UK Fundraising Company – How to handle and process charity money

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Hello, we are a limited company which raises money for charity by selling our products with a portion of the sale price going to charity.

We have a contract with different charities which outlines that the money we raise is held in our bank account temporarily and later transferred to them.

We would like to make sure we are managing this as appropriate in our accounts and bookkeeping. This charity money that comes into our accounts should be exempt from VAT.

For example: We sell a product for £500.
£100 goes to charity.
£400 goes to our company.
In our book keeping, this is logged as £400 vatable, £100 vat exempt.

From a legal perspective and for easier management, would it be better to have two separate bank accounts (one for charity money, one for our money)?

I’m not sure whether this just over complicates things unnecessarily because we take payments by card terminal and either way (based on example above) the £500 would be going into our bank account to then be separated later.

It would be great if we can have some professional advice on this and whether this setup would be required or are we just overcomplicating our bookkeeping by splitting the bank accounts and transferring funds across the two bank accounts?

It would also be good to know if there are any other legal requirements for us to be processing charity money in this way.
 

Werner Reisacher

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It is not only advisable, but you are actually following the law, by keeping these funds, that do belong to a third party, separate from the funds of your company.
Your company is a for-profit trading company, governed and taxed as such. You have entered a "Fiduciary Agreement" with Charities, to collect funds on their behalf. Make sure that the ownership of the collected funds is clearly defined in the Fiduciary agreements for reasons explained later.
Legally, these funds are at all times the property of the Charities. Your function is limited to that of a "fiduciary agent" which gives you temporary control over the funds, but never the ownership. It would, therefore, be a prudent business practice to at least, transfer these funds into a separate bank account over which nobody, but selected people, involved in the fiduciary activities, have signature powers.
When it comes to legal issues, I always assume the worst-case scenario. Let's assume your business goes into bankruptcy or is getting sued. You would have a hard time providing the proof that part of your funds in your bank account actually being to a third party.
Depending on the amount of money involved and the time period during which these funds are held, you might even consider keeping the funds in an account outside your legal entity.
Last but not least, a separate bank account eliminates time-consuming bank account reconciliation work.
 

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