Non-profit accounting – Three Things to Consider When it Comes to Compliance

Non-profit organisations are required to carry out several activities by law when it comes to accounting and financial management in order to stay compliant.

However, the various laws surrounding non-profit organisations such as the Charities Act 2011, the Charities Act 2016 and the Companies Act 2006, can make even the most basic accounting requirements seem like a complex task.

In order to reduce the panic and allow you to focus on the goals that drive the charity forward, below we explain three key areas for non-profits to consider that will help them stay compliant and avoid any legal repercussions.


Your business structure

The first step to understanding what is legally required of you to stay compliant is obtaining a clear understanding of what type of legal entity you are. Non-profit organisations can be structured in many ways, so it’s vital that you understand how your activities, objectives, and overall income will determine your legal structure.

As a non-profit organisation, you could be registered as a charitable company or a community interest company with Companies House, a charity with the Charity Commission or even as a co-operative organisation. Each entity has its own laws surrounding the financial information you need to record and submit.

Let’s say that you are registered as a charity with the Charity Commission; you are required to prepare a set of accounts, an annual return, and a trustees’ annual report which summarises the work that your organisation has carried out throughout the year.

On the other hand, if you’ve foreseen a risk of incurring financial liabilities, you could be registered as a charitable company. In that case, Section 8 of the Companies Act 2006 states that your subscribers must sign and authenticate a Memorandum of Association in addition to the above, showing that they wish to form a company and agree to become members. This document MUST to be sent to the Charity Commission, or you could incur a fine.

Requirement to pay tax

As a non-profit organisation, you are eligible to apply for certain tax exemptions and reliefs such as corporation tax, and income tax for trustees, but you must be recognised by the HMRC to benefit. 

HMRC states that the types of income that are exempt from tax are:

  • donations
  • profits from trading
  • rental or investment income, eg bank interest
  • profits when you sell or ‘dispose of’ an asset, like property or shares
  • property purchases

However, you’re not going to be exempt from all taxes, particularly if your non-profit organisation has used its income on ‘non-charitable expenditure’ or made significant purchases. 

The types of income that non-profits are required to pay tax on according to HMRC are:

  • dividends received from UK companies before 6 April 2016
  • profits from developing land or property
  • purchases – but there are special VAT rules for charities

If any of these apply, your organisation will need to fill out a tax return and send it to the team at HMRC.

How you keep your records

Although profit won’t be your overall metric for measuring success, you are legally required to keep accurate and up to date records of your non-profit organisation’s donations and income.

The length of time you keep records will vary and depends on the type of record (e.g. cash books, invoices, receipts, Gift Aid records, etc.).

Although we would recommend that you confirm the exact length of times with your accountant or business adviser, the government says that you must keep financial records for at least six years from the end of the last related financial year.

Some non-profits are also legally required to be audited. Charities with a gross income of more than £25,000 in their financial year are required to have their accounts independently examined or audited.

An organisation with a gross income between £25,000 – £1 million will require an independent examination, whilst one with a gross income of £250,000 and assets exceeding £3.26 million, will be required to have an external audit carried out by a qualified team.

Audits are an important tool in preventing fraud and reassuring trustees and fundraisers that your non-profit is being managed responsibly.

Our specialist team are always at the other end of the phone if you are ever unsure or need some reassurance from an approachable accounting partner. 

Or, you can arrange an office consultation with one of our friendly experts here at Shenward LLP Chartered Accountants and Business Advisors. 

Why not call either our Bradford office on 01274 722 666 or our Leeds office on 0113 246 1006. Or, if you prefer, you can simply email and we’ll get back to you within 24 hours.