Guide for Charities and the Voluntary Sector
We hope our Guide to Charities and the Voluntary Sector will assist you - click on a link to read more information on that subject:
- Introduction
- Charities
- Non-Charitable Public Benefit Bodies
- Accounting and Reporting
- Taxation and VAT
- Disclaimer
1. Introduction
Organisations working in the voluntary sector will either be unincorporated associations or incorporated.
Unincorporated associations have no existence in law i.e. they are not legal persons whereas limited companies are. It follows that if problems arise from the activities of organisations in the voluntary sector then the responsible individuals of an unincorporated association may be personally liable for wrongs committed whereas in the case of limited companies, at least in the first instance, it is the Company that is liable to the injured party. As a consequence it is increasingly common for such organisations to be incorporated.
2. Charities
Broadly there are two requirements for a voluntary organisation to qualify as a charity - their activities must be for an approved purpose and they must demonstrate that they provide a public benefit.
The original qualifying purposes set down in the Statutes of Elizabeth (the First): for the relief and poverty and sickness and the advancement of education and religion, have now been extended to another eight. These include some clearly useful ones (the advancement of arts, heritage, culture, science and public participation in sports) and some very-soggy PC ones (the promotion of religious or racial harmony, equality and diversity), but which no doubt have their supporters too. The advancement of animal welfare is now recognised.
In recent years Government has wished to further involve the voluntary sector in the delivery of services but, at the same time, have required greater accountability and they have sought that accountability through the establishment of the Office of the Scottish Charities Regulator (OSCR).
All bodies wishing to operate as charities in Scotland are required to register with the OSCR.
Charities registered with the OSCR will (it is intended) have an additional option to being either an unincorporated association or a limited company, they may become a Scottish Charitable Incorporated Organisation (SCIO), a corporate body with independent legal identity intended to give its members the protection of limited liability. SCIO’s are not available at the time of writing but it is understood that the Scottish Executive is working towards finalising its plans for them. (Hopefully 2009 – they were originally planned for 2007).
3. Non-Charitable Public Benefit Bodies
Since charities have no requirement normally to pay dividends, it is common for charitable companies to be limited by guarantee i.e. all the members agree to contribute a sum of say, £1.00 each in the event of the Company going into insolvent liquidation.
Social enterprises and not-for-profit bodies generally, wishing the protection of limited liability, may also choose to carry on their activities through a company limited either by shares or by guarantee (see charities). But such organisations commonly require funding and investors may wish to see a return on their investments. In such cases a company limited by shares can pay a dividend if required whereas it cannot do so if it has no shareholders. This can be attractive to both potential investors and to the organisation concerned since permanent funding can be attracted in exchange for shares rather than having to rely on loan funding only.
An alternative is a Community Interest Company (CIC). A CIC cannot be a charity but it could be a useful way of operating a trading activity, such as a charity shop and matters can be arranged so that by covenanting all its profits to its associated charity that Corporation Tax on its profits is avoided. A charity in fact can register a CIC as a subsidiary company (if a charity itself is a company). CIC’s are intended to provide a convenient vehicle to contain assets established for public benefit purposes but where charitable status is either not available or not desired.
Many voluntary organisations pursue a variety of social objectives but the protection of limited liability has only been available either through limited companies formed under the Companies Acts or through charitable arrangements. The former have not been ideal since they were designed for commercial purposes and the latter may not have been available or desirable. While CIC’s do not have certain tax advantages of charities, the regulatory regime applicable to them should be less demanding than that for charities.
Unfortunately, in practice the advantages (if any) are very limited as against not-for-profit limited companies and since they are subject to the additional compliance and reporting burden of the CIC Regulator over and above their usual Registrar of Companies compliance, they have not to date proved too popular.
4. Accounting and Reporting
Limited companies (unless registered under the Industrial and Provident Societies Acts) are obliged to maintain certain information at the Registrar of Companies, including accounts and an Annual Return, all of which is available for public inspection. It includes the names of the members and officials of the Company. The reason being that if the protection of limited liability is required then the public has a right to know with whom it is dealing.
Charities registered with the OSCR must submit an Annual Return, a Supplementary Monitoring Return and a set of accounts. The Trustees or Officers of the charity must also prepare an Annual Report. Reporting requirements differ depending upon the size of the charity. Some require no third party reporting at all, others require an Independent Examiner’s Report and some larger charities may require an Audit.
An Independent Examiner’s Report must be given by a member of one of the listed professional bodies and an Audit conducted by a Registered Auditor. We are qualified to undertake both on your behalf.
The Independent Examiner’s Report requires the examiner to state, broadly, whether anything has come to his attention to give reasonable cause to believe that either proper accounting records have not been kept or that the accounts do not agree with the records, or that the accounts do not comply with the regulations. If we prepare the accounts on your behalf then we will ensure that they comply with the regulations.
The examiner is also required to report any material expenditure or action that appears not to be in accordance with the purpose of the charity.
