Regulation of UK Charities
The Charities Commission
Charities in the UK play a vital role in society – they make a difference to millions of lives in the UK and across the world.
The government body set up to administer and keep oversight of charities in the UK is the Charities Commission.
The Charities Commission sets guidance on how charities must act and has the power to intervene if a charity breaches its guidance.
It plays an important role in helping to make sure that when you see that an organisation is a registered charity, it must be meeting certain standards.
Rules Which UK Charities Need To Follow
There are rules that all charities have to follow:
- A charity’s aims have to fall into categories that the law says are charitable.
- It has to be established exclusively for what is known as public benefit. That means its only purpose must be charitable.
- Charities cannot make profits. All the money they raise has to go towards achieving their aims. A charity cannot have owners or shareholders who benefit from it.
Meaning of Public Benefit
It is up to the Charity Commission in the UK to decide whether an organisation passes the public benefit test. However, generally, public benefit encompasses the following to elements:
- Be of benefit
It has to do positive things, and if there are negative side-effects or consequences, these must be outweighed by its positive work. - Benefit the public
This does not have to mean all of the public. It could mean everyone in a geographic area, or everyone with a specific characteristic such as orphans.
Registering With The Charities Commission
Charities MUST register with the Charities Commission:
(1) Annual income is over £5,000 or
(2) Charity is set up as a charitable incorporated organisation (CIO)
Charities operating under a CIO structure must register regardless of annual income.
Charities & The Board of Trustees
Trustees
Charities are overseen by their boards of trustees. The board of trustees has overall responsibility and accountability for everything the charity does.
Trustees, usually unpaid volunteers, are ultimately responsible for everything a charity does. They are also responsible for ensuring full compliance with UK charitable law and other legal requirements.
The Charity Commission has power to suspend or remove trustees or disqualify people from becoming trustees if they are found to have been responsible for, or aware of, any misconduct or mismanagement at a charity.
UK Charity Reporting Requirements
Reporting Requirements
The reporting requirements are laid down by the Charities Commission and the requirements are dependent on various factors and encompass:
- An annual report - a good annual report explains the charity’s aims and how it is going about achieving them. It meets all the legal requirements and provides a balanced view of the charity’s structure, aims, objectives, activities and performance.
- A set of accounts
- An annual return - the annual return is an affirmation of basic information about the charity and is intended to help the commission maintain an up to date record of all registered charities by ensuring that financial and other details are confirmed.
All 3 of these report have to be filed with the Charity Commission within 10 months of the end of the period being reported for.
Please note that the reporting requirements discussed below relate to those pertaining to the Charities Commission and, if a charity is also a company registered with Companies House, this does not negate the legal requirement to file statutory accounts with Companies House. Statutory accounts must be filed within 9 months of the period being reported on.
Record Keeping Requirements
All charities must maintain accounting records as required by Part 8 of the Charities Act or, for charities registered under the Companies Acts, section 386 of the Companies Act 2006.
The Charities Act 2011 provides that unincorporated charities must maintain their financial records for a minimum of six years from the end of the financial year in which they were made.
The Companies Act 2006 requires that financial records must be
kept for at least three years from the date on which they were made and this also applies to charities operating under a company structure.
What A Charity Should Report To the Charities Commission and When
The flowchart below illustrates the different reporting requirements depending on the charities circumstances regarding annual income, total assets and charity structure:
Flowchart Notes
*Charity registration threshold - annual income of £5,000. A charity with annual income of less than £5,000 does not need to register with the Charities Commission but do need to prepare accounts although they do not need to be filed.
*SORP stands for Statement of Recommended Practice and is an accounting standard for charities. Under this standard, accounts for the charity must be prepared using an accrual basis as opposed to on a cash basis.. Non-company charities with gross income of over £250,000 during the financial year, and all charitable companies must prepare accruals accounts that comply with the applicable Statement of Recommended Practice (SORP). A template has been provided by the Charities Commission for use when completing annual accounts under this method on the HMRC website.
*Receipts and payments is effectively a method of preparing accounts for a charity on a cash basis - the cash in and outflows determine the output of the annual accounts (non accrual basis). This method can only be used by non-company charities with a gross income of £250,000 or less during the financial year. A template has been provided by the Charities Commission for use when completing accounts on this basis and this is available on the HMRC website.
