It’s great news if you’re thinking of starting a charity – they are the driving force behind much of the positive social change that occurs throughout the world. Rules surrounding the establishment of charities are strict because registered charities gain benefits, such as tax breaks, to help them pursue their causes. This article helps you to understand how an organisation gains charitable status, and how it must operate to remain compliant with relevant legislation.

It’s great news if you’re thinking of starting a charity – they are the driving force behind much of the positive social change that occurs throughout the world. Rules surrounding the establishment of charities are strict because registered charities gain benefits, such as tax breaks, to help them pursue their causes. This article helps you to understand how an organisation gains charitable status, and how it must operate to remain compliant with relevant legislation.

What is a charity?

Technically speaking, a charity is a type of non-profit organisation, which is an umbrella term to describe organisations that use any operational profit to achieve their aims rather than reward shareholders or owners.

Note that not all non-profit organisations are charities. Non-profits include cooperatives, where people voluntarily cooperate to achieve mutual goals, or foundations. Charities are differentiated from other non-profits by their mandate – they exist to serve philanthropic causes that contribute to the public good.

When does an organisation become a charity?

Michael Buckworth, founder of London-based Buckworth Solicitors, told inspiresme.co.uk that organisations gain their charitable status not by using a specific structure but by meeting the requirements of the Charities Act 2011. In short, charities “must be established for an exclusively charitable purpose and must operate for the benefit of the public.”

Charitable organisations that bring in over £5,000 per year are required by law to register with the Charity Commission (the Office of the Scottish Charity Regulator in Scotland and HMRC in Northern Ireland), who will judge the organisation based on the criteria outlined in the Charities Act 2011.

Buckworth continued: “Applications for registration by charities falling below the income threshold will be considered by the Charity Commission only in exceptional circumstances, for example where substantial funding rests upon it being a registered charity.”

Excepted and exempted charities

All charities earning over £5,000 a year must register with the Charity Commission except those listed as either exempt or excepted.
  • Excepted charities do not have to register, either because of legislation or an order by the Charity Commission, but are still regulated by the Charity Commission. These include churches, charitable arms of the armed forces and Scout and Guide groups. If excepted charities earn over £100,000 a year, they lose their right to excepted status.
  • Exempted charities are not legally able to register with the Charity Commission, and are not regulated by them because they regulated by another body. Exempted charities include national museums, universities, and the governing bodies of voluntary and foundation schools. Most exempt charities are listed in Schedule 3 to the Charities Act 2011.

Charities that operate abroad

Registration with the Charity Commission does not endow charitable status on the organisation in any other geographic jurisdiction; charities that want to operate abroad, including in Scotland and Northern Ireland, must seek registration with the relevant department.

Because different jurisdictions have different rules surrounding charities, there can be legal issues associated with operating as a charity in places where the charity is not registered. You must ensure you are complying with all relevant legislation.

Registering with the Charity Commission

  • Finding trustees – charities are run by trustees, who act in the charity’s best interest. If you work with vulnerable adults or children, potential trustees should be CRB checked
  • Clearly know the public benefit – charities that do not obviously contribute to the public benefit will have their application turned down
  • Choose the name and purposes – come up with a name (try to make it suit the purpose and nature of the charity) and identify exactly what the purpose of your charity will be
  • Create a governing document – this is known as the charity constitution and codifies the rules and principles on which the charity will operate
Once you have completed these steps, you’ll need to have all relevant documentation available as PDFs, including your governing document and bank statement, so they can submitted alongside your online application.

Once these have been submitted to the Charity Commission, a Trustees Declaration [PDF, 48kb] will be generated which all trustees will need to sign and return. From this point, barring any complications, the Commission will take around 30 days to confirm registration of your charity.

Regulatory requirements of charities

Once registered with the Charities Commission, charities are expected to keep up-to-date records and publish accounts and statements to show how funds have been used in pursuance of the charitable purpose(s).

All charities must prepare a Trustees’ Annual Report (TAR). The information that needs to be submitted depends on the charity’s annual income.
  • £10,000 or less: you only need to inform the Commission if the charity’s details, such as area of operation, expenditure and income, or trustee details
  • £10,000 - £25,000: you must complete an annual return of the charity’s details, the same as above, but are required to submit it each year, even if the charity’s details do not change
  • £25,000 - £500,000: charities must return Part A of the annual return form, confirm there have been no serious incidents that need to be reported, and submit their Trustees’ Annual Report (TAR) and audited/examined accounts and the examiner’s reports
  • £500,000 - £1,000,000: same as above but must also submit Part B of the annual return, which details financial information
  • £1,000,000+: same as above and must also submit Part C of the annual return, which summarises the charity’s aims, activities and achievements.

Tax benefits for charities earning under £5,000

Michael Buckworth says that charities not registered with the Charity Commission are still able to receive favourable tax benefits, which include exemption from income, capital gains and corporation tax on revenue, the ability to use the gift aid system, and exemption from inheritance tax for donors.

“The same tax advantages as are available to registered charities can be secured by a charitable organization simply by seeking a clearance from HMRC.”

Registration with HMRC also confers reputational advantages – charitable organisation that can’t register with the Charity Commission, through no fault of their own, may be regarded with suspicion by potential donors. Recognition of their charitable status by HMRC can help to mitigate this – charities can give their HMRC charity number as evidence.

Expenses and remuneration

According to Michael Buckworth, the “trustees of a charity have an overarching duty to ensure that the resources of the charity are protected and applied to further the charitable purpose.”

Although this mandate must drive all activity, it is particularly important when it comes to remunerating employees. There are specific rules that charities must abide by when it comes to salaries.

“A charity can pay employee salaries and wages but there must be internal financial controls in place to ensure that the charity makes payments at the appropriate rate only to genuine employees of the charity,” explained Michael.

“Policies and procedures must be put in place to ensure that salaries and business expenses are properly authorized and awarded. In particular, charities are required to ensure that no individual employee can influence his own remuneration.”