Charity: what is it?
Charity can have a broad meaning: it can refer to benevolent actions, attitudes, and support, such as food and money, or help for those in need, and it can also refer to not-for-profit organisations established to support meaningful causes with public funds and for the public benefit. In any case, charity does not make profits. In this article, we will consider charities as organisations.
UK charities must be registered with the Charity Commission and comply with the statutory framework set out in the Charities Act 2011. To qualify for registration, an organisation must:
Act exclusively for the public benefit.
Operate as a non-profit entity.
Provide no private benefit to individuals.
Registered charities can also qualify for Gift Aid from HMRC, allowing them to reclaim tax on eligible donations.
Charity Governance: Trustees and Structure
Charities are governed by rules outlined in their constitution—the registration document. Trustees and volunteers manage the charity, make key financial decisions, and ensure compliance. Trustees prepare an annual report and submit it to the Charity Commission.
Accounting for Charities: Receipts and Payments Basis
Most smaller charities (with income below £250,000) prepare their accounts on a receipts and payments basis, which is similar to an income and expenditure account for profit-making organisations. This simplified approach presents the charity’s income and expenditure, along with a balance sheet where surpluses increase the charity’s capital rather than generate profit.
Fund Accounting and Financial Oversight
Charity accounts are prepared under fund accounting principles. Trustees review the charity’s financial position at the annual general meeting and decide how to allocate resources—whether to build up reserves or increase spending on charitable activities. When expenses exceed income and reserves are depleted, trustees must determine the next steps.
Audit and Independent Examination Requirements
Because charities operate with public funds, they face strict accountability requirements. Charities must have their annual accounts independently audited or examined before submitting them to the Charity Commission, as required by law. The method depends on the charity’s income and assets:
Independent Examination
Required if income is between £25,000 and £1 million, or income is £250,000+ with gross assets below £3.26 million.
Can be carried out by a suitably skilled or qualified person.
Focuses on whether accounting standards are met, records are accurate, and the correct format is used. Does not involve transaction-level detail.
Audit:
Required if income exceeds £1 million, or income is £250,000+ with gross assets above £3.26 million.
Must be performed by a member of a recognised professional body.
Involves detailed verification of the accounts to ensure complete accuracy.
There is no statutory requirement for independent examination if a charity’s gross income is below £25,000.
Difference Between Audit and Independent Examination
An independent examination provides an external review of accounts, confirming they are consistent with records and meet statutory requirements. An audit is more rigorous and detailed and requires in-depth checks by a qualified accountant.
Charity Accountability and Reporting
Charities must be accountable to the public and are subject to scrutiny by the Charity Commission. Annual accounts, whether audited or independently examined, ensure transparency and responsible stewardship of public funds.
Larger Charities and Charitable Companies
The Charity Commission defines larger charities and charitable companies in the UK as those with an income exceeding £500,000 or £1 million and above (depending on whether they report individually or as a group of charities).
5 largest charities in England are:
Nuffield Health – £1,484,700,000
The Charities Aid Foundation – £1,390,589,000
The British Council – £1,010,444,269
Save the Children International – £955,412,235
The Arts Council of England – £843,062,677
Larger charities often adopt a corporate legal form rather than a trust or association because of their scale, number of employees, and structure. Many may be involved in business, trade, or profit-generating activities (which they pour back into their parent charity) Modern Charities can fit into various models, from running a business that supports their mission to promoting certain industries or activities as part of purpose-driven benevolent action.
Likewise, large commercial businesses may cooperate for charitable purposes and form charitable trusts. One well-known example is Santander, a major commercial bank, which operates independently as Santander UK Foundation Limited (Charity) and partners with King’s Trust to provide banking services to registered charities.
Whether they work to change things for good or provide temporary relief, charities' work matters, drives social impact, and is gaining increasing recognition.
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