Boosting Income for Academy Trusts: Understanding Trading Subsidiaries and Charity Law

When should an academy trust create a subsidiary company in order to carry out trading activity and comply with charity law?

Understanding the Right Time for Academy Trusts to Form Subsidiary Companies

Academy trusts are operating under significant financial pressure and amid some uncertainty as to the direction of government policy. The finances of academy trusts, and their ability to grow sustainably, are key concerns for senior leaders, with the Department for Education (DfE) looking to both academy trusts and local authorities for school improvement support.

As a result, many academy trusts are seeking to address current and projected financial pressures by pursuing alternative strategies to generate extra income, which might include:

• Letting out facilities, for example to community groups, nurseries, breakfast clubs, afterschool clubs and sports clubs.  Some schools may have conferencing facilities, fitness suites or leisure centres available to let;

• Trading with the general public, such as catering alongside facilities which are hired out to the general public.

• Providing services to other academy trusts such as catering, estates management, HR, IT, payroll and procurement.

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 to provide the services in compliance with charity law.

Understanding Charity Law: Permitted Trading Activities for Academy Trusts

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

These 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, 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'. 

Managing Non-Charity Trading for Academy Trusts

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

In trading terms, income generated by non-charity or non-primary purpose 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-charity trading, without becoming liable for corporation tax, provided that the income generated falls under a certain amount. This is currently 25% of aan academy trust’s total annual turnover 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 (i.e. education).

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

An academy trust should bear in mind that everything an academy trust does should be within its charitable objects. The purpose of any non-charity trading activity should therefore 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 would be a breach of the academy trust’s funding agreement with the DfE (and would potentially result in personal liability for its trustees).

On a separate point, spending General Annual Grant funding on non-academy activities would also be 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 by the academy trust or a trading subsidiary.

Benefits of Using a Trading Subsidiary for Non-Charity Trading

If an academy trust is likely to generate more than £80,000 per year from non-charity trading, they should consider setting 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 by the trading subsidiary to the academy trust under the 'Gift Aid' scheme, thereby 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 still choose to use a trading subsidiary in order to 'ringfence' trading activities from its core charitable activities, especially if the activities involve financial or reputational risks. Such risks might include running private events such as weddings or balls on school property, hiring out facilities or providing services to other academy trusts).

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 conflicts of interest policy to help inform how any conflicts of interest are 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).

In summary

The requirement for a trading subsidiary has been an increasing concern for growing academy trusts, particularly with increased financial pressures and the parity given by the DfE to both academy trusts and local authorities in providing school improvement support. However, there are important factors to consider not just in deciding if and when to create a trading subsidiary, but also in managing its relationship with the academy trust, if the arrangement is to succeed for the benefit of both organisations and for pupils and their communities.

Originally published 4 July 2018 and updated November 2023 and March 2025