Setting Up A Charity

Special Rules And Protections In Charity Accounting

Despite the stereotypes, some people in business actually want to put something back into their communities or the world at large through charities and Social Enterprises. We're not just talking about idealistic dreamers, either. These are people with money and experience, and their numbers are growing.

Call us on 01233 653006 and see how we can help you today.

The rules governing the formation and running of charities are pretty stringent, to prevent fraud and protect legitimate organisations. They also present a couple of unique financial challenges and opportunities. The first thing you'll want to do is get registered, in order to be recognised by HMRC. There'll be a few immediate results of this:

  • Tax reliefs, including Income Tax, Capital Gains Tax and Corporation Tax.
  • Tax repayments on bank interest and Gift Aid donations.
  • Exemption from tax on donations received from companies, as long as the income is used for charitable purposes only.
  • Exemptions from UK tax on most types of investment income, as long as the income is used for charitable purposes only.
  • Exemption from tax on income received from renting out land or property held for charitable purposes, as long as the income is used for charitable purposes only.

You shouldn't assume from this that charities pay no tax at all, and you must always keep HMRC informed of all taxable income you receive via  either a Self Assessment or Company Tax Return, depending on your circumstances. Charities tend to be considered companies for tax purposes, and are eligible for Corporation Tax. If they were set up by a trust deed or will, then they may be considered a charitable trust and other rules will apply. As always, things can get really messy if you fail to submit any required returns or other information on time. There's no defence against a penalty for late filing and the fines can mount up quickly if you don't correctly declare any taxable profits. VAT rules also apply to charities with business activities, but there may be reliefs and exemptions on offer.

The special rules designed to protect and encourage charities come at the cost of red tape and paperwork. Contact RIFT Accounting to off-load the cumbersome complexities and get back to helping people.

Paying it Forward

Setting your charity in motion requires six basic steps.

  • Finding trustees - generally three or more.
  • Examine your goals to make sure you fit the criteria for "charitable purposes for the public benefit".
  • Come up with a name for your charity.
  • Decide on its structure.
  • Create a "governing document".
  • Register as a charity if your annual income is over £5,000, or if you set up a charitable incorporated organisation (CIO).

If you're not sure about any of these steps, you should immediately consult someone experienced in the field. Naturally enough, we'd recommend RIFT Accounting for this, and we'd be more than happy to walk you through the procedures and make sure you fit the criteria.

The first thing you'll want to be sure of going into this is that your business qualifies for charitable status. You'll find general information about this on the government's own website, or talk to us for more tailored, in-depth advice. The bottom line, though, is that you need to be "established for charitable purposes only".

If you want to get more technical about it, the Charity Commission (the independent government department that registers and regulates charities in England and Wales) goes further. They say:

“Charities exist to benefit the public, not specific individuals. Because of this, charities pay reduced business rates and receive tax breaks but are restricted in what they can do and how they work.”

Of course, it takes more than a well-meaning original intention to operate as a charity. With very specific laws and regulations to follow, your charity needs to be fully transparent in all its dealings. Having trustees who benefit directly from the charity's work, for example, might be considered a step in the wrong direction.

In 2013, a new term entered the field of charities: "Charitable Incorporated Organisations". As the Charity Commission puts it, a CIO is something created "in response to requests from charities for a new structure which could provide some of the benefits of being a company, without some of the burdens”. Essentially, it's an incorporated form of charity, but not actually a company in its own right. It's registered with the Charity Commission, rather than Companies House and can offer limited or no liability to its trustees for the charity's debts.

Charities are a vital part of the UK's social infrastructure, and an important sector of its economy. If you're looking for ways to start giving back and would like to discuss your needs please get in touch.

Call us on 01233 653006 and see how we can help you today.

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