Spire Accountants

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.

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. 

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.

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:

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 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:

1. on donations 
2. on profits from trading 
3. on rental or investment income, for example bank interest
4. on profits when you sell or ‘dispose of’ an asset, like property or shares
5. 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.