Charity Accountants for SORP Accounts, Independent Examination and Gift Aid
Two sets of rules behind your charity accounts change in 2026: the Charity SORP and the audit and examination thresholds. The 2026 Charity SORP applies to reporting periods beginning on or after 1 January 2026. The audit and independent examination thresholds rise for accounting years ending on or after 30 September 2026. We are charity accountants, Chartered Certified Accountants and Chartered Tax Advisers, and we are already preparing charity SORP accounts and independent examinations on both sets of rules through our accounts preparation service. We also act as not for profit accountants for CICs, clubs, associations and social enterprises.
Does my charity need an audit or an independent examination?
It turns on gross income, gross assets and your governing document. The 2026 change to the charity audit thresholds lifts every limit below. The new figures apply to accounting years ending on or after 30 September 2026, under the Charities Acts 1992 and 2011 (Substitution of Sums) Order 2026 (SI 2026/427). These figures apply to charities registered with the Charity Commission for England and Wales. Scottish charities follow OSCR’s rules, and Northern Ireland has its own thresholds.
| Test | Threshold before | Years ending on or after 30 September 2026 |
|---|---|---|
| Audit, income | Over £1 million | Over £1.5 million |
| Audit, assets | Assets over £3.26 million plus income over £250,000 | Assets over £5 million plus income over £500,000 |
| Independent examination | Over £25,000 | Over £40,000 |
| Qualified independent examiner required above | £250,000 of gross income | £500,000 of gross income |
The threshold above which a parent charity must prepare group accounts also rises, to £1.5 million of aggregate gross income.
A charity with £1.2 million of income that needed an audit under the old limits can move to independent examination for its first year ending on or after 30 September 2026, unless its gross assets exceed £5 million, its governing document requires an audit or a funder insists on one. Where an audit is needed, Merit Accountants is registered by ACCA to carry it out.
One quirk worth knowing. The examination threshold rises to £40,000, but the threshold for filing accounts and the trustees’ report with the Charity Commission stays at £25,000. For years ending on or after 30 September 2026, a charity with income over £25,000 and up to £40,000 prepares and files accounts but needs no independent examination. The government kept the filing threshold only because the Commission’s systems could not be changed in time, and it remains under review.
Warning
The test is the year you report on, not the date trustees sign. A March 2026 year end keeps the old limits.
What is changing in the 2026 Charity SORP?
The 2026 SORP is mandatory for reporting periods beginning on or after 1 January 2026, so for a 12-month year the first accounts it applies to are those for the year ending 31 December 2026. Five changes matter.
- Lease accounting. Operating leases move onto the balance sheet, following the FRS 102 amendments.
- Income recognition. New rules, including a five-step model for income from contracts, change the timing of multi-year and performance-related grants.
- Tiered reporting. Three tiers by gross income: Tier 1 up to £500,000, Tier 2 from £500,000 to £15 million and Tier 3 over £15 million, with disclosure increasing by tier.
- Trustees’ annual report. Impact reporting becomes a requirement, with fuller explanation expected from Tier 2 and Tier 3 charities, and reserves reporting is expanded, including a comparison of actual reserves with the reserves policy and an explanation of any gap.
- Cash flow statement. Only Tier 3 charities, with income over £15 million, must now prepare one, so most charities between £500,000 and £15 million can drop it.
Example
You lease your office for £30,000 a year with five years left. You now recognise a right-of-use asset and a lease liability of roughly £130,000 each, discounting the payments at around 5%. Total funds barely move, but assets and liabilities jump, and rent becomes depreciation and interest.
Tip
Brief your bank and your biggest funders before they see the new shape of your balance sheet.
How do restricted and unrestricted funds have to be reported?
Restricted funds accounting is where charity accounts come unstuck. Your accounts, and the management accounts trustees see during the year, must show the movement in each fund separately: in, out, and what is left. A restricted fund is held on trust, so it cannot plug a general deficit.
Example
A £60,000 grant is restricted to a youth programme and you spend £52,000 on programme costs. The fund closes at £8,000 and carries forward. Charge general salaries to the fund instead and your examiner will want evidence that each cost falls within the grant terms. If it does not, the funder can ask for the misapplied money back, and some grant agreements let it reclaim the whole £60,000.