* An independent external examination is for charities, and is the minimum legal external scrutiny required if there is a annual income of greater than £25,000 but not more than £1,000,000. It is not as rigorous (or expensive) as an audit and results in a statement that there is no reason to believe the accounts are not accurate.
*An independent audit is form of external scrutiny which is more onerous than an independent examination. It Has to be undertaken in accordance with International Standards on Auditing (ISAs) supplemented by relevant specialist guidance for charity auditors. An external or independent audit is required if a charity has annual income of over £1,000,000 or if the total assets exceed £3,250,000 and income is in excess of £250,000.
*Exempt charities are charities who are exempt from registration and many aspects of regulation by the commission. Most exempt charities have their own ‘principal regulator’. An example of this would be for universities in England s who are regulated by the Higher Education Funding Council for England.
*Annual return must be completed by all charities who are operating as a CIO and all other charities who are registered with the Commission who have an annual income of over £10,000.
*Annual return for registered charities (excluding CIOs) with annual income of less than £10,000 do fill in a return but on a reduced disclosure basis.
*All submissions of annual accounts, annual reports and the annual return to the Charities Commission must be completed online.
How To Set Up A Charity
There are 6 steps to setting up a charity.
(1) Find trustees for your charity - you usually need at least 3. The link provided is a document produced by the Charities Commission outlining how a charity should proceed when looking to appoint trustees to the board.
(2) Make sure the charity has ‘charitable purposes for the public benefit’. This would include a purpose which contribute towards, to name a few, human rights, alleviation of poverty, animal welfare, education and religion. The Charities Commission will look at a charities charitable purpose to decide whether it is indeed a charity. HMRC will also look at this to ascertain whether the charity is eligible to claim tax relief (gift aid on donations for example).
(3) Choose a name for your charity. The name must not be similar to existing charities, be misleading or be offensive.
(4) Choose a structure for your charity. There are 4 main structures to choose from:
- charitable company - must be set up as a company limited by guarantee via the Companies House website. Trustees have limited or no liability for a charitable company’s debts or liabilities;
- charitable trust - a way for a group of people (‘trustees’) to manage assets such as money, investments, land or buildings;
- charitable incorporated organisation (CIO) - has to be created by registering with the Charities Commission. Trustees have limited or no liability for CIO debts or liabilities and
- unincorporated charitable association - a simple way for a group of volunteers to run a charity for a common purpose. Unincorporated charitable associations cannot employ staff or own premises.
(5) Create a ‘governing document’. This is a legal document setting out the charity’s purposes and, usually, how it is to be administered. It may be a trust deed, constitution, memorandum and articles of association, will, conveyance, Royal Charter, scheme of the Commission, or other formal document
(6) Register as a charity if your annual income is over £5,000 or if you set up a charitable incorporated organisation (CIO).
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Tax & Charities
Tax Overview
Charities do not pay tax on most of their income and gains if they are used for charitable purposes - this is known as ‘charitable expenditure’. Tax relief is provided:
- on donations
- on profits from trading
- on rental or investment income, for example bank interest
- on profits when you sell or ‘dispose of’ an asset, like property or shares
- when you buy property
For all charity structure types excluding trusts, the relief provided on points 1 to 4 is corporation tax relief. The relief provided for these same items if charity is set up as a trust is income tax relief (points 1 to 3) and capital gains tax relief (point 4).
The tax relief provided on point 5 is from stamp duty and can be claimed regardless of charity structure.
Charities can claim back tax that’s been deducted, for example on bank interest and donations (this is known as Gift Aid)
When Charities Must Pay Tax
VAT
Charities must pay VAT when buying goods and services from VAT registered businesses who are supplying standard rated items however some of these goods and services can be supplied to the charity at either a reduced rate of 5% or at 0%.
Charities should also register for VAT if generating turnover on taxable supplies of in excess of £85,000 per year..
Business Rates
Charities pay business rates on non-domestic buildings, but they get an 80% discount.
Corporation/Income Tax
Charities must pay tax on any money they do not use for charitable purposes. This is known as ‘non-charitable expenditure’. They will pay either income tax if set up as a trust and corporation tax for all other charity types.
In order to pay tax, they must submit either a corporation tax or income tax self assessment return - please refer to the links which direct you to the area of our website with more detail around corporation tax and income tax.