Rough guide to charity accounting legislation

Navigating financial compliance for charities in the UK

Introduction

Welcome to our straightforward guide to charity accounting requirements in the UK. Understanding your legal obligations for financial record-keeping, accounts preparation, and reporting can feel overwhelming—especially when you're focused on delivering your charitable mission.

This resource breaks down the essential requirements in plain language, helping trustees and staff understand what's needed without getting lost in legal jargon. Whether you're a small volunteer-led charity or a larger established organization, you'll find clear explanations of your obligations based on your charity's size and structure.

Remember that while this guide provides a helpful overview, it's not a substitute for professional advice when dealing with complex financial matters.

Note: Legislation changes over time
This guide reflects requirements as of January 2025

Legal foundation

The requirements outlined in this guide are based on:

• The Companies Act 2006.

• The Charities Act 2011 (which superseded the 2006 Act).

• The Charities (Accounts and Reports) Regulations 2008.

Basic record-keeping requirements

Legal obligation to keep records

Directors of companies and trustees of charities have a legal duty to maintain proper accounting records. These records must:

• Show your day-to-day financial activities.

• Accurately represent your organisation's financial position at any given date.

• Be kept up-to-date and organised.

Practical advice

• Use an accounting system that provides the information needed by your funders, committee, members, staff and regulators.

• Charities must retain all financial records for at least 5 years plus the current year.

• For charitable companies, the minimum retention period is 3 years, though keeping them longer is advisable (especially for insurance purposes).

Annual accounts requirements

There are two basic forms of charity accounts:

1. Receipts and payments accounts

Who can use this method?

• Non-company charities (including CIOs) with gross annual income of £250,000 or less.

What's involved?

• A simple summary of all money received and paid during the financial year.

• A statement listing assets and liabilities at the end of the year.

Important notes:

• Your trustees should formally choose this accounting method and record this decision in meeting minutes.

• Charitable companies cannot use this simpler method.

• While simpler, these accounts only show cash movements (for example, unpaid bills won't appear in the payments, but will be listed as liabilities).

2. Accruals accounts

Who must use this method?

• All charitable companies regardless of size.

• Non-company charities with gross annual income over £250,000.

What's involved?

• Must follow the SORP (Statement of Recommended Practice).

• Must include:

  • A balance sheet

  • A statement of financial activities

  • Explanatory notes

• Required to show a "true and fair view" in accountancy terms.

• Organizations with income over £500,000 have additional SORP requirements.

Important note:

These accounts can sometimes be confusing as they include expenses incurred but not yet paid (for example, an unpaid phone bill from the financial year would still appear as an expense and as a creditor on the balance sheet).

Practical considerations

Most small to medium charities don't prepare their own annual accounts but instead:

• Pass their accounting records to a qualified accountant.

• Use standard templates available from the Charity Commission website.

• Follow examples of accounts published on the Charity Commission website.

If you're unsure about requirements for your specific situation, consulting with an accountant who specialises in charity accounts is recommended.

Two levels of external requirements

Most charitable organisations need to have their accounts independently checked, with the level of scrutiny depending on their size.

1. Independent examination

Required when:

• Gross income is between £25,000 and £1 million.

What is it?

• A less rigorous form of scrutiny than an audit.

• Examiner reports on specific matters identified in the 2008 Regulations.

• For charities with gross income exceeding £250,000, the examiner must be a member of an approved professional organization.

2. Audit

Required when:

• Gross income exceeds £1 million.

• Total assets (before liabilities) exceed £3.26 million AND gross income is more than £250,000.

• Consolidated group accounts must be prepared and audited if the group's gross income (excluding transfers) exceeds £1 million.

What is it?

• Conducted under standards issued by the Auditing Practices Board.

• Must be performed by a registered auditor (registered with a recognized supervisory body in accordance with the Companies Act 2006).

• Generally more expensive than an independent examination.

Important considerations

• Even if not legally required: Many funders, members, or your governing document might require some form of external review even for smaller charities with income below £25,000.

• Check your governing document: Terms like "audit by a qualified accountant" may require a statutory audit even if not legally needed based on size.

• Choose wisely: Your independent examiner must be both independent and competent - ask about their experience and request references.

Filing Requirements

Charity Commission filing

• Charities with income over £25,000: Must submit:

  • Annual report

  • Annual accounts

  • Annual return

• CIOs (Charitable Incorporated Organisations): Must file accounts regardless of income level, even if dormant.

• Smaller charities: May be asked to submit documentation even if not required.

Companies House filing

• All charitable companies: Must submit:

  • Annual report and accounts

  • Annual confirmation statement

• CICs (Community Interest Companies): Must provide an additional report for the CIC Regulator.

Practical Tips

• Be aware of deadlines: Late filing can have consequences.

• Note the consequences: Companies House issues fines for late filing, while the Charity Commission "names and shames" by highlighting non-compliant organisations in red on their website.

Additional Resources

• Charity Commission guidance: Available at The Charity Commission - GOV.UK

• Independent Examination guidance: Available from the Association of Charity Independent Examiners at www.acie.org.uk