An essential guide to charity bookkeeping

Natalie Pieri FCCA

Maintaining good bookkeeping is key to a charity’s ongoing success. From restricted and unrestricted income to Gift Aid, this episode gives a rundown of best-practice bookkeeping in a charity setting.

Natalie Pieri is a chartered certified accountant with 18 years’ experience in the accounting industry. She currently runs her own firm of local accountants in Medway and works closely with the Medway Foodbank and Rapport Housing & Care in a volunteer capacity. You can find out more about Natalie’s work here:

Resources and links


Zac Parsons
Hello, everyone, and welcome to this, the Charity Professional Development Community’s 20-minute webinars. Today, I’m glad to say that we are joined by Natalie Pieri, who is going to be talking to us about the essentials of bookkeeping. So Natalie, over to you.

Natalie Pieri
Good morning. Hello, right. Let me get the presentation up on the screen here. Hopefully, you can all see that. So yep, my name is Nancy Pieri, I run a business called Accounting Connections. We’re a local firm of Chartered Certified Accountants, and I’m here today to give you an essential guide to best bookkeeping for charities.

So, there’s going to be a lot of content that we’re going to run through today; there’s just a brief overview there. I’m not going to go through it all right now, because I’m going to delve into each part in detail.

So who are charities regulated by? They’re regulated by the Charity Commission, which is a non-ministerial department of the government that was set up in 1853 as a regular bit of fact for you there.

So every charity needs to file an annual return electronically with the Charity Commission within 10 months of their year-end date. That is the set deadline for all charities. So if your charity’s end date is the 31st of March 2022, then your annual return needs to be filed with the Charity Commission by the 31st of January 2023.

The contents of what an annual return actually contains differ depending upon how big your charity is, mainly on turnover. So, as you can see there, for each turnover threshold that you hit, the annual return requirement becomes slightly more. As you can see, when you get to the £25,000 threshold there, then you go into independent examiner territory. So I’ll explain what that is.

Now, those annual return requirements are set in stone. There are, however, exceptions as there always are to every rule. If your charity constitution documents state that you must have an audit every year, then regardless of what your threshold is, your turnover threshold, you will have to get your accounts audited every year. Similarly, if you have a funder who was giving your charity money, and they stipulate that you have to be audited every year, then regardless of your turnover, you have to have an audit.

And of course, there are exempt charities. Essentially, they’re the types of charities that don’t have to comply with the thresholds. And they’re things like, oh, gosh, I will get that, I will get that to you soon. I’ll find out the list of exemptions, right, let’s move on.

When a charity’s annual income is over 25,000, the trustees must arrange for an independent person or accountancy firm to carry out their audit or independent examination of their charity’s accounts. The purpose of it is to give charities, trustees, supporters, beneficiaries, and the wider public some independent assurance that the charity’s money has been properly accounted for and that proper accounting records have been kept.

Here we are, sorry, I’ve got to the place in my notes now, apologies. Exempt charities. And we’ve got the charities that are they adhere to reporting thresholds and requirements of additional regulators. So academies, university social housing providers, they don’t have to file the documents with the Charity Commission like everybody else does.

There’s two different types of review you can have on your accounts: independent examination or an audit, I’m going to go through the difference between the two in just a second. But when you get to £25,000 in income, you have an independent examination. When your turnover hits £250,000, then you either have an independent examination or an audit, but this is all dependent upon your gross assets. If your gross assets are below £3.26 million, then it’s just an independent examination. If it’s over £3.26 million, then you’re required to have an audit. And regardless of your assets situation, if your income is over a million pounds, then you must be audited.

I’ve been throwing around these terms ‘independent examination’ and ‘audit’. What’s the real difference between the two?

In essence, an independent examination is a light-touch scrutiny of the accounts; it’s just confirmation that the accounting records have been correctly translated into a set of accounts and they’ve been produced in the right format with the necessary level of disclosure. An independent examiner does not form an opinion on whether the disclosures or the accounts are a true and fair view of the accounting position.

However, on the flip side, an audit is an in-depth scrutiny of a charity’s accounts. The auditor is required to provide a formal opinion on whether the accounts and disclosures represent a true and fair view of the charity’s financial affairs and going concern.

In either circumstance, independent examination or audit, they are legally required to report areas of material concern. Areas of material concern are things like criminal behaviour, so fraud, money laundering, supporting, you know, potential supporting terrorism, or potentially being used as a conduit for criminal activity. Similarly, if they determine any material failures of internal controls and governance, this is something that also needs to be reported.

Who can review your accounts? Well, if the charity’s income is between £25,000 and £250,000, then they need to be signed by a competent, independent person. A competent person technically should have the necessary skill level and experience to carry out an independent examination under the Charity Commission guidelines, they don’t need to be a member of a listed body.

If, however, the charity’s income is over £250,000, but less than £1 million, the report must be signed by a member of a listed body such as ACCA or ICAEW. So that’s chartered certified accountants.

