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What are non-profit organisations?

Non-profit organisations are formed to pursue a goal, not for profit or for any of the proceeds to go to its members or leaders. These organisations don’t have commercial owners and must rely on funds from contributions, membership fees, events, and investment income, among other things. The money made is spent solely on the organisation’s aims (and running costs) to make sure it achieves what it set out to do.

Non-profit organisational structures can be divided into two groups:

  • Charities and community groups
  • Social enterprises

The main difference between the two depends on who is managing the organisation. The former is usually managed by several volunteers, who have been chosen by the other members. Sometimes staff are employed to do some of the work, but since the main members aren’t running the group for financial gain, these kinds of organisations are more likely to receive funding in the form of grants.

The latter are managed by those that have invested in them and/or are paid to work for them. This could range from being one or two people, all the staff, the customers, or people that have bought community shares. These kind of enterprises normally keep themselves afloat by selling products or offering services, or by asking people to invest in them, instead of applying for donations or grants.

Charities and community groups

Even if your charity isn’t required to register with the Charity Commission, you still have to keep accounting records (which can consist of cash books, grant records, receipts, etc.) as well as preparing annual accounts. All work carried out throughout the year also needs to be shown in a Trustees Annual Report.

If your charity earns more than £5,000 per year, you have a legal obligation to register with the Charity Commission. A Trustees’ Annual Report also needs to be prepared and produced on request. Anything below £10,000 has to be included in relevant sections of the annual return, which include trustee details. If you earn above £10,000, you must submit an Annual Return to the Charity Commission within 10 months after the financial year has ended. Accounts must be prepared either on the receipts and payment basis or the accrual basis. If between £25,000 and £250,000 is earned, accounts must be prepared on the receipts and payment basis or the accruals basis. If it’s on the accruals basis, they must be prepared in accordance with the 2008 regulations and the applicable SORP. You have the choice between independent examination or audit by a registered auditor. With annual incomes between £250,000 and £1 million, accounts must be prepared on the accruals basis in accordance with the 2008 regulations and the applicable SORP. An audit is only required if income rises above £1 million. If not, then an independent examination will suffice.

Social enterprise

Social enterprises include community enterprises, credit unions, co-operatives, housing associations, and leisure trusts, among other things. They are businesses that make their money by selling goods and services. The profits made from this are then reinvested back into the business or the local community, unlike conventional businesses where the profits are usually divided amongst shareholders.

Unlike charities and community groups, social enterprises can be owned and run by paid employees. They can adopt different legal structures, so you can decide yourself which one is right for your company. A survey conducted by Social Enterprise UK found that there were 15,000 social enterprises in the UK, which amounts to 1.2% of all UK enterprises. The annual contribution of social enterprises to the UK economy is around £98 billion.

What is the financial legislation for non-profits in the UK?

When it comes to charity accounting, non-profit businesses and registered charities need to prepare (as mentioned above):

  • A set of accounts
  • An annual return
  • A Trustees’ Annual Report

The aim of all these three things is to provide a clear picture of what your charity does and how it’s fairing financially. The Trustees’ Annual Report gives you the opportunity to describe your work to the public and to the funding bodies. By preparing all these, it can make your organisation run more effectively.

It could happen that your organisation is audited so your accounts will be independently examined. This happens more frequently with larger non-profits, since they are more complicated to keep in order. Maintaining accounts for your business might seem like a big feat, but in the long run it will be worth it since it will help everything run more smoothly. If you have to send the organisation’s Annual Report to the commission, you must do so within 10 months of the end of the organisation’s financial year, but earlier is preferred so that the information is as current as possible.

The accounting records (e.g. cash books, invoices, receipts, Gift Aid records, etc.) must be retained for at least 6 years (or at least 3 years in the case of charitable companies) and these need to be made available to the public on request. This is important for public accountability, and must be complied with in all cases

Tax-exempt status

An advantage of non-profit organisations registered in the UK is that they benefit from some reliefs and exemptions. Taxes in the UK can be complicated, but this article helps to shed light on how to file them correctly. Charities and non-profits are exempt from corporation tax as well as the trustees being exempt from income tax. To take advantage of these benefits you must be recognised by HM Revenue and Customs (HMRC), which you can easily do online by filling out a form. It’s also possible to claim tax back i.e. if it’s been deducted on bank interest or donations (known as Gift Aid).

Your non-profit organisation may need to pay tax if it uses some of its income on things not related to the charity (this is known as 'non-charitable expenditure') or if some of the income received doesn’t qualify for tax relief. In this case, you will need to fill out a tax return. If you don’t have any tax to pay, you only have to file a tax return if HM Revenue asks you to. You could find yourself with a fine if your return is late or you don’t complete one when asked, so bear this in mind.

When taxes apply

Non-profits aren’t exempt from all taxes; here is what your organisation has to pay tax on:

  • Dividends received from UK companies before 6th April 2016
  • Profits from developing land or property
  • Purchases, but take note of the special VAT rules for charities

The type of charity you run depends on which tax form is to be filled out. If your charity is a limited company or unincorporated association, you also need to complete a Company Tax Return, if it’s a trust then the Trust and Estate Self Assessment tax return is right for you.

Useful non-profit accounting software

Dealing with non-profit and charity accounting can prove tricky, so if you don’t want to go at it alone, you can count on the numerous software available. Many small businesses don’t have the budget for pricey software, but luckily there are lots of free or affordable options out there.

By having all your records in electronic form, it makes it easier to keep on top of your finances and know the expected income and expenditure each month. The software needs to be able to deal with contributions from donors, grants, investments, and fund raising events as accurately as possible.

Non-profit organisations are always hoping to attract new people and software can help you out with this task. Readable reports for funding sources are necessary so that others can see where their contributions have gone/are going. Non-profit accounting software can also help you plan future initiatives.

It is especially helpful if this software can predict cash flow, so you know what to expect financially and can be more prepared for how unpredictable funding can be. It is of utmost importance that non-profit organisations organise their spending, since there’s always the risk of unforeseen circumstances. The more prepared you are, the less disruptive this will be.

The software program needs to be easy to use and flexible, since many different users will be operating it. Non-profits are often staffed by volunteers, who might not necessarily have charity accounting training, so it helps if the software is uncomplicated and doesn’t need much familiarisation time.

Please note the legal disclaimer relating to this article.

Tax returns Operating costs Balance of accounts