Charities are great. Some of the most inspirational people we've met have been involved in charitable work, all of them doing amazing things to support others. We've worked with lots of different types of charity, from the household name bringing in £100 million of donations each year to social businesses using business principles to plug gaps in public services (a la "big society") and individuals doing all they can on their own time to help a small number of people with a particular need. It's a fascinating and incredibly rewarding sector to operate in and we love it.
However, because charities tend to use donated money or grant funding intended for a particular purpose, they can be a bit of a minefield. There's tonnes more scrutiny over expenditure, a few thorny little administrative challenges, and a whole load more regulatory hoops to jump through. Its almost more crucial for a charity to have good control over its finances then a standard shareholder owned company: every penny wasted is a penny that can't go towards helping others. With this in mind, large charities have taken to publicly reporting the proportion of the donations made which go directly to their beneficiaries (i.e. how much in every £1 you donate is not swallowed in managing the administrative functions of the charity and gets all the way to its intended recipients.) Whilst we maintain some healthy scepticism around the way these statistics are calculated - and how fluid the definition of "administrative" can be - it is good to know that your hard earned cash is really getting spent on the cause stated.
To navigate the various requirements successfully, it is really important that financial systems and processes are properly designed and implemented, and that staff understand what they're doing. This is where we come in! The below outlines a few of the challenges we've come across:
Charity accounts have to distinguish between restricted and unrestricted funds. This can be tricky if you have lots of different "pots" of funding. You also need to report on expenditure by charitable objective to show how funds have been used to fulfil the organisation's aim. There are lots more notes in Charity Statutory Accounts than those required of a small company.
The Charity Commission
Charities are regulated by the Charities Commission. Charities must be registered, and in addition to the annual accounts, a separate annual return needs to be made if your turnover exceeds £10,000 (which isn't really very much) or if you're established as a charitable company. Companies also need to file with Companies House.
Charities registered with HMRC don't have to pay corporation tax (there's slightly more complicated rules for charity subsidiary trading companies) - but you sometimes need to do a corporation tax return anyway. This isn't always straightforward, and you'll need to get your accounts translated into iBRXL format which requires special (not free) software.
VAT - always a challenging area - is even more finicky for charities. We could go on for days but, the headline is that the VAT treatment is different depending on the proportion of business to non-business activity, and the type of activity being undertaken. There are a huge amount of grey areas and its often difficult to get a definitive answer from HMRC. This is our confused & sympathetic face.