Where a trading subsidiary has been created one of the key issues is how it will be funded given the likelihood of start up costs to be incurred as they build up trade and early losses. Poor trading performance by established subsidiaries can also lead to the need for financial support from the parent, and this has of course become more common with the pandemic restricting many trading activities.
As a loan to subsidiary in this way is regarded as an investment by the parent, it needs to be justified for tax purposes otherwise it could be regarded as non-charitable expenditure. In order for loans to be exempt from tax and a qualifying charitable loan, HMRC would be looking for the following to be in place:
- a commercial rate of interest;
- a formal written agreement;
- appropriate security for the loan, if possible;
- reasonable repayment terms; and
- physical repayments of the loan, in line with the written loan agreement.
In addition, there should be a formal business plan supporting the commercial case for the subsidiary and the loan repayments.
Often the subsidiary is unlikely to have an assets of note over which to grant security, in which case HMRC would take a broad view of the whole situation on how the Charity benefits from the arrangement.
This is a complex area, and we would recommend contacting us for further advice before entering into loans of this nature.
Get in touch
If you have any questions about trading subsidies, please contact mail@ct.me.
