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Trading subsidiaries are usually companies limited by shares but occasionally are companies limited by guarantee where the sole shareholder (or member) is the ‘parent’ academy trust. Typical examples of where trading subsidiaries are used include the provision of school business management support, catering services, IT services, the accommodation of Early Years or specialist settings and the commercialisation of intellectual property, such as curriculums and learning resources. Where trading subsidiaries generate a profit, the proceeds are commonly gift-aided to the parent academy trust, thus providing a useful source of additional revenue to the charitable parent.

It will clearly depend on the circumstances but often the answer is no. Trusts can conduct a wide variety of activities within their existing corporate framework. However, there are several common reasons why academy trusts may choose to use a trading subsidiary:

• If the proposed activity falls outside the Objects of the academy trust (as set in its Articles of Association). There is some nuance here regarding ancillary and non-primary purpose trading, but often academy trusts will be more comfortable placing non-core commercial activities outside of the academy framework
• If the activity is such that for financial or reputational reasons it would be advantageous to ring fence the risk of carrying them out in a separate company
• Tax reasons.

Establishing a trading subsidiary properly can be more expensive and time consuming to operate than you may at first anticipate. Here are a number of points to consider:

• Upfront and operating costs: there will invariably be set-up costs connected with professional services to consider, as well as the ongoing costs associated with administrating the subsidiary’s day to day activities, such as resourcing central team staff and of course the annual audit fees.
• Start-up capital: the initial introduction of capital into the new trading subsidiary by the parent Trust needs to be carefully considered in the context of the requirements of the Academy Trust Handbook (Handbook) as well as the Trust’s Funding Agreement. You may also want advice as to whether ESFA consent will be needed.
• Relationship at arm’s length: it is important to bear in mind that the parent Trust must not subsidise the activities of its subsidiary and where services are provided due consideration must be charged. Consequently, it is advisable for a robust services agreement (or similar) to be put in place to properly document any use of the Trust’s resources by its subsidiary (e.g., office space, staff, back-office support).
• Governance: the Charity Commission guidance for trading subsidiaries highlights the importance of maintaining a degree of independence between the trustees/directors of both companies thus allowing for proper decisions to be made unaffected by any conflicts of interest. Careful thought should therefore be given to the membership of the subsidiary’s board and many Trusts may find it helpful to put in place a governance agreement between the two companies that clearly describes the decisions reserved to each layer of governance. 
• Commercial activities: if the trading subsidiary’s activities involve the provision of goods and services to third parties it is important that suitable terms and conditions of supply/sale are prepared to adequately protect the subsidiary’s position.

A well thought out business plan will place into focus many of these factors and academy trusts should carefully consider the costs against the perceived benefits. Careful consideration should be given to the tax position of the subsidiary and, in particular, VAT. It can clearly be disappointing to develop a business plan with a pricing structure to find out at a later date that VAT has to be charged and that it was not included in the modelling.

An accountant or tax expert’s advice should be sought to determine whether the subsidiary will form part of the same VAT group as the parent Trust. Certain activities such as the provision of sport and physical education will require further specialist advice.

DfE: Whilst the DfE have acknowledged the useful application of trading subsidiaries there is little in the way of specific guidance set out in the Handbook. This lack of information has historically made trusts very conservative in the way they operate their subsidiaries. However, recent changes to the Accounts Directions have made the situation somewhat clearer in terms of the regulatory reach of the DfE and applicability of the Handbook. 

Nevertheless, trusts should be mindful of the more general restrictions in the Handbook that can impact on a trust’s relationship with its subsidiary companies. These restrictions can throw up a number of questions relating to issues such as: borrowing, novel, contentious or repercussive activities, related party transactions, disposal of assets and the provision of guarantees many of which will need to be considered (and ESFA permission sought) before the subsidiary can commence trading.

Charity Commission: trusts need to remain conscious of their wider obligations under charitable law with regard to the operation of any subsidiary company. The Charities Commission has published extensive guidance on charities and trading activities in the publication ‘Trustees, trading and tax: how charities may lawfully trade (CC35)’ which is a helpful point of reference.

We have already referred to the importance of putting together a well-researched business plan, but early engagement with lawyers and accountants is crucial to ensure that the correct foundations are put in place. 

°ÄÃÅÁùºÏ²Ê×ÊÁÏ has been advising trusts on joint ventures and the development of suitable structures to deliver strategies for trusts looking to increase revenue through the use of trading subsidiaries for well over 10 years. We would be happy to discuss options with interested trusts. We have acted for trusts looking to set up simple arrangements for the operation of nurseries through to complex trading companies with multi-million pound turnovers.