Warning
One of the findings we see most on charity accounts is restricted expenditure not matched to restricted income. It usually means the charity bookkeeping carried no fund codes, so the split was rebuilt from memory. Fund codes set up in Xero tracking categories avoid this.
How much can your charity recover with a Gift Aid claim?
You reclaim 25p for every £1 given by a UK taxpayer who has made a valid declaration. It is basic rate tax on the gift, which the donor must cover from their own Income Tax or Capital Gains Tax for the year. HMRC pays it only where your records prove the declaration and the donation.
Example
£80,000 of eligible donations a year produces a Gift Aid claim of £20,000 a year. Claims run back four years from the end of the tax year the donation was received in for a charitable trust, or from the end of the accounting period for a charitable company or CIO. At £80,000 of donations a year, four unclaimed years leave £80,000 behind.
What audit trail does HMRC actually ask for?
- A valid declaration per donor: full name, home address, your charity’s name, the donations it covers, a statement that the donor wants Gift Aid to apply, and an explanation that they must pay at least as much UK Income Tax or Capital Gains Tax in the tax year as you reclaim.
- A record of when each declaration was made and which donations it covers, including any backdated ones. HMRC does not insist on a date, but without one you cannot show which past donations it reaches.
- An auditable link from every donation to its declaration. A spreadsheet total is not a trail.
- Bank records evidencing receipt: six years after the end of the accounting period for a charitable company, or for a trust the later of six years after the end of the tax year and 12 months after the claim.
On a compliance check HMRC samples declarations. If the sample fails, HMRC can apply the error rate to the whole claim and recover the tax with interest, and penalties can follow if the claim was careless. We build trails that survive the first sample.
How much can you claim under the Gift Aid Small Donations Scheme?
The Scheme tops up cash and contactless donations of £30 or less where you hold no declaration, such as collection tins. The limit is £2,000 of top-up, on £8,000 of small donations, per tax year. The catch is the matching rule: small donations claimed cannot exceed ten times the Gift Aid donations you claim in the same tax year, and you must not have had a Gift Aid penalty in the previous two tax years.
Example
You collect £8,000 in tins and contactless giving. The full £2,000 needs £800 of declared Gift Aid donations in the same tax year. Claim ordinary Gift Aid on only £300 of donations and you can claim on just £3,000 of small donations, so the top-up drops to £750. That shortfall costs £1,250.
Tip
Small Donations Scheme claims expire after two years, not four. Claim these first when catching up.
What charity accounts and returns do you have to file, and when?
If your income is over £10,000, or you are a CIO, your charity annual return is due within ten months of your year end, with accounts and the trustees’ annual report above £25,000 of income. CIOs file accounts and the trustees’ report at every income level. Accruals accounts under the SORP are required above £250,000, and that limit doubles to £500,000 for years ending on or after 30 September 2026, which lets a good many unincorporated charities and CIOs move back to receipts and payments. Charitable companies must still prepare accruals accounts, and they file them at Companies House within nine months of the year end, a month before the Commission deadline. Companies House charges an automatic penalty if they are late. Late returns to the Commission show as overdue on the public register, which funders read.
Is your charity exempt from VAT?
No. Charities are not automatically exempt from VAT, and it is the misunderstanding we correct most often. You register once taxable business supplies pass the £90,000 registration threshold in any rolling 12 months, and then file VAT returns like any business. What you get is targeted relief: zero-rating on qualifying advertising, and on certain building work and equipment.
Example
£10,000 of qualifying advertising at 0% rather than 20% keeps £2,000 in the charity, and on a £400,000 new building used solely for a relevant charitable purpose, with a certificate given to the builder, zero-rating is worth £80,000.
Warning
If you run non-business charitable activities alongside taxable trading, VAT on shared costs must first be split between business and non-business use, and the non-business share cannot be recovered. If you also make exempt supplies, such as some lettings, partial exemption applies on top. Both methods have to be fair and defensible if HMRC asks.
CIC accounts: how are community interest companies and social enterprises taxed?
A CIC is a company, not a charity, and the tax follows. CIC accounts and the annual community interest company report (form CIC34) go to Companies House together, which passes the report to the Regulator of Community Interest Companies, and you pay Corporation Tax on profits. No charity reliefs apply: no Gift Aid, no exemption on surpluses.
