Accountants for Non-Profits & Charities —
SORP Compliance, Gift Aid & Restricted Funds

The most serious governance failure in charity accounting is using restricted fund income for purposes other than those specified by the funder. Even where the alternative use serves the charity’s general purposes, it constitutes a breach of trust. We maintain fund-specific ledgers and alert trustees if spending approaches fund conditions.

Many charities — particularly smaller ones — either don’t claim Gift Aid at all or claim it incorrectly (missing qualifying donations, processing declarations incorrectly, failing to make annual reclaims). For any charity with significant individual donations, Gift Aid adds material income at no cost.

The Charity Commission requires annual accounts and annual return within 10 months of year end. Late filing results in a public ‘default’ record on the Charity Commission register — visible to funders, donors and the public. We track all client deadlines and file well in advance.

Charities must follow SORP income recognition — income is recognised when it is receivable, not necessarily when received. Grant income may need to be deferred if conditions are not yet met. Legacies are recognised when receipt is probable and measurable. Incorrect income recognition creates material misstatements in the accounts.

Registered charities must prepare accounts under the Charities SORP (Statement of Recommended Practice), which is based on FRS 102 (the UK accounting standard). SORP accounts include a Statement of Financial Activities (SOFA) in place of a profit and loss account, a balance sheet, a cash flow statement and a Trustees’ Annual Report. The accounts must be signed by trustees and, depending on income level, either independently examined or audited.

An independent examination is a less rigorous review than an audit — the examiner checks that the accounts are consistent with the charity’s records and comply with the relevant legislation. Independent examination is required for charities with gross income between £25,000 and £1 million (or £250,000 if assets exceed £3.26 million). Below £25,000, accounts need not be independently examined (unless the charity’s governing document requires it). Above £1 million, a full statutory audit is required.

Gift Aid allows UK charities to reclaim the basic rate income tax the donor paid on the donation. For a basic rate taxpayer donating £100, the charity reclaims £25 from HMRC — receiving £125 total. Higher rate taxpayers can personally claim the additional relief in their Self Assessment, but this does not go to the charity. For Gift Aid to be claimed, the donor must have paid at least as much income tax and capital gains tax as the charity intends to reclaim, and a Gift Aid declaration must be in place.

A restricted fund contains income that has been given to the charity for a specific purpose — for example, a grant from a funder to provide specific services, or a donation designated for a particular project. Restricted income can only be used for the purpose specified by the donor or funder. Restricted funds are presented separately in the SOFA and balance sheet. Trustees are legally obligated to ensure restricted funds are used only for their intended purposes.

UK registered charities are generally exempt from Corporation Tax on income and gains applied for charitable purposes — including trading income directly related to the charity’s primary purpose, investment income and capital gains. However, some charity activities (particularly commercial trading not directly related to primary purpose) may be taxable. We advise on the distinction between exempt charitable activities and potentially taxable commercial activities for every charity client.