It sounds fairly obvious that not-for-profit organisations are different to profit-making ones, but this also affects the way they manage and report on their finances. It can quickly become confusing, so a good starting point is looking at the different types of charitable organisations which exist.

How are non-profit organisations different to a business?

Understanding the goals of an organisation helps the people who run it to make the best decisions for meeting those aims. Most businesses set particular targets in a business plan, revising and updating it as they go along. In practice, this more often than not boils down to ‘make a profit’.

Charities, not-for-profits, and Community Interest Companies are different, in that they’re normally set up to deal with much more specific issues.

This means that the trustees of a charity which was set up to provide audio books probably couldn’t decide to set up a bicycle race one day, unless it helped them deliver on their aims. A traditional business can be much more flexible if the owners want it to be. It’s a really important point because often, the aims of the organisation dictate how it is structured.

Are charities and not-for-profits the same thing?

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

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. In short, their activities are for the benefit of the wider community, rather than the financial gain of an individual or a group of shareholders.

They’re often set up to deliver a project or ongoing solution, such as to provide arts facilities for local people, sports clubs for youngsters, or to run a food bank for people in need.

When we talk about not-for-profits, we are really talking about an organisation that doesn’t conform to the same principles of making money for its owner that a business does. For example, a regular limited company might decide to operate as a not-for-profit organisation, and rather than paying dividends to shareholders from the company’s profits it will instead use any profits to help it meet its charitable aims.

Larger companies often set up and fund not-for-profit organisations as a charitable arm, channelling donations through a subsidiary that is in their control, but not regulated by the Charity Commission.

What is a Community Interest Company?

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

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. Shareholders can even receive dividends, but these are capped:

• A maximum 35% of the profits can be used to pay shareholder dividends in a Community Interest Company
• 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 only be either a charity or a Community Interest Company – not both. As such, CICs don’t need to conform to Charity Commission rules.

Their aims can be much broader than a charity’s, meaning that 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 charities, Community Interest Companies and 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
• If the organisation is a registered charity, it will only need to submit a tax return if it received income which doesn’t qualify for tax relief

If it does need to, 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.

There can also be additional reporting requirements depending on what sort of organisation it is. 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.

 
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