Accounting for charities & non-profit organisations

Anyone who runs charities knows how it differs from running a business, both in terms of motives and objectives.

HMRC treats non-profit organisations and charities very differently to businesses, offering some unique tax breaks in the process. 

If a charity is recognised by the tax authority, it will benefit from certain tax reliefs. This is only as long as the funds raised are used for charitable purposes.

Charities usually pay tax when they receive income that doesn’t qualify for tax relief. In addition, if any income has been spent on non-charitable purposes.

With unique tax breaks come unique challenges, many of which have been made worse by the pandemic. The public’s generosity has been directed towards the UK’s major charities, such as the NHS. This has left many others facing financial ruin. 

There’s a reputational issue, too. More than other sectors, charities depend on public trust, and are expected to be more transparent. It only takes one example of fraud or financial misconduct. Then faith in the concept of supporting the charity is dented. 

Defining Charities

Tax law contains an official definition of a charity: “a body of persons or trust… using all its income and assets for its stated charitable purpose”. A key test to determine the status of a charity is whether or not it exists to benefit the public. All charities have to satisfy what is known as the public benefit requirement. 

In addition, the people running the organisation must be judged “fit and proper”. There are no set criteria for exactly what this means because this rule is intended to counter “fraudsters”. It is kept vague on purpose to give the Charity Commission room to apply judgement in each case. 

For example, judgement can be used for people who have already been thrown out of a charity. They can be prevented from taking up a trustee position with a different charity.

HMRC gives the validation of charity status to the Charity Commission in England and Wales. The Office of the Scottish Charity Regulator in Scotland or the Charity Commission for Northern Ireland. A suitable regulator will confirm that a body meets the requirements to be considered a charity. Then that body can then register with HMRC who will issue them with a charity tax reference number. 

Sometime the regulator doesn’t give charitable status. An application can be made to the Revenue for tax-free status. This may be granted in certain cases.

SORP

Larger charities are expected to abide by the sector-wide statement of recommended practice or Charities SORP. 

The mandatory SORP was initially introduced in 1995. This built on an earlier non-mandatory version and has been updated several times since. 

Under the terms of the SORP, charities matching certain size and income criteria must prepare an annual report. Alongside this a set of accounts must be prepared. They then submit an annual return to the Charity Commission.

A charity registered in England and Wales that has a gross income of less than £10,000 in the financial year. If they do, they are asked to complete the annual return only.

Gift Aid to charities

Gift Aid allows charities to reclaim an extra 25p for every £1 cash donated. It was introduced in 1990, to support and encourage one-off cash gifts of £600 or more. This threshold was reduced to £250 and removed in 2000. Because of the potential for abuse of the scheme, Gift Aid comes with a lot of responsibility and paperwork. 

Most importantly, charities must get Gift Aid donors to make a declaration of eligibility. They need to keep an auditable record of Gift Aid donations valued above £30.

It’s up to individuals to make sure they are eligible to make Gift Aid donations before signing any declaration. However, charities can pay the price if they fail to carry out due diligence. HMRC can ask that any payments made to charities for wrong Gift Aid donations are repaid by the charity.

Government help on Gift Aid is long and complex. It covers everything from church collections to charity auctions. Asking an expert, or at least reading up on the topic, is important.

Tax relief on gifts to charity

It is possible for charities to claim tax relief on some types of investments. It can only be claimed if they are given or sold at less than market value to a UK charity. If you’re gifting land or buildings, you need to make sure the charity is willing to accept the gift. You can’t just burden them with the upkeep on a run-down building and walk away. You must get them to provide a certificate confirming the deal.

Over the years, more than a few people have thought they’d found a loophole. What if I give my house away, claim tax relief on the gift, but keep living in the property? It’s easy to see how that might sound tempting but no such loophole exists. To qualify for tax relief, you have to give away the whole of your ‘beneficial interest’ to qualify. Continuing to live in the house discredits such a claim.

If you make a gift to charity that qualifies for relief, you make the deduction when you calculate your income. This will be applied for the tax year in which the donation took place. 

If it’s a direct gift, you can take the value of the net benefit to the charity; any incidental costs, such as broker’s fees related to the process. You then add back on the value of other benefits you receive as a result of the gift. An example would be a thank-you present from the charity.

Unfortunately, these reliefs have been exploited in complex tax avoidance schemes over the years. This has meant the rules are full of corrective clauses.

Contact us using the below form. One of our accountants can help with charity accounting advice.