Charities financial reporting update

This page details relevant changes in the regulatory and financial reporting environment. Further details of many changes are set out on our charities sector page.

Regulatory issues and other matters

Code of Fundraising Practice

The new Code of Fundraising Practice came into force on 1 October 2019. This code sets out the responsibilities that apply to fundraising carried out by charitable institutions and third-party fundraisers in the UK. A copy of this code can be obtained from here. 

Brexit and Charities 

There is no doubt that Brexit will have far reaching impacts and many charities will be understandably concerned. However, this remains an area of uncertainty for all as the UK’s exit negotiations continue and it is not possible to fully evaluate the impact.

The impact of new energy and carbon reporting requirements on large unquoted companies, LLPs and quoted companies

The reporting of carbon emissions has been extended to private companies (including incorporated charities) who qualify as large i.e. the entity or group meets two or more of the following criteria:

  • Over 250 employees.
  • Turnover more than £36m.
  • Balance sheet more than £18m.

These new regulations are effective for accounting periods commencing on or after 1 April 2019.

Changes to Companies Act

Effective for financial years beginning on or after 1 January 2019

Changes to the Companies Act 2006 and the Companies (Miscellaneous Reporting) Regulations 2018 mean new company reporting requirements for financial years starting on or after 1 January 2019.

Qualifying companies, including incorporated charities, (different for each statement) will need to provide new statements for: employee engagement, corporate governance, compliance with section 172 Companies Act and engagement with anyone with whom they have business relationships. 

Charity commission 

Charity Commission News

Charity Commission News (“CC News”) is the Commission’s quarterly newsletter, which provides essential information for charity trustees and their advisers. The latest CC News: issue 64, was published in October 2019. This edition includes information on a variety of issues including submitting your charity annual return, reporting charity fraud and working to prevent it and preparing your charity for Brexit.  Charity Commission Publications
Set out below are a number of useful Charity Commission publications and guidance:

Change your charity structure Updated November 2019
Managing your charity guidance September 2019
CC31 – Independent examination of charity accounts: guidance for trustees    Updated August 2019
CC23 – Exempt charities Updated August 2019
How to report a serious incident in your charity Updated June 2019
Charities and trading Updated June 2019
Alert for charities – cybercrime and how to report to the Charity Commission May 2019
Prepare a charity annual return April 2019
Guidance for charities with a connection to a non-charity March 2019
Accounts monitoring review: public benefit reporting by charities December 2018
Review of charity reserves policies November 2018
New questions in the 2018 charity annual return service October 2018
How to report a serious incident in your charity October 2018
CC47 – Complaints about charities October 2018
CC3 – The essential trustee (new version) Updated May 2018
CC3a – Charity trustee: what’s involved Updated May 2018
 CC30 – Finding new trustees Updated May 2018
 

A collection of the Charity Commission “CC” guidance publications can obtained from here.

Filing charity annual returns during the coronavirus pandemic

During the pandemic, the charity sector will face challenges looking after staff, volunteers and trustees who may fall ill, have to self-isolate or care for loved ones. The Charity Commission has announced it will be as flexible and supportive as possible in its approach to regulation during this period. As an immediate step, charities that are due to submit an annual return imminently but feel unable to do so can call the Charity Commission contact centre Monday to Friday 9am to 5pm on 0300 066 9197. The Charity Commission will issue further communications in due course which can be obtained from here.

Safeguarding and protecting people for charities and trustees 

The Charity Commission has published guidance on what to do to protect people who come into contact with your charity through its work from abuse or mistreatment of any kind. This includes:

  • people who benefit from your charity’s work;
  • staff; 
  • volunteers; and
  • other people who come into contact with your charity through its work.

This guidance can be obtained from here. Further information can also be obtained from the NCVO’s safeguarding resources and Bond’s ‘Good governance for safeguarding. 

Alert for charities – cybercrime and how to report to the Charity Commission

The Government has revealed that over two thirds of high income charities had recorded a cyber breach or attack in 2018 with the cost of breaches ranging between £300 and £100,000. The National Cyber Security Centre (NCSC) has provided a guide of how to protect from cybercrimes which can be obtained from here.

For larger charities, detailed advice for trustees on improving cyber security is available through the NCSC’s toolkit

Guidance for charities with a connection to a non-charity

The Charity Commission has published guidance for trustees where a charity is connected with a non-charity, for example where a charity:

  • has set up and owns a trading subsidiary; 
  • has been set up by a non-charity (e.g. corporate foundations); 
  • gives or receives regular funding to or from the non-charity; and
  • works regularly with a non-charity to deliver services, campaigns or other projects.

Such connections may expose the charity and trustees to additional risks. The guidance, which can be obtained here, aims to assist trustees in managing and reviewing a charity’s connections with non-charities and to keep in line with their legal trustee duties. 

