The rules governing charities

What is a charity?

A charity is a body set up and established for exclusively charitable purposes. In England and Wales, charitable purposes are as set out in the Charities Act 2006 and each of the charity's aims must provide a benefit to the public. This may be only a section of the public, but must not be unreasonably restricted geographically or by ability to pay any fees charged.

This new public benefit requirement is a continuing duty for charity trustees throughout the life of the charity.

Governance

The nature of the organisation will determine the most suitable legal structure.

Advantages and limitations of being a charity

Advantages to being a charity include not normally having to pay direct taxes (and there is special VAT treatment in some circumstances), paying no more than 20% of normal business rates and often finding it easier to raise funds than non-charitable bodies.

Charities must not carry out any non-charitable activities, and strict rules apply to trading.

Reporting

All registered charities must prepare a Trustees' Annual Report and accounts. The basic contents of the Report are mandatory, though the amount of information depends on the charity's size. It should explain the charity's aims and how it is going about achieving them for the public benefit. All charities must keep accounting records and prepare annual accounts which must be made available to the public on request. In England and Wales, charities whose gross income exceeds £25,000* must file the Report and accounts with the Charity Commission and also submit a completed Annual Return. Charitable companies also have to submit accounts and Annual Returns to Companies House.

There are two bases on which charity accounts may be prepared:

• Receipts and payments basis, which may be adopted where a non-company charity has a gross annual income of £250,000† or less. It consists of an account summarising all money received and paid out by the charity and a statement giving details of its assets and liabilities at the end of the year.

• Non-company charities with gross annual income of over £250,000†, and all charitable companies, must prepare their accounts on the accruals basis in accordance with the Statement of Recommended Practice – Accounting and Reporting by Charities (SORP). They contain a balance sheet, a statement of financial activities (SoFA) and explanatory notes. These accounts are required, in accountancy terms, to show a “true and fair view”.

External scrutiny

The Companies Act 2006 largely harmonises the accounting and independent examination regimes for all charities. For accounting periods starting on or after 1 April 2008 the position is as follows.

* £10,000 for accounting periods ending before 1 April 2009
† £100,000 for accounting periods ending before 1 April 2009
Note: for charitable companies a statutory audit is required when the total assets exceed £3.26m, regardless of the income.

There is much useful information available on the website of the Charity Commission www.charity-commission.gov.uk

Charities in Scotland

All charities operating in Scotland (including those already registered with the Charity Commission) must register with the Office of the Scottish Charity Regulator (OSCR) and are subject to full responsibilities and requirements under the Charities and Trustee Investment (Scotland) Act 2005. This includes submitting an Annual Return form, with accounts produced under the Charities Accounts (Scotland) Regulations 2006:

For more information visit www.oscr.org.uk.