UK: When Should An Academy Trust Establish A Trading Subsidiary?

What circumstances mean an academy trust may need to set up a subsidiary company to carry out trading activity, in order to comply with charity law?

Originally published 4 July 2018, updated November 2023

Academy trusts may decide to pursue alternative strategies to generate extra income, as highlighted inthis earlier Wrigleys article. Such activities may be classed as trading, particularly where services are provided alongside school facilities, such as cleaning or catering.Where this is the case, an academy trust may need to set up a trading subsidiary in order to undertake them.

What trading can an academy trust do itself?

The general rule is that an academy trust can only carry out trading activity which furthers its charitable objects, or which is ancillary to furthering those objects.

The objects are found in the academy trust's articles of association.The Department for Education ("DfE") model objects require an academy trust to advance education for the public benefit in the United Kingdom.For academy trusts with DfE model objects, they may therefore carry out trading which has an educational purpose, or is ancillary to an educational purpose.

In practical terms, this means that an academy trust can charge for some educational activities such as music tuition and board and lodging on residential trips (provided this is permitted by legislation applied to the academy trust under its funding agreement with the DfE), and for ancillary activities such as school meals or uniforms.

Some academy trusts also have leisure and recreational charitable objects, which permit activities such as hiring out playing fields or serviced facilities to local sports clubs and other groups.However, the DfE is reluctant to permit new academy trusts to be incorporated with this object.

An academy trust should therefore check what its own objects are, as a first step when reviewing the trading activities it carries out. Trading which is permitted by an academy trust's objects may be referred to as charity trading, or 'primary purpose trading'.

What if an academy trust carries out non-charity trading?

A charity is only permitted to carry out non-primary purpose trading (or non-charity trading) where this does not involve significant risk to the resources of the charity.Examples of activities which would fall within this category include selling services outside the academy trust, such as HR, IT and catering to other schools and academies.Although renting out land and buildings does not generally qualify as 'trading' for this purpose, in some circumstances it may, particularly where the facilities include services (e.g. catering or cleaning).

In trading terms, income generated by non-charity trading will usually be chargeable to corporation tax.However, there is a useful tax concession which helps to manage non-charity trading.This permits an academy trust to do a small amount of non-charitable trading, without becoming liable for corporation tax, provided that the income generated falls under a certain amount.This is currently 25% of a charity's income up to a maximum of £80,000 per annum and is known as the 'small scale exemption'.Any profits generated must be applied for the charitable purposes of the academy trust.

It is important to note that the amount of trading undertaken takes into account all of the schools within an academy trust. It is not done on a school by school basis.An academy trust therefore needs to regularly review the trading activities carried out by all the schools it operates.

You should bear in mind that everything a charity does should be within its charitable objects.The purpose of any non-charity trading activity which is undertaken should be purely to raise money for the academy trust to spend on its charitable purposes.If an academy trust undertakes activities outside its objects, it could lead to an academy trust losing its charitable status, which is a breach of the academy funding agreement (and would potentially result in personal liability for the trustees).

On a separate point, spending General Annual Grant funding on non-academy activities is also a breach of an academy trust's funding agreement with the DfE, so it is important that an academy trust can identify the source of any funds used in seed funding or supporting any trading activity.

Using a trading subsidiary

If an academy trust is likely to generate more than £80,000 per year from non-charity trading, it is customary to set up a trading subsidiary (a separate company wholly controlled by the academy trust).Non-charity trading is then undertaken by this trading subsidiary. Any profits generated can be transferred to the academy trust under the 'Gift Aid' scheme, reducing the liability of the trading subsidiary to corporation tax.

Even where non-charity trading is less than £80,000 per year, an academy trust may choose to use a trading subsidiary anyway, to 'ringfence' trading activities from their core charitable activities, especially if the activities involve financial or reputational risks (such as running private events such as weddings or balls on school property).

Where an academy trust does use a trading subsidiary, care must be taken to avoid any conflicts of interest that may arise between the two entities. Conflicts of interest will likely arise where trustees of the academy trust are also directors of the trading subsidiary. It will therefore serve an academy trust and its trading subsidiary well to have different people serving as trustees and/or directors of each organisation and for each entity to have a conflict of interest policy to help inform how any conflict of interest is to be identified and managed. Further information about the use of trading subsidiaries and the relationship between trading subsidiaries and the academy trust which controls it can be found on the Charity Commission website (as part of its generic advice for charities), available here.

In summary

The requirement for a trading subsidiary has been an increasing concern for academy trusts particularly as growth has increased the size and capacity of many trusts. Increasing financial constraint within funds provided by the DfE also drives the need to generate income from other activities. However, there are important considerations to take into account not just in deciding if and when to create a trading subsidiary but also in managing its relationship with the academy trust if the enterprise is to succeed for the benefit of both organisations and for pupils and their communities.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.