Charities Annual Return

From 12 November 2018, the first time you log in to your online account you will be asked to check and update all your charity details. The Charity Commission have published a guide which can be obtained from here that sets out the information covered so you can collect the required information before you log in.  

New Governance code

The new Charity Governance was launched in July 2017, to assist charities and their trustees develop high standards of governance and is available online. The new version of the code starts with the assumption that all trustees are committed to their charity’s cause and have joined its board because they want to help the charity deliver its purposes most effectively for public benefit and understand their roles and legal responsibilities as set out in the Charity Commission’s guidance The Essential Trustee (CC3).

There are seven principles which make up the Code and each section includes recommended practice for larger and smaller charities:

  • Organisational purpose.
  • Leadership.
  • Integrity.
  • Decision-making, risk and control. 
  • Board effectiveness. 
  • Diversity. 
  • Openness and accountability.

The recommendations included within the code are as follows: 

  • more oversight when dealing with subsidiary companies; registers of interests and third parties such as fundraising agencies or commercial ventures;
  • an expectation that the board will review its own performance and that of individual trustees, including the chair, every year, with an external evaluation for larger organisations every three years;
  • no trustee should serve more than nine years without good reason;
  • boards thinking carefully about diversity, how they recruit a range of skills and experience, and how they make trusteeship a more attractive proposition;
  • boards should operate with the presumption of openness; and
  • stronger emphasis on the role of the chair and vice chair in supporting and achieving good governance.

Governance Code consultation

In November 2019 a consultation on refreshing the Charity Governance Code was launched. It is a voluntary code which promotes good practice for charities. The consultation will run until 28 February 2020 and is intended to be a “light refresh” of the code. Details of how to respond to the consultation can be found at here. 

Protect your charity from Fraud

The Commission has issued updated guidance on its website. Charities of all sizes are challenged by a range of fraud that can impact on all areas of the organisation. Trustees need to implement a proactive and preventative approach to the issue, rather simply than identifying and reporting a fraud when it occurs. 

The guidance includes a range of templates for policies including and anti-fraud and corruption policy and a whistleblowing policy template. The guidance also provides useful information on the types of fraud as well as reporting serious incidences.

Automatic disqualification rules for charity trustees and charity senior positions 

From 1 August 2018, changes to the rules mean that there will be more restriction on who can run a charity. The changes introduce new disqualification reasons and will stop disqualified people from being able to act in some charity senior manager positions.

From 1 August 2018 the two key changes are:

  1. people who are disqualified from acting as a trustee will also be disqualified from holding certain senior manager positions in charities; and 
  2. an increase in the number of reasons that disqualify someone from acting. The new reasons include being on the sex offenders register and certain unspent convictions – such as for terrorism or money laundering.

Under the new rules, acting whilst disqualified will still be a criminal offence and there will be no change to the right of disqualified people to apply for a waiver.  

Accounts monitoring

The Charity Commission has published several reports following its accounts monitoring reviews, on charity’s annual reports and meeting the reader’s needs and on public benefit reporting requirements for charities.

Charity annual reports and meeting the reader’s needs

The publication on charity’s annual reports can be found here. The review focussed on whether accounts met the basic requirements of the users rather than strict technical compliance with the SORP and other reporting requirements and found that 74 per cent of accounts were of acceptable quality.

There is detailed guidance to assist trustees with the preparation of the annual report and financial statements available here.

Public benefit reporting

The review of public benefit reporting can be found here. The report focussed on whether annual reports demonstrated a clear explanation of who benefits from the charities activities and if the trustees had made a statement as to whether they have had due regard to the commission’s guidance on public benefit. The report found that only 51 per cent of charities demonstrated these requirements.

The Charity Commission has published guidance on how to report on your charity’s public benefit.

Large charity reserves

The report found the less than a quarter of charities accurately reported the level of financial reserves they hold in their trustees’ annual report.

The Commission has indicated its findings suggest an incomplete understanding of what reserves are, which could lead trustees to make poor decisions about their charity’s finances.

Charity guidance on reporting relevant matters of interest 

Reporting of relevant matters of interest to UK charity regulators issued by the Charity Commission for England and Wales, the Office of the Scottish Charities Regulator and the Charity Commission for Northern Ireland includes examples of relevant matters which may be reported by auditors and Independent Examiners, available here.

Trustees need to be aware of the list of matters of material significance and of the duty placed upon an auditor or independent examiner to report these matters to the regulator.

Trustees have a parallel duty to report serious incidents to the regulator. Where a charity’s auditor or independent examiner decides to report a matter of material significance, the trustees should consider whether they also have a duty to report a serious incident.

This guidance was updated April 2020 to include further clarifications on what should be reported, particularly during times of national emergency, in light of the coronavirus pandemic. 

Regulatory alerts, inquiry and case reports

https://www.gov.uk/government/collections/charity-commission-reports-decisions-alerts-and-statements 

As in the public interest, the Charity Commission usually:

  • releases a public statement whenever it opens a statutory inquiry into a charity; and
  • publishes a report of the inquiry.

