Non-profit ac­count­ing

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 ac­count­ing is simpler than ac­count­ing for for-profit or­gan­isa­tions since it involves less paperwork. Our article on the topic will outline the different types of non-profit or­gan­isa­tions and what they need to consider, including tax reliefs and ex­emp­tions as well as what to look for in non-profit ac­count­ing software programs should you choose to use one.

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 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.

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

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.

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

• Dividends received from UK companies before 6^th 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.

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.