pandemic, an expert has warned.

Some charities have trading subsidiaries set up to run a commercial activity, such as a retail operation, and any profits are covenanted back to the charity under corporate Gift Aid rules. 

But the pandemic has meant that many such operations have been closed for long periods, meaning they could well be loss-making and in need of funds to prop them up, according to Mark Salway, managing director of fundraising and management at the accountancy firm Moore Kingston Smith. 

He said this created potential issues for the charity because any additional support from the charity must be given as an “arm’s-length” transaction, such as in the form of a loan to keep it going. 

But investment or support money cannot just be freely given, said Salway, and any loan must be seen as a good use of charitable funds and at commercial rates. 

Ultimately, charities might not be able to support their trading subsidiary if these conditions are not met, he warned. 

“Many trustees and senior management forget this,” said Salway. “Trading subsidiaries are a powerful weapon in your armoury, but understanding the detail now can save significant pain in the long-term.”

Asked for views on the subject, Oxfam said it carried out some, but not all, of its trading through its subsidiary, Oxfam Activities Limited, which mainly purchases goods from commercial suppliers to be sold at a profit.

The charity said the temporary closure of its shops and cancellation of fundraising events due to Covid-19 had cost it about £5m a month.

“We have nearly completed a strategic reorganisation which aims to reduce costs by £16m annually, which will help to mitigate the impact of the lost income from Covid,” a statement from the charity said. 

“We are also hopeful of further support from the government to help us and other large charity retailers – lifting the cap on state aid restrictions would help us to recoup the millions lost through lockdown, and help to protect charity shops on high streets up and down the country.”

The British Heart Foundation has a trading subsidiary to operate its network of 750 shops, which have missed out on millions of pounds due to their enforced closure in recent months.

But Allison Swaine-Hughes, retail director at the British Heart Foundation, said the charity would not know the full impact on the charity until further down the line. 

“We will only know the true extent once we have been trading for a longer time with the new requirements to keep customers safe and have assessed the changes in shopper habits,” she said. 

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