Published statements and reports are shown on the charity’s entry on the public register of charities.

The Commission may also publish reports of its non-inquiry work where:

  • there is significant public interest in the issues involved and the outcome; and
  • there are lessons that other charities can learn from them.

Measuring impact

A website, funded by the National Lottery, has released a range of free guides and self-assessment tools to assist small and medium charities to understand, evaluate and increase their impact. 

Financial reporting update

Updates to the Charities SORP

In October 2019, the second edition of the Charities SORP (FRS 102) was published. It is effective for periods commencing on or after 1 January 2019 and the updates principally reflect the content of Update Bulletins 1 and 2.

Control measures and charity financial reporting during coronavirus

ICAS have released guidance on the financial reporting implications of coroanvirsu for the charity sector. The key message of the guidance is:

  • The measures being taken to contain coronavirus will impact on charities in many different ways and it is important for charity trustees to understand the impact on the delivery of their activity and their governance including their finances. 
  • Where a charity is preparing a set of accounts and these have not yet been approved, trustees should consider whether information needs to be included to explain the impact of the coronavirus situation on their charity.
  • There could be changes to the financial statements needed as a result of the coronavirus situation and it is important that trustees understand and consider these.
  • Charities should keep up to date with developing guidance from the relevant charity regulator in their jurisdiction. 

The full version of the guidance can be found here. 

Charities SORP (FRS 102) – Information sheet 3

Following the Government approving The Companies (Miscellaneous Reporting) Regulations 2018, the SORP Committee has considered the new reporting requirements and how they interact with the current trustees’ annual report and issued new guidance which can be obtained from here. The new requirements are set out below and are applicable for reporting periods beginning on or after 1 January 2019.

Large charitable companies will need to include a statement as part of their strategic report describing how the directors have had regard to the matters in section 172 (1)(a) to (f) of the Companies Act 2006:

A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to: 

a) the likely consequences of any decision in the long term;
b) the interests of the company's employees;
c) the need to foster the company's business relationships with suppliers, customers and others;
d) the impact of the company's operations on the community and the environment;
e) the desirability of the company maintaining a reputation for high standards of business conduct; and 
f) the need to act fairly as between members of the company.

This statement must also be published on a website maintained by or on behalf of the charity.

Large charitable companies will also be required to include a statement as part of their directors’ report summarising how the directors have had regard to the need to foster the company’s business relationships with suppliers, customers and others, and the effect of that regard, including on the principal decisions taken by the company during the financial year. 

From a charitable company perspective, the Information Sheet recommends that charities consider expanding the statement to cover the charity’s relationship with other stakeholders, for example service users, beneficiaries, funders and the wider community. This may be combined with the charity’s reporting on those relationships that have affected the achievement of its objectives under paragraph 1.45 of the SORP.

Where a charitable company presents a combined directors’ and trustees’ annual report (following paragraph 15.6 of the SORP), the Information Sheet suggests including the statement as part of the content contained under the heading of ‘structure, governance and management’, unless it combines the information with that required by paragraph 1.45 of the SORP as previously mentioned.

For charities with more than 250 employees, the statement summarising how the directors have engaged with employees is required to be included in the directors’ report. The Information Sheet recommends that the following is considered by charities when providing this information:

  • The existence of employees’ share schemes within a charitable company would not be relevant. Therefore, other employees’ reward or incentive schemes should be considered under this statement. 
  • It is acknowledged that factors, other than economic and financial factors, may affect the performance of a charitable company. Therefore, other factors should be considered under this statement. 
  • Charities often rely on the contribution of unpaid general volunteers in carrying out their activities. Therefore, this statement may describe the action aimed at engagement with volunteers as well as paid staff. 

Where a charitable company presents a combined directors’ and trustees’ annual report (following paragraph 15.6 of the SORP), the Information Sheet suggests including the statement as part of the content contained under the heading of ‘structure, governance and management’.

Charities SORP (FRS 102) – Information sheet 2

Following the publication of Charities SORP (FRS 102) – Update Bulletin 2, Information Sheet 2: Accounting for gift aid payments made by a subsidiary to its parent charity where no legal obligation to make the payment exists was issued in January 2019. This publication provides additional guidance and examples on the accounting treatment of gift aid payments made from subsidiaries to parent charities. A copy of the publication can be obtained from here.

In summary, gift aid payments are a distribution from the entity to its owners and expected gift aid payments should not be accrued unless a legal obligation to make the payment exists at the reporting date. A board decision to make a gift aid payment, that has been taken prior to the reporting date, is not sufficient to create a legal obligation. Where no legal obligation exists, gift aid payments should therefore be treated akin to dividends and recorded in the period in which they are physically paid. Where application of this amendment:

  • changes an entity’s existing accounting policy for expected gift and payments and/or the related tax relief; and
  • the transactions are material. 

