Anonymous
Share this content
17

Charity - donation before setting up & Restricted

Donations prior to charity set up, plus restricted funds: How to record these in its accounts please

Didn't find your answer?

The new charity started in Feb 2019 with its first accounting year set to end in March 2020. There were donations before the charity was set up. How far can we go back in accounting these donations please? If we can't, how do we record the money in our balance sheet please? Do we need to record restricted funds separately? For example 10% admin fund is made available for a project. Should we record it separately from the fund? Thanks all.

Replies (17)

Please login or register to join the discussion.

Scalloway Castle
By scalloway
17th Jan 2020 19:48

I would record them as actually happening on the date the charity was set up.

Thanks (1)
avatar
By Accountant A
17th Jan 2020 21:51

Quote:

There were donations before the charity was set up.

How's that work?? Was this cash? Paid into someone else's bank account?

How much are we talking about?

Thanks (0)
Replying to Accountant A:
avatar
By eteb3
19th Jan 2020 12:40

It works by A giving to B money to be used for charitable purposes: a charitable trust is thereby formed, and if the amount of the donation is >£5000, B must now register the charity with the Commission (but not otherwise).

Whether registration is required or not, B can transfer the assets to another charity:

- Registration of a CIO by the one holding the assets causes those assets to vest in the CIO automatically. (Charities Act s. 210). How you show a receipt that occurs by operation of law, I don't know.

- In the case of a charitable company or an unincorporated association, assuming CC's model articles are used, then vesting is not automatic, and the donations will show in the accounts when actually transferred.

- In the case of a trust, things may be more complicated, as the standard deed declares that the trustees [already] hold £x for charitable purposes X Y & Z. The accounting for the trust may well need to stretch back to the initial donation in that case, as that's when a trust was formed, legally speaking - you accountants will know better than me.

Thanks (1)
Replying to eteb3:
avatar
By xiaoxin
20th Jan 2020 19:16

Thank you. Most helpful. It's a simple form of CIO and there is no trustee involved. We will record these small donations as if receiving them on day 1.

Thanks (0)
Replying to Accountant A:
avatar
By xiaoxin
20th Jan 2020 19:13

The total sum is less than 1.5k. They were donations for book translations (fee and associated costs) to the individuals before they went on to set up the charity.

Thanks (0)
Replying to xiaoxin:
avatar
By eteb3
21st Jan 2020 19:48

This business of "donations" for work done is jolly confusing!

Three possibilities:

1) The funds were pure charitable donations to those 'startup individuals' by other people, in circumstances where it was quite clear that they were entrusting the startup individuals to apply the funds for charitable purposes. Even if the translations weren't completed, those parting with their money would be equally happy; and if the money didn't to charity, they'd be hopping mad. The money is held on charitable trust and those who hold it are trustees.

The donations are gift aidable if you can convince HMRC that they were genuinely charitable donations to an unconstituted charity, not just gifts to those individuals . Hard to do, but not impossible. (Emails? minuted meetings?) But the unconstituted charity, not the CIO, claims the gift aid. Funds vest automatically on registration of the CIO.

2) The funds are trading income arising from a translation contract with the startup individuals (whether working separately or as a partnership or as an unincorporated association, depending on their relationship). There is no trust in that case (it's a simple contract) and the money isn't a charity.

The startup individuals must pay tax on the profits of their translation work. They are free to donate the funds to the CIO if they wish (it's their money), in which case they can gift aid it and the CIO can reclaim the tax. It appears in the CIO accounts on the day they transfer it (because there was no prior trust and so no automatic vesting).

3) The startup individuals were associated together only for the purposes of starting the charity, and on that basis they undertook the translations, and all concerned understood that the *whole* amount of the fee (less incidental expenses) would go to charity, *no payment to the translators* (assuming the translators are the startup individuals who registered the CIO). Funds vest on registration of the CIO. It's not income on which they need to pay tax. But there's no GA claimable anywhere, because this was a fee for work done (albeit in the way of charity), and not a donation.

You may find smallcharitysupport.uk useful - though this sort of mind-bender is probably beyond them.

And PS, there is most definitely a trustee (indeed, more than one) who directs the CIO.

Thanks (1)
Replying to eteb3:
avatar
By xiaoxin
22nd Jan 2020 20:35

Thanks ver much! It's scenario 3 most definitely. We will make sure all boxes are ticket on the scenario you described.

Thanks (0)
Replying to xiaoxin:
avatar
By eteb3
21st Jan 2020 22:47

I'm a bit baffled by this tbh.

Either they were *donations* for charitable purposes, which entails a trust even without a written deed, or they were *payment* (fee) for services rendered under a contract, in which case no trust arises. They can't be both.

If they're payments under contract, they're taxable in the hands of the individuals who went on to set up the charity, as Tax Dragon said (though the CIO may be able to claim the gift aid back once the funds are donated to the CIO. And they must actually be donated: they don't vest automatically as the funds aren't held on trust, so they don't necessarily hit the books when the CIO is registered).

You could conceivably argue that these individuals were an unincorporated association with charitable aims (eg, to set up the charity), and the contract for the translations was charitable trading in fulfilment of its purposes - but that sounds like a stretch.

Maybe this is clear to you and fuzzy language is misleading me. Anyway, if the charity is your client, presumably whether those who set it up are doing their SA correctly is none of your concern.