Example
A CIC with a £40,000 surplus pays £7,600 of Corporation Tax at the 19% small profits rate. The same work in a charity, as primary purpose trading with the surplus applied for charitable purposes, is generally exempt. Add £80,000 of donations worth £20,000 of Gift Aid to a charity and nothing to a CIC, and structure is worth £27,600 a year.
Tip
A CIC is not wrong, just different: faster to set up and founder-controlled. As accountants for CICs and social enterprises we model both routes before you incorporate.
Why do trustees choose Merit?
- Chartered Tax Adviser-led. We are a firm of Chartered Certified Accountants and Chartered Tax Advisers, so your Gift Aid, VAT and choice of structure get specialist tax review.
- Worked inside HMRC. Our team includes professionals who have worked inside HMRC, so we know what a Gift Aid compliance check looks for.
- Commercial partners, not textbook accountants. Our partners have built their own businesses from nothing to over £1m in turnover, so we know what a tight cash month feels like.
- Payroll and finance support. From payroll for charity staff to a complete finance function for larger charities.
- Clear terms. Fixed fees, a free first meeting, a reply within two business days, and charity accountants in Manchester, London and Hertfordshire.
Charity accounting questions trustees ask us
When do the 2026 charity audit threshold increases apply to our year end?
The higher thresholds apply to accounting years ending on or after 30 September 2026. The test is the year you are reporting on, not the date trustees sign, so a year ending before that date is judged on the old limits even if the accounts are signed later.
Who can act as an independent examiner for a charity?
Below the qualified examiner trigger, an independent examiner for a charity needs the requisite ability and practical experience, so an experienced volunteer can qualify. Above it they must belong to a professional body listed in the Charities Act. That trigger rises from £250,000 to £500,000 of gross income alongside the other threshold changes.
Should we adopt the 2026 Charity SORP early?
Usually not. Early adoption is permitted, but only if you apply the 2024 amendments to FRS 102 in full from the same date. It does not smooth the change. On leases, FRS 102 Section 20 requires you to recognise the cumulative effect at the date of initial application without restating comparatives, so the step change simply arrives a year sooner. Model the lease entries first, because they alter your balance sheet and the reserves explanation in your trustees’ report.
Can we use a restricted fund to cover a shortfall in general funds?
No. Restricted money is held on trust for its stated purpose, so spending it elsewhere is a breach of trust. If cash is stuck, ask the funder in writing to vary the restriction, check whether your costs are properly chargeable to the fund, or apply to the Commission.
How far back can we make a Gift Aid claim?
Four years from the end of the tax year the donation was received in if you are a charitable trust, or from the end of your accounting period if you are a charitable company or CIO, provided a valid declaration covers it. At £80,000 of donations a year, that is up to £80,000 sitting in past years. Small Donations Scheme claims expire after two years, so deal with those first.
What does HMRC look at in a Gift Aid compliance check?
Declarations first. HMRC samples donors, tests whether each declaration is valid and covers the donations claimed, then traces individual donations through your records and bank statements. Officers also check whether donors received benefits above the limits, or whether a receipt was really a payment for something.
Our income is under £25,000. Do we still file anything?
Usually. Over £10,000 of income you file a charity annual return within ten months of your year end. Accounts and the trustees’ report go to the Commission above £25,000, but a CIO must file its annual return, accounts and trustees’ report whatever its income, and all trustees must still prepare accounts.
Can a CIC convert to a charity later?
Yes, a CIC can convert to a charity or a charitable incorporated organisation, but it is a formal process involving the Regulator and the Commission, with the asset lock handled properly. Choosing correctly at the start is cheaper, so we model both routes first.
Ready to get your SORP accounts, examination and Gift Aid right?
Bring your last accounts, your fund breakdown and your latest Gift Aid claim. In one free meeting we will tell you which side of the thresholds you land on, what the 2026 SORP does to your balance sheet, and where Gift Aid sits unclaimed.
Two things to do now:
- Test your gross income and gross assets against both the old and the new thresholds.
- Pull ten Gift Aid declarations at random and check them against the audit trail list above.
Last reviewed: October 2026.
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