But there is one aspect of a charity's structure that should not be overlooked - the solvency or otherwise of any trading subsidiary.
Trading subsidiaries are strictly separate companies with their own board of directors who will need to consider the position of that company and its financial projections taking into account their duties as directors of that company. Many boards of directors will have been doing so (likely in consultation with the charity) and may have taken advantage of the furlough scheme and the business interruption loan scheme where operations have been affected.
The boards of trading subsidiaries are likely to continue to face economic uncertainty and they should continue to consider its financial position carefully and ensure they are fully up to speed with up-to-date financial information in order for them to do so and be very mindful of whether the subsidiary is or is likely to remain solvent. It would also be right for the parent charity to be kept informed of these matters as (very often) the sole member.
If there is any question that the subsidiary may face insolvency the directors should take immediate advice as their duties as directors will change.
Where a subsidiary does face financial issues (whether or not they threaten its solvency), it can be tempting for the parent charity to provide financial support. This is something that should be very carefully considered by the charity, and its trustees should consider the interests of the charity alone and whether it would be a suitable investment for the charity to make. Notwithstanding the unprecedented circumstances, providing support should absolutely not be the default position and the Charity Commission is clear that a charity must not subsidise a failing trading subsidiary.
If trustees consider that support is appropriate having taken into account all the circumstances and their investment duties, they must be very careful how the charity does so and, where appropriate, ensure that it is structured in the right way (normally by way of a loan or occasionally equity investment) to be compliant for charity law and tax purposes. In most cases it will be appropriate to take advice on these aspects. The likelihood of the charity being able to recover its loan or investment will be a critical factor in the trustees' decision making.
In making decisions of this type, trustees must be very careful to ensure that any conflicts of interest (perhaps because they are also a director of the trading subsidiary) are managed and that all decision making is carefully minuted.
Perversely, there may also be issues where a trading subsidiary seeks to retain its own profits at the end of the financial year in order to manage its cash flow. Ordinarily the profits would be paid by way of a qualifying donation to the charity under the gift aid scheme to limit liability to corporation tax. Corporation tax may become payable if profits are retained and there may also be VAT traps to be aware of in such circumstances.
While we expect the revenue raising abilities of trading subsidiaries to be compromised this year, solvency is only likely to be an issue for a few. Nonetheless, we advise directors (and parent charities) to be vigilant.