Not For Profit Accounting: The Complexities of the Voluntary Sector

The UK not for profit sector is vast. In 2023, it was reported that the UK had 168,893 registered charities, with another 20,000 organisations without charitable status featured on the register. It’s an area we specialise in at Monahans and we’re proud to have a team of experts with years of experience on hand to support all organisations with their accountancy needs.

Charities might be the first type of organisation that springs to mind when people think of the not for profit sector, but there we also work with Academy Trusts, Registered Social Housing providers and Community Interest Companies.

When a voluntary organisation is set up, there are is a decision to be made on how they should be constituted, so we help organisations select the best option for their goals. Each structure has different rules around its regulation, statutory reporting and tax. Charities, for example, have more tax exemptions than community interest organisations, however, tax can be a complicated territory for all organisations in the sector.

Charities
Broadly speaking a charity can be set up in several ways. The first decision is whether the charity should be incorporated or unincorporated. The nuances of each option come with a range of different accountancy requirements as there are various rules an organisation must comply with.

Incorporated charities:
Are separate legal entities formed through a process under relevant laws or regulations (whether the Companies Act or more recently the Charities Act). They offer similar benefits to a limited company such as liability protection for Trustees. There is greater flexibility attached to this structure as incorporated charities can enter contracts and own property.

Unincorporated charities:
Unincorporated charities lack a separate legal identity and operate informally as associations or trusts without formal incorporation. Individuals associated with unincorporated charities may be personally liable for debts and legal obligations. Organisations in this category can face limitations in entering contracts or owning property, potentially impacting their ability to engage in certain activities or secure funding.

Charities are governed by the Charity Statement of Recommended Practice (SORP) and certain complexities accompany this framework. This includes the need to strategically plan income expenditure to ensure it’s allocated to the right project . Splitting funds into different streams can raise accountancy challenges so it’s best to get advice from a not for profit accountancy expert to ensure you are ticking all the right boxes.

To add an extra layer of expertise, Monahans is member of the Charity Tax Group, a group of specialists that help charities understand the complex tax regime. Being a Charity provides potential significant tax savings, but the rules are complex.

Academies
Academies are exempt charities which means they do not need to register for Charity Commission but do need to follow specific guidelines. The Education and Skills Funding Agency (ESFA) provides guidance called the Accounts Direction, which is essentially its take on the Charity SORP, but it has a bigger list of nuances. The Monahans team’s largest and most complex sets of accounts falls within the academy sector, which due to the level of complexity involved requires unique finance expertise.

Registered Housing
Organisations that fall into the Registered Housing category must follow the Housing SORP which outlines a different set of rules and disclosures. It’s slightly simpler in terms of receiving and allocating funds but there are extra complexities involved with owning properties and buildings.

Community Interest Company (CIC)
CIC organisations are set up just like normal companies, so they are more straightforward, but there is asset lock protection attached to them. This means the owner of the CIC is unable to exit the organisation with any money in their pocket. This type of not-for-profit organisation is set up for public benefit and if it’s shut down for any reason, the assets will be passed on, rather than claimed by Directors.

There are a number of different avenues in not for profit accounting and it can be overwhelming to understand which rules affect your business. If you need assistance from a team of experts, get in touch with me today.

James Gare