Charity accounting in the UK follows different rules from commercial business accounting. The Statement of Recommended Practice (SORP) governs how charities prepare their accounts, and the requirements depend on the size and legal structure of the charity. Getting it right is not just about compliance – it is about demonstrating to donors, funders and the public that their money is being used properly.
Regulatory framework
UK charities are regulated by different bodies depending on where they are registered.
| Jurisdiction | Regulator | Registration threshold |
|---|---|---|
| England and Wales | Charity Commission | Income over £5,000 |
| Scotland | OSCR (Office of the Scottish Charity Regulator) | All charities must register |
| Northern Ireland | Charity Commission for Northern Ireland | All charities (registration ongoing) |
Legal structures for charities
| Structure | Key features |
|---|---|
| Charitable Incorporated Organisation (CIO) | Limited liability; no Companies House filing; registered with Charity Commission |
| Charitable company (CLG) | Company limited by guarantee; dual regulation (Companies House and Charity Commission) |
| Unincorporated charitable association | Simple to set up; trustees have personal liability |
| Charitable trust | Created by a trust deed; trustees manage the assets |
The CIO has become the most popular structure for new charities because it offers limited liability without the dual filing requirements of a charitable company.
SORP explained
The Charities SORP (Statement of Recommended Practice) is the accounting standard that charities in the UK must follow when preparing their accounts. There are two versions:
| SORP version | Applies to |
|---|---|
| FRS 102 SORP | Charities preparing accruals accounts under UK GAAP |
| FRS 102 SORP (Section 1A) | Smaller charities qualifying as small entities |
Charities below the audit threshold that choose to prepare receipts and payments accounts do not need to follow SORP, but they still have reporting obligations.
Key SORP requirements
SORP requires charities to produce:
- Statement of Financial Activities (SoFA) – the charity equivalent of a profit and loss account
- Balance Sheet – assets and liabilities at the reporting date
- Notes to the accounts – explaining accounting policies, fund movements and other details
- Trustees’ Annual Report – a narrative report on the charity’s activities and achievements
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Fund accounting
This is the most distinctive feature of charity accounting. Unlike commercial businesses where all money goes into one pot, charities must track money according to the restrictions placed on it by donors and funders.
Types of fund
| Fund type | Definition | Example |
|---|---|---|
| Unrestricted funds | Money that can be spent on any charitable purpose | General donations, fundraising event income |
| Designated funds | Unrestricted money that trustees have earmarked for a specific purpose | Building repair fund (self-imposed, not donor-imposed) |
| Restricted funds | Money that must be spent on a specific purpose as specified by the donor | A grant for youth work; a donation “for the food bank” |
| Endowment funds | Capital that must be retained; only the income can be spent | A bequest where the capital is invested and interest funds operations |
Getting fund accounting wrong is one of the most common and serious errors in charity accounting. If you spend restricted money on something other than its stated purpose, you are in breach of trust. This can lead to regulatory action, loss of donor confidence and personal liability for trustees.
Practical fund management
- Record the restriction when income is received – check the grant agreement, donation letter or appeal wording
- Code transactions to the correct fund in your accounting system
- Monitor fund balances regularly – a restricted fund should not go into deficit
- Transfer between funds only when legitimately permitted (e.g., when the restriction is fulfilled or the donor agrees to widen the purpose)
Income recognition
SORP has specific rules about when charities should recognise income.
| Income type | When to recognise |
|---|---|
| Donations and gifts | When received (or when it becomes probable and measurable) |
| Legacies | When you are virtually certain of receipt and can measure the amount |
| Grants (performance conditions) | As the conditions are met |
| Grants (no performance conditions) | When the entitlement criteria are met |
| Trading income | When the goods or services are provided |
| Investment income | When receivable |
Legacies require particular care. A charity may know it is named in a will but cannot recognise the income until:
- Probate has been granted
- The executors have confirmed the estate has sufficient assets
- The amount can be measured reliably
- It is virtually certain the charity will receive the funds
Until these conditions are met, the legacy should be disclosed as a contingent asset in the notes to the accounts, not recognised as income.
