Charitable status: an introduction
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Eligibility for charitable status
Only some non profits are eligible for charitable status. To be a charity an organisation must:
- exist for purposes that the law recognises as exclusively charitable. (The 2006 Charities Act lists 13 charitable purposes.)
- exist for the public benefit.
Pros and cons of charitable status
Charitable status brings both privileges and obligations. Charities must abide by charity law and if you are a charity trustee you have specific duties.
Some social enterprises find the restrictions of charitable status conflict with their objectives. Some social enterprises (for example community interest companies) are not eligible to be charities.
Privileges of charitable status
- Charities are generally trusted and supported by the public particularly by donations
- Charities can access funds, especially grants, that are not available to non charitable organisations
- Charities enjoy a number of tax advantages, for example, Gift Aid relief, exemptions from stamp duty, inheritance tax on legacies, bank interest, rate relief and certain trading activities.
Responsibilities of charitable status
- The charity must operate within its objects which must be charitable. Changing the charity’s objects is a legal process and can be lengthy and complex.
- Charities are subject to complex financial rules for example:
- There are restrictions on trading.
- A significant element of VAT cannot be recovered by charities.
- Charities cannot raise equity finance
- Charities must apply to HMRC for recognition of their charity for tax purposes either by providing their Charity Commission registration number or by satisfying HMRC they are charitable.
- Trustees cannot usually be paid, other than reasonable expenses. Ordinarily employees of a charity do not serve on its governing body, although in some circumstances the Charity Commission will allow this.
- In England and Wales charities with income of over £5000 a year are required to register with the CC. All registered charities must prepare a Trustees’ Annual Report (TAR) and accounts. However the amount of information that has to be provided and to whom varies according to the size of the charity. The larger the income of the charity the more information needs to be made available. Different rules apply in Scotland and in Northern Ireland.
- Charity trustees are required to avoid conflicts between charitable and personal interests.
- Charities must follow Charity Commission guidance on political campaigning.
Regulation and registration of charities
Charities are regulated by the Charity Commission in England and Wales, by the Office of the Scottish Regulator in Scotland and in Northern Ireland by the newly established Northern Ireland Charity Commission. (The information on this website relates to England, bear in mind that there may be some differences in Scotland and Northern Ireland).
Charities only need to register with the Charity Commission once they reach a particular size, when they are given a registration number. (Charities who are too small to register with the Charity Commission but want to take advantage of the tax advantages should register with the HMRC who will provide an HMRC Charity number. This should be accepted by banks and grant funders as evidence of your charitable status.)
- The Charity Commission has more information on charity essentials
- The Office of the Scottish Charity Regulator (OSCR)
- The Charity Commission NI (CCNI)
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