Not-for-profit organisations might be set up with different goals to profit-making ones, but they’re still required to manage and report on their finances. The type of accounting records non-profit organsiations need to keep depends on how they’re set up and registered, so we’ll go this in more detail.

What is a not-for-profit organisation?

The phrase ‘not-for-profit’ is something of a catch-all term which describes an organisation set up to deal with an issue in the public interest. Their activities are usually for the benefit of the wider community rather than the financial gain of an individual or a group of owners.

Non-profits are often set up to deliver a project or ongoing solution, such as providing arts facilities for local people, sports clubs for youngsters, or to run a food bank for people in need.

Are not-for-profits the same as charities?

You might hear the terms used interchangeably, but not-for-profit organisations aren’t necessarily always registered charities. An organisation must meet the Charity Commission’s rules and regulations to be called a registered charity, but a not-for-profit doesn’t have the same restrictions.

• A registered charity is always a non-profit organisation

• A not-for-profit organisation isn’t always a registered charity

How are non-profit organisations different to a business?

Most businesses will have a goal in mind, but this often boils down to ‘make a profit for the owners’. Non-profit making organisations such as Community Interest Companies and charites are usually set up to support a particular area of society.

A not-for-profit might still create profit, but this is usually used to pay for any costs and then reinvested back into what it’s trying to achieve.

What struture can a not-for-profit (NFP) be?

There are several options to choose from when you’re setting up a non-profit. It’s an important decision because the structure affects who is responsible for it and what it can do. The National Council for Voluntary Organisations go over this in far more detail!

What is a Community Interest Company?

A Community Interest Company (CIC) is a limited company which has additional features (and reporting requirements!). They exist to carry out activities in the interest of the community or a specific area of society.

Known in the accounting world as a Public Benefit Entity (PBE), CICs are at liberty to make a profit and act just like any other business – as long as they comply with their aims. Community Interest Companies (CICs) are even allowed to give their shareholders dividends, but these are capped at a maximum of 35% of their profits. 65% of the profits in a CIC must be used for community purposes.

Are Community Interest Companies the same as charities?

No, CICs are not the same as registered charities. An organisation can’t be both a charity and a Community Interest Company. As such, CICs don’t need to conform to Charity Commission rules.

Their aims can be much broader than a charity’s, meaning they can be set up to generate income for charities. Charities often set up subsidiary CICs to manage their commercial activities, or for related work like lobbying whilst the charity delivers on its aims.

Sometimes CICs will be set up as joint ventures between charities and public bodies to deliver on mutually beneficial aims.

Do not-for-profits submit tax returns?

An organisation’s reporting requirements usually depend on its structure. A good place to start is whether or not the organisation is a registered charity:

• An organisation which isn’t a registered charity will need to submit a tax return
• Registered charities only need to submit tax returns if they receive income which doesn’t qualify for tax relief

What sort of tax return should a non-profit use?

If it needs to send a tax return, the type of tax return an organisation submits depends on its legal structure.

For instance, Community Interest Companies, regular companies which are not-for-profit, and charities set up as a limited company or unincorporated organisation must submit Company Tax Returns. A charity set up as a trust must complete a Trust and Estate Self Assessment tax return.

What other reports are needed?

Non-profits might also have additional reporting requirements depending on what sort of organisation they are. For instance:

• A registered charity must submit an annual return to the Charity Commission if its income is more than £10,000
• A Community Interest Company must also submit separate reports

What records do not-for-profit organisations need to keep?

All organisations must keep accounting records, regardless of what they’re for or how they’re set up. Most businesses use Financial Reporting Standards (FRS). These change depending upon the size and nature of the business, but for registered charities there are different standards entirely.

The Statement of Recommended Practice (SORP) is a reporting standard used by registered charities when they report on their activities. It takes into account the fact that charities are totally different from profit-making enterprises, and that this naturally affects the reporting requirements.

In short, if the organisation is a registered charity, it must use the Statement of Recommended Practice (SORP). Anyone else can use the Financial Reporting Standards (FRS).

Showing what the funds are for

This is arguably the biggest difference between a normal limited company and an NFP or charity (even if they’re also set up as limited companies).

Businesses are free to earn money and then use it as they see fit, but the same isn’t always true for non-profits. When people give donations to a charity, they might do so without any specific expectations, but will likely have some sort of general understanding that the money will be used in a certain way.

Reporting on restricted funds

When local authorities or grant-making bodies like The Arts Council or National Lottery give money, it’s often given for a specific reason. The organisation which receives it is not able to use that income for a different purpose. Called ‘restricted funds’, money given for a specific purpose must be kept separate and reported upon.

For example, an organisation might ask the National Lottery for cash to deliver five-a-side football sessions for disadvantaged youngsters. They wouldn’t then be able to use some of it to build a new office.

This means, at the very least, a not-for-profit needs to be able to categorise income in terms of restricted or unrestricted funds.

Accounting for expenses in charitable organisations

When donors give money for projects, they will sometimes ask that the not-for-profit reports on what it was used for. This means that a not-for-profit spending cash to provide services will also need a way to allocate expenses to specific projects so that they can report on them later.

The cost of having people to work on the project will also need adding in, as will the cost of any admin staff supporting it, for example. This can actually get quite complex and time-consuming, and we often find that it can be difficult for smaller charities to achieve.

 
Learn more about our online accounting services. Call 020 3355 4047, or get an instant online quote.