In either case, to be classified as an independent, the person mustn’t have a connection with the charity, with any of the charity trustees, which might inhibit the impartial conduct of the examination, that’s the technical wording. They are allowed to be a supporter of the charity, but they’re not allowed to be a material donor. They also can’t be involved in the day-day administration of the charity or be closely connected to anybody that is, there’s obviously guidance on it all at the Charity Commission, but that is a brief overview.

Types of income. Your charity, as it rolls through its year is going to have income from lots of different sources, obviously, donations, people are going to be giving you money, because they want to support your cause. Legacies, this is when you’re given money in somebody’s will when they leave it to you in trust. Charitable activities and fundraising, this is the general day-day stuff that you do in your charity to raise money for your activities.

Trading activities, however, is slightly different because your charity might perform a trade. So as an example, I’d say running a coffee shop, that is a trade. However, so long as the profits from that trading income are going to be used to serve the charity’s primary purpose, which is detailed in your governing document, then you don’t have to pay any tax on any profits that you make, because the profits are reinvested back into the charity for its primary purpose.

Similarly, charities can have investments, and they can have gains and losses that need to be reported also. But all of these different types of income need to be listed separately. So in your financial records, in your bookkeeping records, I would suggest having different nominal codes for each of these different types of income

In addition to having multiple different types of income within your charity, you are also going to have restricted or not restricted, unrestricted, incomes. They are like subcategories of each of your items of income. Any money that’s given to a charity for a specific purpose needs to be ring-fenced as restricted income. So, for example, I’m just going to give a real-life example a few years ago, myself and the ladies in my office, we put on an event and we raised money specifically because we knew that our local Medway Food Bank needed a van. So we gave them the money and we said we have raised this money specifically to help you fund a van. Because we have told them that that is the stipulation by which we’ve given them that money, they had to account for it that way, they had to put it in a ring-fenced account for a van and that’s what it was spent on. Any other money that you give to the charity, where I just donate it and say “there you go, here’s some money carry on doing your great work”, then it would have been put in in their general fund and could be used in any way the charity sees fit but primarily it’s to suit the primary purpose as outlined in the governing document.

This is what the note in the accounts looks like for income. As you can see, you’ve got all your different income types listed there, but also you’ve got two different columns, and the restricted income funds are listed entirely separately. Within each income category, you’ve got restricted and unrestricted. And this is how you report funds.

Let’s say, in each circumstance, when somebody gives you some money, and it’s restricted, then that, in essence, creates a fund. And that fund needs to be accounted for separately to everything else, you need to know what income is. There are lots of separate pots eventually.

For this one, for example, I’m going to run through this. At the beginning of the period, you’ve got a balance for each pot, you’ve then got any income that’s gone into it during the year, you’ve then got the money that’s spent out of the pot during the year. Sometimes you can have transfers between the pots; for example, if one pot’s balance is particularly low, and you think, “oh, we need some more money in that, we need to transfer the funds”. The thing I would say, though, that if you’re trying to transfer money out of a restricted fund into the general fund, then you must always go back to the person that gave you those restricted funds to ask for their permission as to whether that is acceptable for you to move that in back into general funds.

The gains and losses column here is for investment gains and losses. And then obviously, that leaves you with your balance carried forward into the next year. So this will be a standard note that’s in all charity accounts, and will list all the separate restricted funds that you have.

Gift Aid. Back in 1990, the Chancellor of the Exchequer at the time was so John Major, and he introduced the Gift Aid scheme. So we have something to thank so John Major for; it’s this. The scheme allows charities to increase their donations by 25%. It means that if somebody donates a pound to your charity, the government will give you an extra 25p, so you as the charity will receive £1.25.

Gift Aid can only be claimed in certain circumstances. The person that’s given you the money, they must be a UK taxpayer, they must have paid the same amount or more in income tax or capital gains in that tax year in order to claim the Gift Aid. And you must hold a completed and signed Gift Aid declaration on file for each donor.

When I say a Gift Aid declaration, this is what I mean. In order to have an accurate Gift Aid declaration, it has to include the name of your charity on it, because obviously the donor they need to know that is your charity that they’re giving money to and claiming the Gift Aid for. The donor’s full name and address. And if you don’t have the full address, then the house number and postcode is sufficient. A declaration by the donor agreeing that they’re happy for you to claim Gift Aid on their donation. And also a declaration confirming that they’ve paid sufficient UK tax in that tax year. Because if they haven’t, then it is their responsibility to pay any difference. So you need to make sure that they’re aware of that.

As a point to know, if you’re asking donors to sign one form for all of their donations, you know, if they’re giving you a regular donation, and they just want to sign one form, and that be done with it, then just put a little caveat statement in there just to say, it’s your responsibility if you move or if you stop paying the sufficient level of tax for us to claim Gift Aid, you need to let us know, inform us of any changes.

