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Introduction

Setting up and running a charity or not-for-profit (NPC) organisation is often a very noble and morally commendable thing to do. That doesn’t mean HMRC make it any easier than running a for profit company of course. In fact running a charity requires keeping to some fairly complex rules and regulations and, as such, the services of a chartered accountant are essential.

Whilst this guide is no substitute for the one to one advice of an accountant (preferably one with experience of charity accounting) it does cover some of the fundamental concepts and rules that come with setting up and running a charity.

The Definition of a Charity

As of April 2008 all charities must prove to the Charity Commission that they are for public benefit. HMRC guidance states that any benefits must be ‘identifiable and capable of being proved by evidence’ and that any detriment ‘must not ‘outweigh the benefits. The public aspect must also be shown to ‘benefit the public in general, or a sufficient section of the public’ which can vary dependent on the purpose.

All charities and NPCs must satisfy these two requirements. Examples of charitable causes include relieving poverty, education, the arts, amateur sports, human rights, religious harmony, environmental protection and animal welfare. HMRC have guidance to writing up your charitable purposes, which is essential reading if you’re thinking of setting up a charity. These are, however, not intended to substitute the advice of a qualified accountant. 

Legal Structures 

A charity isn’t a single legal definition in itself and there are various legal structures that can fall under the umbrella of a charity of not-for-profit. These can be split into two groups; community groups / voluntary organisations and social enterprises.

Exploring these would warrant an entire article of its own but I’ve listed a few of the more common legal structures below:

●       Unincorporated Association

This is the cheapest and easiest way for a group to set up a charitable organisation. These are run by members and must register with the Charity Commission if its income is above £5,000 per year. 

●       Charitable Trust

Similar to an unincorporated association but this is run by trustees, who must sign a Trust Deed. These are more widely recognised as being for the public good than an unincorporated association that could also benefit its members. Must register with Charity Commission if income over £5,000 per year.

●       Charitable Incorporated Organisation

CIOs came into being in 2013 and is a charity that is incorporated, meaning its registered with Companies House as well as the Charity Commission. CIOs can allow voting rights to its members or be run solely by its Trustees. Crucially it is a separate the legal entity and its Trustees have limited liability.

●       Co-operative

A co-operative, also known as an industrial and provident society (IPS), is a business owned by its employees, who have a democratic say in running it. The rules governing a co-op mean that profits must be put back into the company. Any profits that are used elsewhere must adhere to the stated aim of the organisation, usually for charitable purposes. Co-ops do not have to register with the Charity Commission but they are bound by UK charity law.

There is a load more information and detail on these and other NPC legal structures on the ResourceCentre.org website. 

Tax and VAT Relief

All recognised charities that have been registered with the Charity Commission are liable for tax and VAT relief and can claim Gift Aid. This means exemption from paying any tax on revenue that contributes towards your pre-defined charitable purposes.

This includes income generated through the following means:

• Profits from trading
• Rental or investment income (ie bank interest)
• Profits through the sale of assets (such as shares)
• Purchase of property
• Charitable Donations

Charities do have to pay tax however on all income received through dividends from UK companies before 6^th April 2016, profits from developing land or property and purchases. With regard to the latter there are special VAT rules, which mean charities get VAT relief on most purchases. This will either be at 5% (for fuel and some other things) or at zero rate.

Gift Aid

When charities claim back tax on donations, this is done through Gift Aid and must meet certain criteria. The first of these is that the donor hasn’t paid less in income tax or capital gains tax in that financial year than you want to claim in Gift Aid.

The donor must also have completed a Gift Aid declaration which has specific wording, as laid out by HMRC.  The exception to this is with cash donations of £20 or less.