Expenditure
SORP requires expenditure to be classified by activity:
- Expenditure on raising funds – fundraising costs, trading costs, investment management
- Expenditure on charitable activities – the actual delivery of the charity’s purposes
- Other expenditure – governance costs (audit fees, trustee meetings, legal compliance)
Support costs
Support costs (finance, HR, IT, premises) must be allocated across activities on a reasonable and consistent basis. Common allocation methods include:
- Staff time spent on each activity
- Floor space used
- Number of transactions
The method chosen should be disclosed in the notes to the accounts and applied consistently from year to year.
Reporting thresholds
The level of scrutiny your accounts receive depends on the charity’s income and assets.
England and Wales
| Income | Accounts requirement | Scrutiny requirement |
|---|---|---|
| Under £25,000 | Receipts and payments (or accruals) | No statutory requirement (but good practice) |
| £25,000 to £1,000,000 | Receipts and payments (or accruals) | Independent examination |
| Over £1,000,000 | Accruals (SORP) | Audit |
| Over £250,000 (if gross assets over £3.26m) | Accruals (SORP) | Audit |
Scotland
OSCR has different thresholds:
| Income | Scrutiny requirement |
|---|---|
| Under £100,000 (and assets under £3.26m) | Independent examination (may be by a lay person) |
| £100,000 to £500,000 | Independent examination (by a qualified person) |
| Over £500,000 | Audit |
Independent examination vs audit
An independent examination is a less rigorous (and less expensive) form of scrutiny than a full audit. The examiner checks whether the accounts are consistent with the underlying records and whether there are any matters of concern.
An audit is a full examination by a registered auditor, providing a higher level of assurance. It is significantly more expensive and time-consuming.
| Feature | Independent examination | Audit |
|---|---|---|
| Who can do it | Qualified accountant (or lay person for small charities) | Registered auditor only |
| Level of assurance | Negative assurance (“nothing has come to my attention”) | Positive assurance (“in our opinion, the accounts give a true and fair view”) |
| Typical cost | £500-£3,000 | £3,000-£15,000+ |
| Time required | 1-3 days | 1-4 weeks |
Trustees’ Annual Report
All registered charities must produce a Trustees’ Annual Report alongside their accounts. The contents depend on the charity’s size.
Required for all charities
- Charity name and registration number
- Names of trustees (and those who served during the year)
- Principal address
- Description of the charity’s purposes and activities
- Summary of achievements and performance during the year
- Financial review (including reserves policy)
Additional requirements for larger charities (income over £500,000)
- Risk management statement
- Plans for future periods
- Grant-making policies (if applicable)
- Investment policies
- Fundraising practices statement (required by the Charities Act 2022)
Gift Aid
Gift Aid allows charities to reclaim 25p for every £1 donated by a UK taxpayer. This is one of the most valuable tax reliefs available to charities.
How it works
- The donor makes a Gift Aid declaration (written, verbal or online)
- The charity reclaims the basic rate tax (25% of the gross donation) from HMRC
- A £100 donation becomes £125 for the charity
Small donations scheme (GASDS)
For cash donations and contactless card donations of £30 or less where no Gift Aid declaration is obtained, charities can claim under the Gift Aid Small Donations Scheme. This allows a top-up payment equivalent to Gift Aid on up to £8,000 of small donations per year (worth £2,000 in top-up payments).
VAT for charities
Charities are not automatically exempt from VAT. The rules are complex:
- Business activities (trading, hiring out premises) are subject to normal VAT rules
- Non-business activities (providing free services funded by donations) are outside the scope of VAT
- Some supplies have reduced rates or exemptions (e.g., advertising for charities is zero-rated)
- Fundraising events are exempt from VAT if the charity qualifies and the event meets the conditions
If a charity has both business and non-business activities, a partial exemption calculation may be needed.
Common accounting mistakes charities make
- Mixing restricted and unrestricted funds – spending restricted money on general purposes is a breach of trust
- Recognising legacy income too early – follow the SORP criteria strictly; premature recognition overstates income
- Not filing on time – the Charity Commission publishes the names of charities that file late; it damages credibility
- Inadequate reserves policy – trustees must explain why they hold the reserves they do
- Not claiming Gift Aid – many charities fail to collect Gift Aid declarations or delay submitting claims
- Ignoring the GASDS – the small donations scheme is free money that many charities overlook
- Treating all grants as unrestricted – read the grant agreement carefully; most grants carry restrictions
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