Cash donations. There is a scheme called The Gift Aid Small Donation Scheme (GASDS). And this allows you to claim that additional 25% without having any Gift Aid declarations in place for cash donations of £30 or less. You can only claim up to £2,000 of this Gift Aid every tax year. So that’s £8,000 pounds worth of cash donations, but each individual donation needs to be £30 or less.

You cannot claim Gift Aid in all circumstances, okay? And I will explain the reasons why. Charity membership fees. If you are charging people to be a member of your charity and, in return for that, they’re getting certain benefits, then they’re not donating to your charity, they’re paying to be a member. So in that circumstance, you can’t claim Gift Aid.

Similarly, if you’re charging people to come to an event, they’re giving you the money in exchange for attending an event, that’s not a Gift Aid donation. Money raised from a charity auction is similar. Again, they’re paying for an item, they’re not donating to your charity. Even though a part of it is coming to the charity, it is not for that reason. Similarly, selling goods is exactly the same reason why.

Limited companies. Now, limited companies get tax relief on charity donations already through the limited company, so the government is not going to give additional relief by adding 25% to their donation.

CAF vouchers is a specific exemption that isn’t included. Similarly, payroll giving.

Really what you need to think about is if somebody is donating money to my charity, are they getting a benefit for doing so? If they’re giving you £10, and then you’re giving them a badge or a bag or something in exchange for the money that they’ve just given you, then that’s not a donation. That’s a purchase.

Gift Aid reclaims. Gift Aid reclaims are made through your charity Government Gateway account. When you go to reclaim through your Government Gateway account, you’re asked to upload a list, just an Excel list as a template, you can download it, the contents of that Excel is your donor names, addresses, amounts, dates. And that’s all the stuff that you need to hold on to.

Record keeping. There the time requirements here, as you can see, it’s pretty much six years. However, for each individual thing, it all depends on the point at which that six years starts. So your accounting records, it’s six years after the charity’s financial year-end. For cash donations, it’s six years after the date you received the cash. But, primarily, you’re looking six years to keep all your records and this is what you need to keep – all your core records, which is evidence of income, bank statements, costings, receipts, all of this stuff.

However, what I will say is you can is that it’s perfectly acceptable to have good quality photographs or scans, you don’t have to keep everything on paper. HMRC have said that they will accept good quality photocopies or scans as evidence of receipts and income etc. If somebody has said that an item of income is restricted, then you should be keeping that as evidence your independent examiner auditor will ask for confirmation of restricted income. Similarly, they will ask you to evidence that large chunks of unrestricted income has been clarified as not restricted as well.

And then Gift Aid records. The Gift Aid records you want to keep all of those Excel uploads that you’ve put in all of the assigned Gift Aid declarations. Again, you can keep these scans or photocopies. And for the cash donation scheme, a little bit more that you need to keep here; you need to keep a complete list of all the cash donations you received, the date you collected the cash, and the date it was paid into the bank. And if you’re taking card, contactless card payments, then you’re going to need all the card receipts as well, or some kind of statement showing all of that. You might have seen on the previous slide I said General Ledger as well. General Ledger is a list of all the transactions that have taken place in your financial year, your income, your expenses, your journals, etc. And that will all be on whatever bookkeeping system it is that you’re using, whether that be Xero, QuickBooks. Similarly, a full list of everything that’s happened in an Excel format is entirely acceptable too. And there we go. We got through it in the end. That is all the information back to you, Zac.

Zac Parsons
Amazing, thank you so much, Natalie, for that. There was a lot to take in, but I think will be extremely useful. And the great thing is that it’s recorded so people can go back and look at what you said. I have one very quick question. Would you ever recommend someone at an organisation or charity to perform an audit or should I say, get their accounts audited, even though they weren’t legally required to do; don’t hit the threshold?

Natalie Pieri
It’s a big expense to get your accounts audited. I would say only in the circumstance where you feel that it will be required. Let’s say if you’re going for some big funding, some large funders tend to say they’re going to want to see audited accounts to make sure that the charity that they’re giving money to is going to be using it properly. Probably the way to give a little bit more emphasis to the fact that you’re doing things right is to say here is an audit statement from our auditor, and it’s all been done properly.

Zac Parsons
That’s understandable. Thank you for that. I think it’s a good thing to bear in mind, if you did want to go a little bit more stringent or a bit more scrutiny, then it’s an option, but it is at a cost.

Natalie Pieri
Absolutely. It is a cost as well.

Zac Parsons
So brilliant. I mean, that’s all we have time for today. I think that was a really great session. Just so you all know, this is an ongoing series. And our next session will be with Ruth Dwight, who’s going to be talking to us about the difference between governance and management. That will be on the 15th of September, and I’m really looking forward to that. So last thing to say is thank you again to Natalie for today. And we will see you all next time, I hope.