Do I really need a trading subsidiary?
Whether you need to set up a trading subsidiary is driven by direct tax and whether you are trading.
- Primary purpose trading is exempt from direct tax as is any trade ancillary to primary purpose (such as uniform sales).
- In general fundraising events are exempt as long as profits applied to charity’s primary purpose.
- Lettings such as room hire are exempt from direct tax but other services provided such as catering are not.
- HMRC’s small trading exemption allows turnover of up to £50,000 pa without suffering direct tax on the profits. But once this is exceeded the full amount becomes taxable (not just the excess!).
You could elect to pay the corporation tax rather than set up a subsidiary. Corporation tax is 20 per cent and will fall to 18 per cent by 2020. Remember you only pay tax on the profits after deducting direct and relevant indirect costs. If you want to avoid paying any corporation tax, a trading subsidiary will be needed and all of its taxable profits will need to be gifted back to the school.
So where do schools typically fall foul of trading?
- Letting of sports facilities to the community (local sports clubs etc).
- Letting of accommodation together with catering or other services (eg lifeguards with pool lettings).
- Corporate events.
- Development of overseas operations.
Income from any of the above in excess of £50,000 may be better off in a trading subsidiary. However, there will be VAT implications of doing so. VAT exemptions are available to schools (as charities) for:
- sport; and
- services provided to other educational bodies, eg summer lets.
This VAT exemption is not available to a commercial trading company, resulting in potential VAT costs if such services are provided by a trading company. However a recent change has extended the exemption to 'eligible bodies' being entities that cannot distribute profits. The sport exemption is only available to those entities which distribute their profits to another non-profit making body. Schools could consider amending the articles of their trading subsidiaries to qualify for this exemption. The exemption covers sport services provided by ‘eligible bodies’ as long as the beneficiaries are individuals, families or unincorporated groups. Many schools and trading companies have received repayments of VAT in respect of sports services although a recent case has challenged eligible body status even where all profits of the trading subsidiary were paid under covenant to the parent (charitable) school.
If you would to discuss any of the points further, please contact Heather Wheelhouse, or your usual RSM adviser.