Thanks (0)
Replying to xiaoxin:
avatar
By eteb3
21st Jan 2020 22:48

I'm a bit baffled by this tbh.

Either they were *donations* for charitable purposes, which entails a trust even without a written deed, or they were *payment* (fee) for services rendered under a contract, in which case no trust arises. They can't be both.

If they're payments under contract, they're taxable in the hands of the individuals who went on to set up the charity, as Tax Dragon said (though the CIO may be able to claim the gift aid back once the funds are donated to the CIO. And they must actually be donated: they don't vest automatically as the funds aren't held on trust, so they don't necessarily hit the books when the CIO is registered).

You could conceivably argue that these individuals were an unincorporated association with charitable aims (eg, to set up the charity), and the contract for the translations was charitable trading in fulfilment of its purposes - but that sounds like a stretch.

Maybe this is clear to you and fuzzy language is misleading me. Anyway, if the charity is your client, presumably whether those who set it up are doing their SA correctly is none of your concern.

Thanks (1)
Replying to eteb3:
avatar
By xiaoxin
22nd Jan 2020 20:43

It was my fussy language. Apologies. These group of translators have been doing charity work for a while before the CIO was set up. Their translation work weren't paid under contract. They were donations, and were transferred to the CIO's bank account as soon as it was set up. Therefore we will treat these as donations to the CIO on day one.

Thanks again. I should have explained the situation in more detail.

Thanks (0)
Replying to xiaoxin:
avatar
By eteb3
22nd Jan 2020 21:44

Thanks for the feedback - and apologies from me for multiple posts: I sent one, and it just didn't appear, so I sent the other after. Now they're both there! Hopefully useful to someone else one day.

Thanks (0)
avatar
By WhichTyler
17th Jan 2020 23:30

Quote:

Do we need to record restricted funds separately? For example 10% admin fund is made available for a project. Should we record it separately from the fund? Thanks all.


Not sure what you mean and it sounds like you need to spend some quiet time alone with the Charity SoRP (or hire someone familiar with it)

In the specific circumstances you are describing, I would recognise all of the grant as restricted income and allocate general admin cost to it to absorb the 10% allowance.

Thanks (1)
Replying to WhichTyler:
avatar
By eteb3
19th Jan 2020 19:37

Restricted funds are those held on special trusts, and (iirc) need to be reported separately under SoRP. eg, charity owning several nature reserves receives bequest 'to preserve and develop Little Copse Reserve'. Trustees can't use it on Big Copse Reserve. Or a church runs a fundraiser for the roof: absent weasel words on the form of gift, they have to spend the money raised on the roof (or, possibly, cy-près).

Don't confuse with designated funds, which is what your 10% admin reserve sounds like, whether the 10% was arrived at by trustees' decision or by contractual condition imposed by institutional funder. (The latter doesn't imply a trust - that operates independently, and possibly not at all.) EDIT: The project fund itself is probably not a restricted fund but a designated fund.

Thanks (1)
avatar
By Tax Dragon
18th Jan 2020 08:57

I suspect you, like soooo many querists, may be confusing tax and accounts. You obviously have to account for all the money donated, whenever that was. But the donations could not possibly have been made under e.g. gift aid until the organisation obtained charitable status. (Has that happened yet?) Donations may be taxable on the recipient, depending on factors you have not mentioned.

Thanks (1)
Replying to Tax Dragon:
avatar
By eteb3
19th Jan 2020 11:42

Quote:

Donations may be taxable on the recipient, depending on factors you have not mentioned.

I'm not disputing this, but in what situation is a donation to a charity taxable in the hands of the recipient?

Thanks (0)
Replying to eteb3:
avatar
By eteb3
19th Jan 2020 13:04

Ah, I see - you mean the pre-existing org may not have been charitable.

Thanks (0)
Replying to Tax Dragon:
avatar
By eteb3
19th Jan 2020 19:30

Quote:

But the donations could not possibly have been made under e.g. gift aid until the organisation obtained charitable status. (Has that happened yet?)

Sorry: if I follow what I think you mean, this is wrong. There is no need to 'obtain' charitable status, eg from HMRC or CC.

Charitable status, recognition by HMRC as a charity, and registration with the Commission are all separate things. (The first is a condition for the other two; the second is independent of the third; and the third is persuasive evidence for HMRC in their decision about the second).

You can claim Gift Aid up to four years back. The donor can retrospectively GA all donations made in that time, and it's immaterial whether the charity was recognised by HMRC at the time the donations were made or when the declaration was made: what matters is that it was a charity, which happens as soon the money was dedicated for exclusively charitable purposes.

Whether in this case you can Gift Aid the donations made 'before the charity was set up' (see above for nuances on that), I don't know. Very likely not, unless the trustees put on paper the legal reality that a separate charitable trust was automatically in existence before your client charity was 'set up'*, and that charity claims the Gift Aid.

*EDIT: Assuming the early donations were given to private individuals, or to a collective of promoters. As Dragon implies (and as I now understand him to be saying), if the early donations went to a non-charitable organisation, then it's more difficult, perhaps impossible.

Or just possibly there may be room for a fudge if the trustees of the 'automatic' charity and the 'set up' charity are the same: they could cast themselves as donors of the initial funds, construing those as having been, in the first instance, gifts to themselves personally rather than held on charitable trusts.

Thanks (1)
Share this content