Then the changes in accounting policy will require full retrospective application of the policy and a prior period restatement may be required. This restatement will impact the parent charity SoFA and Balance Sheet only and not the charity’s consolidated financial statements given that the gift aid income is fully eliminated on consolidation.

Practice Note 11

In November 2017 Practice Note 11 (PN11) was revised to incorporate guidance issued by Charity Regulators their guidance on reporting matters of matters of material significance and reporting relevant matters of interest to UK charity regulators.

The Practice Note has also been updated to reflect changes and developments in: UK auditing and accounting standards; the charities SORP; and relevant legislation. Please note that PN 11 continues to provide guidance but does not of itself introduce any new requirements. 

Previous guidance moved or removed

PN 11 needs to be read in conjunction with ISAs (UK) and other guidance because it no longer contains: 

  • material that can be found in the ISAs themselves;  
  • material where an ISA does not give rise to any charity specific considerations;
  • guidance that can be found elsewhere (e.g. in the SORP); or 
  • illustrative audit reports, example trustee responsibilities or engagement letter paragraphs.

The ‘Special Features of Charities’ section has been integrated into the relevant ISA (UK) sections, predominantly ISAs 315, 330 and 600.

Charities SORP (FRS 102) – Update Bulletin 2

An “update bulletin 2” has been published (October 2018) to amend the text of the underlying SORP for changes in Accounting Standards and legislation subsequent to the SORP’s issue in July 2014. 

Effective date

The amendments set out in this Update Bulletin apply to all charities in the United Kingdom and Republic of Ireland that follow this SORP for reporting periods beginning on or after 1 January 2019. If the charity adopts the amendments early, they must all be early adopted at the same time (with limited exceptions).

The bulletin is to update the Charities SORP (FRS 102) for amendments to FRS 102 issued by the Financial Reporting Council in December 2017: Amendments to FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland – Triennial review 2017 – Incremental improvements and clarifications.

The amendments have been classified as: 

  • clarifying amendments; 
  • significant amendments; and
  • other amendments. 

1. Clarifying amendments are effective from 5 October 2018 and are summarised as follows: 

  • Module 3: Accounting standards, policies, concepts and principles, including adjustment of estimates and errors: clarifying the requirement to provide comparative information; 
  • Module 5: Recognition of income, including legacies, grants and contract income: clarifying when payments by subsidiaries to their charitable parents that qualify for gift aid should be accrued in the individual accounts of the parent charity;
  • Module 10: Balance Sheet: removes the undue cost or effort exemption for depreciating assets comprising of two or more major components which have substantially different useful economic lives; 
  • Module 13: Events after the end of the reporting period: clarifying when payments by subsidiaries to their charitable parents that qualify for gift aid are adjusting events occurring after the end of the reporting period.

The module 5 clarification is likely to impact a number of charities. It was not in the draft bulletin and has been made in response to feedback from the consultation. SORP paragraph 5.52 addresses the recognition of dividends and following the amendments in the bulletin, it now addresses the issue of gift aid payments receivable by a parent charity. Gift aid payments are distributions, which are akin to dividends (but not legally dividends), should only be accrued when they are payable to a charity under a legal obligation. Thus, there should be symmetrical accounting by the parent and its subsidiary(ies) in respect of all gift aid payments.

No further amendments were made in respect of gift aid, despite respondents asking for further guidance on when a legal obligation is created (the only example given is a deed of covenant). However, the SORP committee have acknowledged that guidance would be helpful and say in their June minutes that a working party has been formed to develop an information sheet to offer advice on this issue.

2. Significant amendments are those which are likely to have an impact on the financial statements of charities: 

  • Module 10: Balance Sheet;
  • permitting charities that rent investment property to another group entity to measure the investment property either at cost (less depreciation and impairment) or at fair value; 
  • removing the undue cost or effort exemption for the investment property component of mixed use property to require measurement at fair value; and
  • removing the disclosure of stocks recognised as an expense.
  • Module 14: Statement of cash flows: requiring charities to prepare a reconciliation of net debt as a note to the statement of cash flows (a comparative net debt rec is not required).
  • Module 27: Charity mergers: including the transfer of activities to a wholly owned subsidiary undertaking as an example of a charity reconstruction that should be accounted for as a merger.
  • Appendix 1: Glossary: inserting a definition of the term service potential.

