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Due diligence

Due Diligence checking for charities

I’ve written about this subject briefly in other articles, simply because it’s such a huge umbrella of a term. It’s difficult to encompass absolutely everything a charity needs to think about, in order to stay the right side of the regulator and the law, in just one blog.

What I’d like to cover in this article is the importance of due diligence, in terms of safeguarding your organisation against things you may not know and the consequences of such.

One of the concerns of a charity is raising funds for their cause. This could be via a range of places, including:

  • Grants and trusts

  • Individuals

  • Businesses

The latter could donate to charity in a number of ways. And why wouldn’t they do this—supporting a charity gives their company image a boost and it can help them connect with the communities they work in. Companies may use charitable donations as a way to offset some of their tax commitment; though, in doing so, they don’t necessarily keep more in their pocket, it’s just a nicer feeling to give profit away to a good cause rather than the nasty taxman.

Due diligence checking to make sure charities are legal

Some charities use this ‘offsetting’ to their advantage when appealing for donations from the private sector. However, unless you know the ins and outs of the tax system, this could be quite dangerous.

I’m certainly not an expert when it comes to tax, but if I had to publicly state anything on this subject, even on a social media post or piece of marketing, I would consult an expert to verify what I’m saying. The last thing I’d want to do is get one of my clients (or myself) in hot water by promoting incorrect information. And that’s what I’m recommending charities do, too.

Sponsorship is another way in which charities can raise funds. They may have a specific project that they want to run; let’s say, for example, they plan to hold a charity ball. Even on a small scale, these events can be expensive. By the time you’ve paid a venue and caterer, your costs could already be sizeable. Rather than spend hours selling each ticket or ‘plate’ for a nominal amount to individuals, some charities kill two birds with one stone and approach businesses for sponsorship. Knowing that the event’s core costs are covered by someone else takes the pressure off ticket sales and increases the donation total. In return for covering core costs, charities typically use their sponsor’s logo across all the decoration, literature and promotional posts.

On the face of it, this looks like a win/win transaction for both parties. The charity offloads the costs associated with the events, which means the revenue from any tickets they sell can go towards their project. The business gets a good deal of exposure and ‘goodwill’ from being the event sponsor.

The taxman, however, would take a different view of the sponsor’s altruism. Though direct donations and financial gifts are quite straightforward items on a tax return, things become more complicated if the company receives any benefits in return for their generosity.

This is how HMRC explains the difference:

‘Charity sponsorship payments are different from donations because your company gets something related to the business in return. You can deduct sponsorship payments from your business profits before you pay tax by treating them as business expenses.

Payments qualify as business expenses if the charity:

  • publicly supports your products or services

  • allows you to use their logo in your own printed material

  • allows you to sell your goods or services at their event or premises

  • links from their website to yours’

As you can imagine, and demonstrated in the scenario above, businesses receive benefits of an intangible kind when they sponsor events. How many charities know the difference between these methods of donation?

If you were to suggest that a sponsored event qualifies for the same tax relief as a direct donation, you could be muddying the waters for your sponsor, who may not themselves know the distinction between the two.

Due diligence for small charities doesn’t mean training to be an accountant or tax adviser as well as all the other hats you will undoubtedly wear within a small organisation, it’s more a case of gaining expert advice to cover your back (as well as the backs of your stakeholders). Once you have the right answer to a question, approach or process, you can go forth with this information and use it again and again—which makes the cost of any advice or consultancy a good investment.

This is just one example of due diligence. I can think of many more related to winning funds from grant-making organisations, creating policies within the organisation to ensure the safety and compliance of your staff, and how to ensure you meet all the demands of the sector’s regulator. Set your stall out the right way, from the off, as they say. Expert advice can be worth its weight in gold if it stops you presenting incorrect information to interested partners that could make their lives more difficult.


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