Charities - Trading Issues For Trading Companies

• Published date: 14 July 2020
• Subject Matter: Corporate/Commercial Law, Tax, Coronavirus (COVID-19), Charities & Non-Profits , Corporate Tax, Sales Taxes: VAT, GST, Financing, Operational Impacts and Strategy
• Law Firm: Veale Wasbrough Vizards
• Author: Emma-Jane Dalley

The impact of coronavirus (COVID-19) has put a tremendous additional work load on board of trustees and senior leaders in charities. The pace of change has been high and the need for dynamic decision making has never been more important.

But there is one aspect of a charity's structure that should not be overlooked - the solvency or otherwise of any trading subsidiary.

Trading subsidiaries are strictly separate companies with their own board of directors who will need to consider the position of that company and its financial projections taking into account their duties as directors of that company. Many boards of directors will have been doing so (likely in consultation with the charity) and may have taken advantage of the furlough scheme and the business interruption loan scheme where operations have been affected.

The boards of trading subsidiaries are likely to continue to face economic uncertainty and they should continue to consider its financial position carefully and ensure they are fully up to speed with up-to-date financial information in order for them to do so and be very mindful of whether the subsidiary is or is likely to remain solvent. It would also be right for the parent charity to be kept informed of these matters as (very often) the sole member.

If there is any question that the subsidiary may face insolvency the directors should take immediate advice as their duties as directors will change.

Where a subsidiary does face financial issues (whether or not they threaten its solvency), it can be tempting for the parent charity to provide financial support. This is something that should be very carefully considered by the charity, and its trustees should consider the interests of the charity alone and whether it would be a suitable investment for the charity to make. Notwithstanding the unprecedented circumstances, providing support should absolutely not be the default position and the Charity Commission is...