For the foreseeable future charities will continue to use subsidiaries to generate trading income.

The new Draft Charities Bill covers a number of important areas, but to the disappointment of many in the sector, it does not propose that charities should be allowed to trade within the organisation, rather than through a trading subsidiary. In fact, this comes as no surprise as the Home Office had already made it clear that it did not favour this change.

For the foreseeable future, therefore, charities will continue to use subsidiaries to generate trading income. Although this structure is widely understood, there is one aspect that deserves to be better known.

In order to avoid tax, subsidiaries pay over their profits to the charity under Gift Aid. In arriving at the profit figure there may be management charges from the charity where there are shared resources.

Although this works perfectly well, it does mean that it is difficult for the subsidiary to build up reserves.

However, under current tax legislation the first £10,000 of profits falls into the zero rate band, allowing a subsidiary to retain this amount and still escape tax. Over a period of years, a useful sum could be built up. Of course, it will be necessary to consider the company's constitution to ensure that building up resources is permitted. In the case of older subsidiaries set up before Gift Aid legislation, the original covenant or trust deed should also be reviewed. However, even if the constitution disallows the retention of profits, there is no reason why it cannot be altered. There will be a small cost in doing so, but the benefits could well justify it.

One of the difficulties of the existing structure is that trading subsidiaries have generally felt it necessary to operate with very small reserves, or none at all. This is not an ideal position for any organisation to be in, as it could make it very difficult for it to deal with sudden and unexpected demands upon its financial resources.

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