Trading subsidiaries

02 December 2021

All charities will have been affected to some extent by the COVID-19 pandemic. Some, such as those operating in the health and social care sector, may have struggled to cope with demand for their services. Others will have seen demand for their services, or important sources of funding, ‘switched-off’ overnight. Performing arts charities, and charities operating visitor attractions and shops will have been particularly affected.

The challenging trading conditions have extended to charities’ subsidiary companies, many of which may be struggling to maintain financial viability. We are seeing many charitable groups reconsider their corporate structures, and whether they remain fit for purpose in the post-pandemic era. We have set out below areas for consideration by both Trustees and charitable subsidiary directors as a result.

Financial reporting and accounting

A lack of distributable reserves may restrict the ability to gift aid up to the Parent Charity.

Financing transactions may need to be accounted for in relation to loans offered by the Parent Charity to support the Subsidiary if they are interest free or at a non-market rate of interest.

If a Subsidiary reduces or ceases trading the financial statements of the Group, Parent Charity or Subsidiary may need to reflect:

  • Discontinued operations
  • Impairments in relation to goodwill, the investment in subsidiary or any intergroup debt
  • Non financing transactions in relation to non market rate loans offered by the Parent Charity
  • The waiver of any intergroup loans – these won’t always be reflected in income and expenditure
  • Non going concern basis of accounting in the Subsidiary

If the Charitable Group divests of themselves of the subsidiary, the financial statements of the Group and Parent Charity may need to reflect:

  • Whether it is a sale or a gift
  • Removal of goodwill and investment in the Subsidiary
  • Possible disclosure of profit or loss on disposal on the face of the SOFA
  • Subsidiary results no longer included in group accounts post disposal
  • Discontinued operations
  • Disclosure of the transaction

Interaction with parent charity

  • Are the Boards sufficiently independent? (Charity Commission provides specific guidance on this).
  • Effect on parent if subsidiary closes (cost/resource sharing, income generation etc).
  • Terms of intra-group transactions – are these properly documented (eg loan agreements, service levelagreements)?


  • Is the current structure required and sustainable?
  • Are we fit for purpose and meeting our objectives?
  • Are we aware of our responsibilities if the entity is having cashflow issues?
  • Do we understand what is required of Trustees by the Charity Commission and HM Revenue & Customs in terms of oversight of subsidiary entities?
  • How do we ensure that our various regulatory responsibilities (eg reporting and filing requirements) are met across all group entities?

Directors' responsibility

  • Ensure the Directors are taking all stakeholders into consideration when making decisions.
  • If the subsidiary is experiencing cashflow issues, are the Directors breaching any of their duties under the Insolvency Act?
  • Are the Directors acting in the best interest of the Company or the Charity?


  • Is the entity required? Consideration of ongoing costs for an empty vehicle.
  • Solvent or insolvent? Can the entity be wound down in an orderly manner
  • Can the activities be transferred to another organisation in the group?
  • Realising maximum value of assets on winding up.
  • Residual tax exposures.

Going concern

  • Is the subsidiary viable, is there sufficient funding?
  • How do our forecasts and cashflow look over the short to medium term?
  • What is the level of funding that will be required to be provided by the charity? What form will that funding take?
  • Would it be capable of being ‘approved’ by HM Revenue & Customs?
  • Does the charity need to waive any debt to other group entities? Accounting, charity law and tax implications?
  • Do subsidiary companies need to retain profits in order to enhance the value of their balance sheet and demonstrate going concern – possible tax implications

To discuss any of the considerations please contact one of our specialists:

Karen Spears
Director, Head of Corporate Simplification
Sharon Monteith
Accounting and Financial Reporting Director
Nick Sladden
Nick  Sladden
Partner, Head of Charities and Independent Schools
Karen Spears
Director, Head of Corporate Simplification
Sharon Monteith
Accounting and Financial Reporting Director
Nick Sladden
Nick  Sladden
Partner, Head of Charities and Independent Schools