How to Set Up a Charity

Are you thinking of setting up a charity? This post will cover the key steps in how to set up a charity and explain the main reporting requirements to the Charity Commission and HMRC. We’ll even offer an alternative option if you discover that setting up a charity isn’t right for you.

How do I set up a charity?

There are six steps you must follow to set up a charity in England. They are:

Appoint trustees
Ensure you are starting a charity for charitable benefits for the public
Name your charity
Choose a charity structure
Produce a governing document (explaining the rules of your charity)
Register the charity if applicable

Charities that are structured as a Charitable Incorporated Organisation (CIO) or a charity that makes at least £5,000 per year must register with the Charity Commission. This means most new charities will need to register.

Do charities pay tax?

If the charity is recognised as such by HMRC, it will not have to pay tax on most types of income. This is the case as long as the income received is spent on defined charitable purposes, e.g., environmental protection, health, education or saving lives.

How much does it cost to set up a charity?

There are four different types of structures for a charity. There is no cost to set up a charity under three of these structures, namely as a CIO, Charitable Trust or an Unincorporated Charitable Association.

However, if you want to set up using a Charitable Company, the company must be registered with Companies House. To register in this way, there is a £40 application fee.

Speak with a registered UK accountant to learn what structure is best for your situation.

HMRC reporting requirements for charities

Charities report their annual finances to the Charity Commission, but what they have to report will differ depending on how the charity is set up and how much money it receives per annum.

Even if it has not been registered with the Charity Commission, every charity must prepare annual accounts and hand them to the Commission when requested.

Moreover, CIOs and otherwise structured charities with annual income above £10,000 must submit an annual return form after its financial year ends. But some charities with an income below £10,000 can be asked to submit an annual return by the Commission at the end of its financial year too.

The charity may or may not need to submit a tax return at the end of the tax year, depending on how they spent their income. If any income that was received was not spent on charitable purposes, then this income will be subject to tax and the charity will need to complete a tax return. If all income was spent on charitable purposes there is no requirement to complete a tax return unless asked.

Can you make money owning a charity?

Charities can pay staff a reasonable amount to do work for the charity. “Owning” a charity may make you a Trustee and things are not quite as simple. If you want to receive fair remuneration for your charity work as an “owner” you may be better off setting up a different type of social enterprise.

Alternative options for setting up a charity

A Community Interest Company (CIC) is a good alternative to setting up a charity. The CIC is a limited company rather than a registered charity, but it exists with the overarching aim of benefiting the wider society.

Because a CIC is not a charity, it is allowed to receive income for non-charitable purposes, but the CIC will be subject to tax in an identical way to other limited companies. Although CICs may not have the same tax advantages, there are fewer arduous regulations and less administration to navigate when setting up and running a CIC.