Charitable status can be attained by trusts, associations or companies limited by guarantee. Charities must be set up to benefit the public and must register with the charities commission.
If accounting and tax position fundamentally depends on the type of entity:
- Associations have simple accounts and corporation tax return
- Trusts have more detailed accounts and complete a trust tax return.
- Limited companies require full financial statements and complete a corporation tax return.
In addition to the accounting rules for their particular type of entity, charities also have to comply with the Statement Of Recommended Practice (SORP) for Charities.
Many charities also have to have their accounts checked. This may take the form of an independent examination or an audit, depending on the size and internal rules of the charity.
There is no blanket exemption from tax for charities. There are, however specific exemptions that mean that a charity is generally not taxable on the donations it receives that it puts to the use of its charitable aims.
Larger charities with trades often set up subsidiary companies to hold and operate the trade. The trading subsidiary then donates all of its profits to the main charity. The donation means there is no tax on the trading subsidiary or the main charity. This arrangement is approved, and indeed recommended, by HM Revenue and Customs.
Charities have certain exemptions and reliefs from VAT, but again there is no guarantee that VAT is “not applicable” to charities. Often charities do not have VAT related income and therefore cannot register or cannot claim back the VAT on their costs.
As mentioned in the limited by guarantee pages, it is not possible for such a company to pay a dividend. This can mean that a small charity pays considerably more national insurance than a like for like small company.
Overall it is vital to take the best tax and accountancy advice when setting up and operating a charity.