Download our app
You can pay in cheques, transfer money, and do much more, all from your mobile.
Setting up a trading subsidiary for academy trusts
Law firm Browne Jacobson LLP, and Audit & Risk specialists Crowe UK, highlight and explain some key considerations for academy trusts who might be looking to set up and establish a trading subsidiary.
Read time: 7 mins Added: 26/08/25
What is a trading subsidiary?
A trading subsidiary is typically a company with share capital owned and controlled by a parent charity (in our context an academy trust).
What type of activities are generally operated through a trading subsidiary?
There are many different activities that can be run through a trading subsidiary but commonly for an academy trust these may include:
- Operating a Leisure Centre or managing and operating the lettings of school premises to third parties
- Operating local theatres and other local community centres
- Provision of hospitality services for external events/organisations
- Managing a nursery provision
- Providing traded services to other schools and academies
- Other commercial activities.
Why might academy trusts want to establish a trading subsidiary?
Increasingly, academy trusts are interested in exploring the establishment of a trading subsidiary. Reasons will vary between trusts but may include one or more of:
- The trust does not have power to undertake proposed activity (i.e. the activities fall outside the academy trust’s charitable objects)
- Ring-fencing any risks associated with trading away from the academy trust
- Minimising any tax liabilities associated with non-primary purpose trading
- Making the most of existing assets and resources to generate additional income for the academy trust in a tax efficient way.
Whilst on paper a trading subsidiary may look appealing, it is often ruled out by the academy trust board. This may, for example, be because it is considered to be too time consuming or too difficult to implement. It is therefore important to be fully prepared, and this article seeks to help you start to plan your approach.
There is some guidance such as the Academies Accounts Direction (Accounts Direction) (PDF 708KB) and Academy Trust Handbook (PDF 591KB), but as they become more common, DfE may introduce more guidance.
Cost vs benefit of setting up a trading subsidiary
It is advisable to be really honest with yourself and ensure even where you have a good reason to establish a trading subsidiary on paper, that it is financially viable and that the costs and additional complexity of operating a trading subsidiary are worth the anticipated benefits. A robust business plan based on a realistic and not best-case scenario is recommended.
Costs
There are inevitably costs involved in setting up a trading subsidiary (financial and resourcing costs). These may include:
- Professional advice on constitution of the trading subsidiary, the relationship between the group entities, taxation and regularity
- Time incurred by trustees and management teams in establishing how the two entities will be managed and funded
- Additional governance costs
- Annual audit fees (the trading subsidiary will be subject to external audit in the same way as the academy trust).
Benefits
The benefits tend to be a little more subjective and will depend on the individual business plan, but can include:
- An annual corporate tax saving each year assuming sufficient profits are generated in the trading subsidiary, but it may take many years for this saving to exceed the set-up costs referenced above
- Ring-fencing the trading operations so that they don’t interfere with the academy trust’s primary objects which are to provide education to its pupils
- A less regulated environment for the activity to enable the trading company to deliver on its potential
- Ring-fencing risk and liabilities to protect the assets of the trust.
Further Considerations
Making a profit
In the initial years of trading, it is not uncommon for a trading subsidiary to be loss making. In order to make a gift aid payment, the subsidiary needs to have both the cash available and also sufficient distributable reserves. Gift aid payments need to be physically paid out to the academy trust within nine months of the year end. It is important to ensure that costs in the subsidiary are fully tax deductible to ensure taxable profits align closely with accounting profits.
Funding the subsidiary
Trustees will need to decide how to fund the subsidiary until it is able to fund itself. This may be through a combination of share and loan capital, and both have associated advantages and disadvantages. The academy trust board will need to consider the provisions in the Articles and the DfE regulatory framework, particularly the Handbook before committing to an approach.
The source of any funds you intend to use to fund the trading subsidiary also needs careful consideration.
Where there is a loan there are a range of issues that will need to be considered from a charity law, regulatory and tax perspective.
VAT implications
It is important to remember that VAT is a tax on supplies so you need to look at your activities to determine how they should be treated for VAT.
Price lists for activities such as lettings or catering provision tend to be agreed well in advance of any VAT considerations. If subsequently you realise VAT is chargeable it can clearly erode margins (depending on whether you can pass to the end user) and/or impact on the deliverability of the business plan if increased prices impact on sales.
It may be necessary to explore whether to register for VAT or become part of a VAT group with the academy trust.
Setup
When establishing a trading subsidiary, it is also advisable to put in place formal arrangements that go beyond setting up a shelf company to ensure robust governance for the group. In particular, academy trusts may want to consider:
- If any consents are required under the Funding Agreement/Handbook
- The appropriate company type for the planned activity (ordinarily a company limited by shares)
- A suitable governance structure (DfE expect separation between trust board and trading subsidiary board. The Charity Commission guidance CC35 is particularly helpful in sharing good practice for governance arrangements when a charity incorporates a trading subsidiary. Academy trusts are exempt charities, and the Charity Commission guidance applies equally here)
- Whether they should put in place appropriate corporate governance arrangements at both the academy trust and the trading subsidiary (these will typically include appropriate wholly owned subsidiary articles, an intra-group agreement and possibly a services agreement which formally documents the arrangements where support and other services are required from the academy trust so that the trading subsidiary can operate its business)
- That appropriate mechanisms are in place to ensure the trading subsidiary has sufficient working capital.
Other factors to consider
There are of course a wide range of other factors that may be relevant:
- Ownership and treatment of any intellectual property involved
- Employment implications for the staff working on each of the service lines
- Suitable contractual terms and conditions for the proposed activities
- Insurance arrangements.
In terms of DfE consents, you should consider your proposal in the round and reflect on whether what you are proposing would be caught by the DfE’s rules. There are potentially two areas you may wish to consider; the DfE’s rules on related party transactions and whether anything in the arrangement is likely to fall within the remit of “novel, contentious and/or repercussive transactions” as set out in the Handbook. The use of academy trust property by the trading subsidiary may also need consent under the terms of the Funding Agreement.
Conclusion
Setting up a trading subsidiary is something that requires advance planning and an honest, early appraisal of the benefits vs costs.
In practice, many academy trusts establish a trading subsidiary to either mitigate and ring-fence risks and liabilities from trading or because the trading activity in question is significant enough to operationally ring-fence the activity from the academy trust’s core objects. The associated corporation tax saving incentive is usually a secondary benefit, not the key driver.
The application of the regularity regime has been a key issue for CFOs in recent years. The accounts direction has brought welcome clarity as to whether the regularity regime will apply to an academy trust’s subsidiary. The accounts direction has now clarified that regularity only applies to a subsidiary to the extent that it is receiving and spending academy trust funds.
Self-generated funds of the trading subsidiary are not subject to the same regularity regime. This means some of the restrictions that once made subsidiaries less competitive compared to their charitable peers are no longer in place opening up new possibilities and opportunities to generate income for the academy trusts in an environment where financial sustainability and efficiency is increasingly important.