The distinction between an Independent Examination and an Audit is chiefly that the auditor is required to give an opinion as to whether the accounts give a true and fair view of the income and expenditure of the year and of the state of the charity’s affairs at the year-end. Audit is a regulated activity and Professional Auditing Standards require that such audits be undertaken in a prescribed manner. They are necessarily therefore more formal, involve greater responsibility and are as a result more expensive than independent examinations.
The Trustees Annual Report is required to contain certain information including the charity’s objectives, a review of its financial position, an explanation of the salient features in the accounts, a review of the development of the charity and its activities and achievements during the year and its future plans and commitments.
The accounts of charities are (unfortunately) subject to a battery of regulations including the Charities Accounts (Scotland) Regulations 1992, the Charities (Accounts & Reports) Regulations 2000, the Charities Accounts (Scotland) Regulation 2006 and the Charities and Trustee Investments (Scotland) Act 2005. In addition there is a substantial Statement of Recommended Practice for charities published by the Professional Accountancy bodies. The current rules that largely govern the conduct of Scottish charities are to be found in the Law Reform (Miscellaneous Provisions) (Scotland) Act 1990. The OSCR itself was established by the Charities and Trustee Investment (Scotland) Act 2005. Formerly the Inland Revenue had responsibility for charities in Scotland.
The OSCR is understood to wish to apply a proportionate ‘light touch’ to the regulation of charities, but laymen commonly find that the Regulator’s idea of what constitutes a ‘light touch’ reporting regime to be decidedly daunting. It need not be overwhelmingly so if professional assistance is engaged.
The OSCR has a variety of enforcement powers to ensure proper and timely compliance.
Non-charitable companies have no further reporting burden beyond that of the Registrar of Companies. Non-charitable unincorporated associations normally have none at all.
CIC’s however are also regulated by the CIC Regulator. It, briefly, requires that the Company pass a Community Interest Test at the outset and maintain it thereafter, and deliver an annual Community Interest Report, the contents of which are prescribed by the Registrar.
5. Taxation and VAT
There is a widespread but quite incorrect belief that charities are exempt from tax and VAT. Their income is certainly exempt from Income Tax but may very well be subject to Corporation Tax. Broadly, the charity will be exempt from Corporation Tax on interest and on profits generated from fund raising events within certain restrictions. The conditions include that the event is organised and promoted primarily to raise money for the benefit of the charity and the term ‘event’ implies a one-off or an occasional activity. Which means that running a shop or a bar cannot qualify. Typically dances, concerts, fêtes, car boot sales, quizzes and displays will qualify.
Income from trading activities however will be subject to tax except in a particular, very limited circumstance where it can be demonstrated that the trade is actually carried on as part of the primary purpose of the charity. For example a religious charity selling bibles or a charitable clinic charging patients. A further exemption is available where the beneficiaries carry out the trading, for example the sale of items by disabled people.
VAT is a tax on supplies made rather than income earned. Any supplies of goods or services made by the charity in the way of business are subject to the normal VAT rules. That means that if the supplies made exceed the VAT registration limit then registration may be necessary and VAT charged and accounted for on the supplies that it makes. A VAT registered organisation may be able to reclaim VAT suffered on certain costs which it is obliged to make for the purpose of making the supplies to its customers.
Ordinarily only a VAT registered organisation can reclaim input VAT of any variety, however certain limited supplies to charities may be zero-rated by the supplier i.e. the supplier does not charge the charity VAT. Such supplies include talking books for the blind and certain aids for disabled persons, medicinal products and equipment and so on. Some advertising can also be zero-rated.
However, it must be emphasised that in common with much other UK taxation and VAT law, the rules relating to charities are detailed and complex and occasionally uncertain in their impact.
Organisers should take advice if they have the least doubt as to their entitlement to exemption.
Unincorporated associations and not-for-profit companies, including CIC’s, will usually be liable to Corporation Tax on their income sources in the normal way. (There is however an exemption from tax where the sum of tax payable is less than £100 – it costs too much for the Revenue to collect it.) But not all income is taxable, most importantly grants received from funding sources will not normally be taxable since they have not arisen from a taxable source i.e. they do not arise from trading.
Certain organisations, typically Social Clubs, are often exempt from Tax on their profits as a result of the principle of mutuality i.e. The club only trades with its members (allegedly), and the club consisting only of its members, cannot make a profit by trading with itself. Were it to trade with non-members e.g. by permitting non-members to purchase drink at the bar or allow them use of the facilities in exchange for a fee, a green fee on a golf course perhaps, then it may be liable to tax on the profits arising as a result.
6. Disclaimer
While we hope the above has been found to be useful it is intended only as a general guide, may not reflect the very latest developments in tax law, and cannot be a substitute for professional advice.
We cannot accept any responsibility for loss occasioned to any person acting or refraining from acting as a result of material contained in this guide.