Accounting For Non Profit Charities and Organisations

Introduction

How to choose an accountant for your charity – an outsourcing guide for small-mid-sized UK charities and social enterprises. 

Accounting requirements for UK charities and social enterprises/not-for-profits are an ever-changing, complex field. For small organisations without an in house accountant, finance team, or knowledgeable Finance Director, an accountancy firm that understands the funding concerns and payroll/bookkeeping requirements of Third Sector organisations is an invaluable resource.

Why do charities need a specialist accountant?

Over recent years, direct government funding for the Third Sector has decreased, so the competition for private donations, Trust Funds, government grants, and local authority contracts has skyrocketed. This is why charities should prioritise legal compliance and sustainability as an integral part of their financial planning strategy when approaching fundraising and bid management.

If you run a charity or social enterprise, you need an accountant who can help you fulfil the statutory filing duties stipulated by the Charities Commission (CC) – and an impartial advisor who can support you in making good financial decisions for your charity.

Specialist guidance in this area is vital, because accounting standards and SORP (Charities Statement of Recommended Practice) in the UK is set to change in 2023.

Forming a New Charity

If you want advice about setting up a registered charity or social enterprise, or even for help establishing the right accounting systems for an unincorporated association, a good accountant can evaluate your plans and help you determine the structure that best fits your purposes.

This will affect who runs the organisation, whether it employs people under its name, whether trustees are accountable for the organisation’s actions, and whether it has a broader membership. In most cases, there are four main charity structures, namely: a Charitable Company (a not-for-profit business limited by guarantee), a CIO (Charitable Incorporated Organisation), an Unincorporated Association (UA) and a Trust.

Some charities are structured as formal ‘corporate’ bodies. If you opt for this model, the law regards your organisation as an individual legal entity, separate from its officers and trustees. Consequently, your charity will be permitted to do things, under its name, that individual people are permitted to do. This includes providing charitable services under contractual arrangements, employing staff, owning property or leasehold/freehold land, and signing commercial agreements in its name. Typically, the trustees in charities of this kind have no personal liability for what the organisation does.

In contrast, if your charity is ‘unincorporated’, i.e. not a corporate body, its trustees have personal liability for its actions. Your organisation will not be allowed to control certain investments, accept certain grants, or sign contracts in its name.

If your charity is structured to include a wider membership, its members can vote on key issues at annual general meetings, etc. They might vote to appoint committee members, or they could hold a ballot to change the governing document or ‘Articles of Association’ for the charity.

Charities with wider memberships must not exist to benefit their members solely, a large enough percentage of the general public must be able to become members and enjoy the benefits too. Amateur sports clubs, which are open to everyone, are a good example of this. This ensures that your charity operates in the interests of society as a whole.

Of course, some charities are not structured to include a membership base. In these organisations, the trustees make all operational decisions. They choose how to allocate the budget and how to appoint new trustees.

Sometimes, the trustees of a charity might decide that its structure should change, to better support the work they do. However, this can sometimes prove difficult or in some cases not possible, therefore hiring a specialist accountant from the outset will allow you to choose the right structure to achieve your future goals.

Value Added Tax (VAT)

When it comes to VAT, charities often struggle to determine the specialist VAT rules that apply to the Third Sector, as these are more complex than for businesses in the private sector.

Tax Considerations 

A notable issue that charities face is their tax liability, which is different to private companies. Some of the key considerations include:

1. Tax planning to include things like trading subsidiaries and the small trading tax exemption.
2. Checking that Gift Aid, tax and VAT reporting are being handled in a compliant manner.
3. Calculating any tax liabilities on profits not qualifying for tax relief.
4. Organising and optimising systems for Gift Aid.
5. Ensuring that fundraisers receive training on tax implications.
6. The specific taxation rules surrounding the profits of Community Amateur Sports Groups (CASC’s).

Accounts, Annual Reports and Annual Returns

You will need to prepare annual accounts that are available on request, regardless of whether your Charity is registered with the Charity Commission or not (you must be registered if your income is £5,000 or higher, or you are a CIO).

There are different rules about accounting for charities, based on their size and type. To understand the rules for your organisation, check its income to date for the year, and the value of its assets. Also, you should know whether you have to register as a charity, and whether you are classed as a CIC or a company.

A registered charity has to prepare an annual trustee report, and make this available when requested.

For all CIOs and for charities whose income exceeds £25,000, they must file both annual accounts and the trustee’s annual report online with the Charity Commission.

Annual return form – This allows the Charity Commission to update the information about every organisation on its register. These forms are supplied to registered charities yearly and provide the commission with basic financial data, as well as details of activities, trustees, and contacts. They indicate which classification a charity falls under too.

Receipts and payments is the simplest preparation method. This can be used if your charity is not a company, with an annual income no higher than £250,000. This involves preparing an account summarising the money received and paid out and received by your charity during the financial year. Also, you must provide a statement detailing your assets and liabilities at the year end.

All charitable companies and non-company charities with a gross income exceeding £250,000, must prepare financial accounts on the accruals basis, in accordance with the Charities Statement of Recommended Practice (SORP). You will have to complete a statement detailing
your financial activities (with explanations) and a balance sheet. This information is needed to provide a ‘true and fair view’.

Choosing an accountant who knows which elements of legislation affect your charity gives you confidence that your accounts will be handled correctly, in a timely manner. In addition, hiring an accountant with expertise in digital accountancy ensures that your records will be kept efficiently, in the right way. This will speed up the accounting process and reduce its cost going forward.

Auditing and Independent Examinations

There are legal thresholds governing the independent scrutiny that is required for the accounts of charities.