3. Other amendments are those which are likely to have an impact on the financial statements of a limited number of charities: 

  • Scope and application module (para 20): The SORP has been amended to change the reference to those charities which meet the definition of a financial institution.  This potentially widens those charities which meet the definition of a financial institution beyond only charitable incorporated friendly societies. Charities which meet the definition of a financial institution must make additional disclosures as required by section 34 of FRS 102. The Bulletin had proposed to state that a charity was likely to meet the definition of a financial institution if its principal activity included lending at a market rate or an element of market return (ie mixed motive) or it was a charitable incorporated friendly society. The wording has now been revised to only include the latter. The scope wording excludes charities which make social investments including concessionary rate finance in the form of programme related investments, unless such lending is the charity’s principal or sole charitable activity.
  • Module 11: Accounting for financial assets and financial liabilities: amendment to table 7 common financial instruments and changes to paragraphs which cover the initial measurement of basic instruments. The SORP is also amended to encourage charities to make additional disclosures where they hold financial instruments and the risks arising from these are particularly significant. FRS 102 encourages entities to provide information to enable users of financial statements to evaluate the significance of financial instruments held. 
  • Module 18: Accounting for heritage assets: changes to those paragraphs which cover the initial measurement of assets at fair value. 
  • Module 21: Accounting for social investments is amended to change those paragraphs which cover the measurement of assets at fair value. 
  • Module 24: Accounting for groups and the preparation of consolidated accounts is updated:
  • to cover the exclusion of immaterial subsidiaries from consolidated financial statements;
  • to include the accounting treatment of intangible assets acquired in a business combination; 
  • to include the requirement for unconsolidated interests in special purpose entities to be disclosed where consolidated accounts are prepared; and
  • to introduce the requirement for the disclosure of intangible assets which are acquired in a business combination and not separately recognised. 

  • Appendix 1: Glossary of Terms is amended to align the glossary definition of an intangible asset with that in FRS 102. 

Scottish charities

This section details changes and current developments specifically impacting charities (including cross border charities) in Scotland.

Charities and coronavirus

In light of the fast-moving coronavirus situation, OSCR have published a regularly updated webpage with a range of guidance and FAQs to support the sector. This guidance can be obtained from here. 

OSCR

As OSCR registered its 10,000th new Charity in April 2017. It continues to have a primary focus on “monitoring the public's confidence in charities”, OSCR reshaped its processes and structures and in April 2016 launched a Targeted Regulation approach to better aim their efforts and energies at Charities that were likely to pose the highest risks to public trust and confidence in the sector. The key changes were:

Publishing Reports and Accounts

From 1 April 2016 OSCR began the process of publishing annual reports and accounts beginning with all charities with an income of £25,000 or more together with all SCIO accounts this continues with guidance on the website about file sizes for lodging. See also the proposed changes to charity law below and the effect on the publishing of reports and accounts.

On-line services

There is also a real focus on encouraging all charities to sign up for OSCR’s on-line services which were upgraded in April 2016 with 92 per cent of all Scottish Charities using these.

Legislation

Charity law consultation 2019

The Scottish Government consulted on proposed changes to Scottish Charity law in the early part of 2019 with results of the consultation published in July 2019. It has been 17 years since the Scottish Charity Law Review Commission (the ‘McFadden report’) proposed establishing a new regulator for Scotland and more than 14 years since the passage of the Charities and Trustee Investment (Scotland) Act 2005 which forms the basis of the legislative framework for charities in Scotland.

Given the passage of time since the Act was passed, and the changing environment that charities are operating in the consultation sought to consider how well the current arrangements are working and explore potential improvements to the statutory charity regulation in light of proposals put forward by OSCR.

The proposals broadly focused on improvements to charity law that would increase transparency and accountability in order to maintain public trust and confidence in charities and OSCR.

The changes that OSCR requested can be summarised as follows:

  • Publishing annual reports and accounts in full for all charities on the Scottish Charity Register. 
  • An internal database and external register of charity trustees.
  • Criteria for automatic disqualification of charity trustees and individuals employed in senior management positions in charities. 
  • A power to issue positive directions to charities. 
  • Removal of charities from the Scottish Charity Register that are persistently failing to submit annual reports and accounts and may no longer exist. 
  • All charities in the Scottish Charity Register to have and retain a connection in Scotland. 
  • Inquiries into the former charity trustees of bodies which have ceased to exist and bodies which are no longer charities. 
  • De-registered charities’ assets and public benefit. 
  • The speed and efficiency of OSCR’s powers to gather information when making inquiries. 
  • The reorganisation of charities established under royal charter, warrant or enactment. 

The results of the consultation were published on 3rd July 2019 and the majority of responses (over 300) support changes to increase transparency and accountability. Most prominent among issues raised by respondents was that the scope of the initial consultation was too narrow and fell short of a wider review of Scottish charity law to ensure it was fit for purpose. The Scottish Government confirmed they would fully consider all the points raised, including engaging with those who called for wider changes to the regulations and that collaborative work with the third sector and other key stakeholders would continue as they develop and refine the proposals.

Further details can be found here. 

Other guidance

How to raise a notifiable event

New guidance has been published on how trustees should notify OSCR when a notifiable event occurs in a charity. Notifiable events could include:

  • fraud and theft;
  • significant financial loss;
  • incidents of abuse or mistreatment of vulnerable beneficiaries;
  • a lack of charity trustees required to make a legal decision;
  • when a charity has been subject to a criminal investigation or an investigation by another regulator or agency; sanctions have been imposed, or concerns raised by another regulator or agency;
  • when significant sums of money or other property have been donated to the charity from an unknown or unverified source;
    suspicions that the charity and/or its assets are being used to fund criminal activity (including terrorism); and
  • charity trustees acting improperly or whilst disqualified.

