As a college or further education provider, using a trading subsidiary for non-primary purpose activity can have many benefits, but you should be mindful of the setup and legalities to ensure you can maximise them.

There is a rising trend among colleges and other educational establishments to set up and/or use an existing subsidiary company for non-educational activities or to provide support services such as cleaning, catering, security etc. There could be many reasons for this, not least the potential saving from additional pension costs under the Local Government Pension Scheme (LGPS) that would be payable for support staff within a college. N.B. This briefing doesn’t look into the pensions savings or requirements, and we recommend you seek advice from a pension advisor if this is a concern, and similarly, we will not look at the detailed legal requirements, as you should consult your lawyers before making any transfers of staff or activities to another entity. 

Key documentation

The most important aspect to consider before using your trading subsidiary is ensuring the correct documentation is in place. This will ensure that the subsidiary is established as its own entity and that you compliantly reap the financial benefits this brings.

Key documentation includes:

• Documentation to transfer staff and employment contracts along with the Transfer of Undertakings (Protection of Employment) Regulations (TUPE) – we recommend seeking legal advice.

• New employment contracts are created, removing legal obligations from the college to the subsidiary.  

• Documents to transfer the services from the college to the subsidiary. It’s important to note, if these are taxable services, HMRC could argue that the activity still sits within the college, if no formal transfer or sale document is in place.

• Service agreements between the two entities are established.

• A formal loan agreement should be in place with normal commercial terms, see Funding below.

Other considerations

Alongside the legal documentation, there are various other considerations you should make before using a trading subsidiary. These include:

• PAYE: A new PAYE reference for the subsidiary must be applied for, although the college may still be able to carry on with one payroll run for the two entities.

• VAT: Services provided by the subsidiary are likely to be subject to VAT unless a VAT group is established (group registrations are currently taking a long time to process by HMRC).

• Accounts: A separate set of accounts is required for the subsidiary, and consolidated accounts will be required for the college.

• Tax returns: Annual corporation tax returns are required for the subsidiary, and separate Companies House filings are required yearly.

• Transfer pricing: The subsidiary should consider whether a markup should be made on the services being supplied to the college and at what level.

• Tax on profits: Where net profit exists, corporation tax will be payable unless planning is undertaken to covenant or donate sufficient profits to the college.

• Justifying the change: You should have adequate reasoning for the subsidiary to communicate this effectively to existing staff, any consequential fallout with employees, and their rights. Alternatively, consider new service staff to be employed by the subsidiary company.

• Business Rates relief: The operation of a commercial subsidiary company could impact the Business Rates relief on your property (for which the College currently has with exempt charity status).

• Funding: Consider how will fund the subsidiary on set up e.g., share or loan capital.

• Fees: As a separate entity, additional administration and/or professional fees may be chargeable.

If you’re considering using a trading subsidiary and would like more information, please contact one of our expert team by filling out the form below. Alternatively, please speak with your usual Buzzacott contact.

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