The world of charity accounting is a complex but often misunderstood area. Shifting focus from limited companies and individual tax structures, here we provide an introduction to the accounting framework for charities and their subsidiaries.
Our director Rob Stokes has extensive experience advising a range of charities, and can advise on the core principles, compliance requirements, and the role trustees play in ensuring financial transparency and proper governance.
It is important to understand the difference between incorporated and unincorporated charities. The structure of a charity – whether it operates as a limited company or a trust – affects both its regulatory obligations and the liability exposure of trustees. Today, many newer charities are opting to set up as limited companies to ensure better protection for trustees, who are usually volunteers. This protection is crucial when those volunteers are ultimately responsible for large sums of money and complex accounting.
It’s important to note that charities do not automatically become registered with the Charity Commission at the point of creation. In many cases, organisations begin with charitable aims before applying for registered status. Factors like demonstrating a genuine gap in service provision, avoiding duplication of charitable efforts, and ensuring feasibility are critical to successful registration. Speaking to qualified advisers at the planning stage can make this process smoother and future-proof the charity from an accounting and structural standpoint.
Charity accounting can be significantly more complicated than commercial accounting, largely due to the fund accounting system used. Charities must report income and expenditure against specific funds – separating unrestricted donations from those made for specific purposes. This requires well-structured financial systems and often, expert guidance to ensure records meet standards defined by the Statement of Recommended Practice (SORP) and the Charities Act.
Moreover, charities with income over £25,000 require independent examination, and those exceeding £250,000 must use a qualified accountant. Trustees need to stay informed not only of their financial obligations, but also of changes to accounting standards – particularly as a new consultation is currently underway reviewing the size thresholds and reporting requirements. Proactively involving an accountant, like Optimum, ensures both compliance and operational efficiency. Regular support also helps trustees focus on delivering charitable aims without being overwhelmed by administrative tasks.
Many larger or national charities, such as the Salvation Army, operate trading subsidiaries. These are often set up as commercial limited companies, separate from the charity, to undertake activities that fall outside the charitable objectives – for example, running shops or providing products and services. By doing this, charities can separate risk and ensure they remain eligible for tax exemptions.
Profits from these trading subsidiaries are typically gifted back to the charity, allowing the subsidiary to benefit from corporation tax exemptions. However, the accounting for these transfers must meet strict timing and reporting rules. These subsidiaries can also affect whether the charity as a whole requires a group audit – especially if the combined income exceeds certain thresholds.
This highlights the importance of a joined-up approach to charity accounting, where the charity and any subsidiaries are handled together by advisers who understand the broader governance and disclosure landscape.
From choosing the right structure and registering with the Charity Commission, to managing restricted funds, trading subsidiaries, and ongoing compliance with evolving legislation – the message is clear: charities benefit from clear, expert advice. Trustees in particular carry a significant responsibility and must understand not only their legal obligations but also the systems and support they need to fulfil them effectively.
Charity representatives, advisers and the public should get involved in the current SORP consultation, which could reshape future reporting requirements. Participation is crucial to ensure the regulatory framework supports transparency without placing unnecessary burden on volunteers.
To gain further insight into charity finance – including trustees’ roles, the impact of trading subsidiaries, upcoming legislative changes, and real-world examples – we invite you to watch or listen to the full Optimum Live episode on Accounting for Charities and Their Subsidiaries. It’s an invaluable resource for anyone involved in or curious about how charitable organisations are run.