OSCR does not want to know about every event, only those that threaten to have a significant impact on the charity or its assets. One of the most important assets of a charity is its reputation, so it is also important to consider what impact any event might have on that.

The notifiable event form and guidance can be obtained from here. 

The Scottish Governance Code for the Third Sector

This was published in November 2018 having been developed as a good practice guide by the Scottish Third Sector Governance Forum. It has five core principles with a recognition that equality and diversity is an integral part of good governance which underpins all of these principles, which are:

  • Organisational purpose.
  • Leadership.
  • Board behaviour.
  • Control.
  • Effectiveness.

It is available online here.

SCVO have created a Good Governance Check-up document to be used in conjunction with the Code to help trustees regularly review their governance. Your board can use the check-up to identify areas for improvement and monitor and record your journey to good governance.

You can view the Good Governance Check-up document here.

Charity investments: guidance and good practice

This guidance sets out the key points to consider if your charity has investments or is thinking about investing and how your duties as charity trustees apply. The guidance can be obtained from here. 

Guidance on the risk of fraud

On 6 June 2018 OSCR produced new guidance on how to reduce the risk of fraud in your charity. The guidance tells trustees:

  • what their legal duties are;
  • how they can reduce the risk of fraud; and
  • how OSCR will consider instances of fraud in charities.

This guidance can be obtained from here. On 15 December 2017 OSCR updated its April 2016 Guidance and good practice for charity trustees. The guidance has been updated to provide a clear and practical guide to what charity trustees must consider to meet legal requirements and ensure that their charities are well-run.

Guidance on safeguarding

OSCR have published interim safeguarding guidance to promote the welfare of children and vulnerable adults to protect them from harm. The guidance looks at the key steps trustees should take to make sure this is considered appropriately and charity trustee duties in respect of safeguarding. The guidance can be obtained from here. 

Taxation - all charities

Budget 2020

Charities and gift aid were not mentioned in the budget delivered on 11 March 2020 meaning that there were only indirect impacts in the sector. Some of the more relevant changes have been outlined below:

  • The zero rating of digital publications from December 2020 will be of help to charities who use these to tell people about their work as well as professional bodies that increasingly publish their journals electronically.
  • The additional £1.5 billion over five years to enable FE colleges to improve and update their facilities is welcome.
  • The increase in the employment allowance to £4,000 per annum and the government’s commitment to refund sick pay to businesses employing under 250 people as part of the coronavirus contingency measures will be good news for many charities and NFP’s.
  • On business rates the increase in the retail discount to 50 per cent for 2020 and to 100 per cent for 2021 will potentially help small charities who run charity shops, particularly where these are in a subsidiary; and, finally
  • The review of the business rates system gives an opportunity for charities and CASCs to lobby for an increase in the mandatory business rate relief from 80 per cent to 100 per cent. 

VAT on children’s clubs

In a recent Tribunal there has been an important decision in respect of activity camps. In a previous case, it was ruled that the main aim of services provided by a holiday school camp was the hosting of sporting activities rather than the care and protection of children. As a result, its supplies were subject to VAT and therefore many providers took note and have been accounting for VAT on similar services offerings where the sessions involved sport or were ‘fun’ for the children. However, a recent decision appears to have come to a different conclusion.

RSR Sports Limited (RSR), trading as Get Active Sports, also provides regulated holiday and sports camps for children. On careful analysis, and admittedly a finely balanced decision, the tribunal reached the opposite opinion to Sport Academies. RSR’s services were regarded as welfare and thus exempt from VAT. 

On the face of it, whilst both Sport Academies and RSR were providing very similar services there were some distinguishing factors between the two. These included Sport Academies employing trained staff to teach the activities and using a charging structure based largely on the nature of the activities chosen. In contrast, RSR’s staff held the necessary accreditations for providing childcare, but did not have any particular qualifications related to the activities. These were enough to convince the court that RSR’s services were more concerned with the care and protection of the children as opposed to the sports they played at the clubs.

The RSR case demonstrates the subtleties involved in determining the VAT liability of children’s clubs and events. In light of this recent case, it would be prudent for any provider to carefully consider how their services are advertised and whether their predominant aim is to provide the activity or childcare.

Off payroll and IR35

The Government has now published draft legislation for extending and reforming the current off-payroll rules. These already apply in the public sector but are being amended and extended to the private sector from April 2020. The proposed legislation brings medium or large-sized organisations, including Charities and Housing Associations within the scope of the rules first introduced for the public sector in April 2017.

The proposals shift the responsibility, for deciding whether the rules apply, away from the individual’s personal service company (PSC), to the organisation that is the end user of the worker’s service.

Organisations will need to decide whether or not the rules apply to an engagement with individuals who work through an intermediary. They will then have to provide the worker, and the third party that they contract with (such as a recruitment agency) with a status determination statement setting out the reasons for that conclusion.
If the rules do apply, the organisation, agency or other third party paying the worker’s PSC will need to deduct PAYE and employee NICs and pay employer NICs and the apprenticeship levy (where applicable).

HMRC has the Check Employment Status for Tax (CEST) service to help organisations determine whether off-payroll working rules apply. 

Input VAT on investment management costs

The European Court has supported HMRC’s submission that VAT incurred on the management of an investment fund is wholly irrecoverable. The decision in respect of the University of Cambridge follows a referral from the UK courts. Previous decisions, which HMRC has accepted, relating to the generation of additional funds through investment and fundraising have taken the view that if the costs generate funds for the charity’s economic activity in general the costs can be attributed to all activities of the charity and can be treated as an overhead for the purpose of VAT recovery. The VAT is then recoverable on the basis of the charity’s business/non-business and partial exemption method.

In the University of Cambridge case, the European Court has determined that the costs incurred must be a component of the onward taxable business transaction in order to give a right to reclaim the VAT incurred. The management of donations and endowments are not incorporated into a particular income transaction and no right of deduction therefore arises.

This contrasts with a 2005 decision in respect of Church of England Children’s Society where it was confirmed costs relating to funds raised to support taxable business activities were wholly recoverable and the VAT on costs relating to funds raised which relate to all activities of the charity can be recovered on a fair and reasonable basis which normally requires an apportionment method to reflect the taxable business use.

The European Court has now said costs incurred by the University of Cambridge cannot be components of an onward taxable sale because funds raised allow the charity to subsidise business activities and cannot, therefore, be components of the business income of the charity. This is a more restrictive interpretation than that previously accepted by HMRC and it remains to be seen whether HMRC will attempt to restrict further a charity’s VAT recovery on fundraising costs.

In the circumstances, charities should review their position and ensure they are applying any input VAT apportionment method in accordance with their agreed business/non-business/partial exemption method.

Non-executive directors and travel expenses

It is common for an organisation to meet the cost of travel expenses for non-executive directors (NEDs) to attend board meetings and, where necessary, the cost of related accommodation and subsistence too.

Whilst a NED may say that they are home based, HMRC are unlikely to accept that the NED’s home is a workplace. Furthermore, if all (or almost all) of the time that a NED spends working for an organisation is spent at the location at which the board meetings take place, HMRC will regard this location as a ‘permanent workplace’. Journeys between a home and a workplace are ordinary commuting and the travel expenses attributable to such journeys (and any related accommodation and subsistence) are generally taxable.

Historically, many organisations settled tax due on a NED’s taxable travel and subsistence expenses through a PAYE Settlement Agreement (PSA). This treatment, has however been withdrawn by HMRC from 6 April 2019. From that date the only items permitted to be included in a PSA for a public sector organisation must be either:

  • minor (in terms of the value of the item);
  • irregular (in terms of the provision of the benefit or expense); or
  • impracticable (to apply PAYE or apportion between the employees receiving the benefit).

We would recommend all organisations check the position regarding NED expenses to see if the correct tax treatment has been applied.   

Making tax digital for VAT – are you ready?

Along with the UK exiting the EU, making tax digital is the most significant change in the administration of the UK tax system in a generation and will fundamentally change the way that taxpayers communicate and interact with HMRC.

Making tax digital for VAT (MTDfV) requires VAT registered organisations with taxable turnover above the VAT registration threshold (£85,000) to keep records in digital form and submit their VAT returns using MTDfV compatible software which is able to interface with HMRC’s systems. Organisations, including charities, with taxable turnover below the VAT registration threshold will be able to apply MTDfV for VAT on a voluntary basis.

Unless an organisation has been formally notified by HMRC that it meets the conditions to be considered ‘complex’, MTDfV is mandatory for VAT periods beginning on or after the 1 April 2019.

For complex organisations the first VAT return which will need to be MTDfV compliant is the first return for a VAT period starting on or after 1 October 2019.
HMRC is in the process of issuing letters to all VAT registered entities confirming whether they will be mandated to be MTDfV compliant from either 1 April or 1 October 2019. These letters are being sent out automatically based on the organisation’s VAT registration details held by HMRC and only those entities in receipt of a letter confirming that they are complex can benefit from the six-month deferral without further action.

It is apparent, however, based on a number of letters which have already been sent, that HMRC’s categorisation of organisations between complex and non-complex is not accurate, with some complex recipients being advised they have a 1 April start date and some non-complex recipients being advised they have a 1 October start date – it is worth checking that your organisation has been allocated the correct start date, and where this does not appear to be the case, taking professional advice as necessary and raising this with HMRC to get the position corrected.
Whilst certain exemptions will apply for ‘digitally excluded’ businesses; eg businesses run by those prevented from using computers because of religious beliefs, the exemptions do not extend to VAT registered charities or other not-for-profit organizations with taxable turnover above the VAT registration limit.

Charities that have not already initiated their MTDfV preparations should do so urgently, and should ensure that they have addressed all the requirements, which may necessitate new processes, procedures and possibly new software, in order to ensure they are prepared for the introduction of making tax digital for VAT.

A cautionary tale on the change of use of qualifying buildings

The unfortunate and avoidable case of Balhousie Holdings Limited [CSIH 7] provides a cautionary tale for charities where the qualifying use changes, or there’s a disposal of, a relevant residential or relevant charitable building within ten years of acquisition or construction.

Balhousie purchased a care home from a (non-VAT group) ‘design and build’ associated company and, by certificate, confirmed that it intended to use the property solely for a relevant residential purpose – thereby allowing its initial purchase to be VAT zero-rated. 

Balhousie was having difficulty in raising bank finance, and to fund the project, decided to finance the purchase by entering into a sale and leaseback agreement with a third-party Real Estate Investment Trust (REIT). The sale and leaseback was, as argued by Balhousie, wholly interdependent and to all intents and purposes, part of a single transaction given that Balhousie would continue to use the building as a care home.

Balhousie however fell foul of a rule originally designed to claw back VAT zero-rating if a building is used for a non-qualifying purpose as, since 2011, the ‘self-supply’ provision also applies if the beneficiary of the zero-rating sells its entire interest. This applies whether the qualifying usage carries on, or the building will be used for (say) offices.

While Balhousie’s initial appeal was successful, the Upper Tribunal, and more recently the Court of Session, found in favour of HMRC. As the ‘sale’ and the ‘leaseback’ were, as a matter of substance, two entirely different transactions, the second being dependent on the completion of the first, the application of the VAT ‘self-supply charge’ did apply. 

As the sale of the property, and the consequent disposition in favour of the REIT, divested Balhousie of its entire interest in the property, it was not relevant from a VAT analysis whether Balhousie continued to physically ‘use’ the premises as a care home. The self-supply charge applies when there is the disposal of an interest and, VAT being a tax on transactions, does not consider any related leaseback.

VAT cost-sharing exemption – recharges of costs

As previously announced by HMRC, the ‘transitional’ rules which allowed cost-sharing groups (CSG) to continue to ignore certain non-qualifying supplies for the VAT cost-sharing exemption (CSE) ceased on 31 December 2018.

Under previous rules known as the ‘directly necessary’ test, HMRC considered that a CSG could treat supplies to its members as exempt from VAT if the individual member made 85 per cent or more VAT exempt and/or non-business supplies.

This 85 percent test for directly relevant services was however withdrawn from 14 August 2018, although CSGs that had correctly used the previous guidance could continue to use the tests in that guidance until 31 December 2018.

Under HMRC’s revised policy, apportionment of the CSG’s recharge of costs will be allowed if the CSG can carry out such apportionments fairly and keep the necessary records to enable HMRC to verify the calculation eg, the use and retention of the CSG member’s partial exemption calculations. 

Amended guidance is included in pages CSE 3850 to CSE 3895 of HMRC’s cost-sharing exemption manual.

Fundraising events – or something else
Although the case of Loughborough Students Union & Others UKFTT 357 (TC) related to activities undertaken by students unions, there are some general points worthy of note for charities undertaking fundraising events.

Based on the presented facts, the first-tier tribunal (FTT) concluded that events run by the Student Unions did not qualify as VAT exempt ‘fundraising’ events as there was nothing distinguishable from the events in question to the other social entertainment and recreational activities undertaken. 

Whilst fundraising need not be the sole purpose of an organised event, if fundraising is not the main purpose of the event then the FTT considers it is not a fundraising event but is instead merely an event which has the incidental purpose of being expected to yield a profit.

In this respect the FTT determined from the facts of the case that many of the events run by the Students Unions took place on a weekly basis during term-time, with many of these, seemingly the most profitable, being nominated as ‘fundraising events’ after the event had taken place and not individually promoted as fundraising before the event had taken place. Although some selected events were larger annual events (in some instances described as student balls), on scrutiny these events were, in the FTT’s view, a continuation of the social calendar of VATable business activities. 

The facts of the case also determined that many of the events, particularly the weekly events, also failed the ‘distortion of competition’ tests given that such were in direct competition with other entertainment establishments (bars, nightclubs etc). Of particular note to any charity running regular events is that, although the FTT considered that running up to 15 events was not, in itself, likely to cause distortion of competition, a greater number (ie weekly) indicated a course of normal trading which may be distortive. On this issue the FTT further added that running a large number of events, ie, more than 15, would disqualify all the events from VAT exemption, not just the 16th and subsequent events.

Developing case-law could result in CASCs being afforded VAT reliefs

In the case management hearing before the Upper Tribunal in Eynsham Cricket Club [UKUT 47] in which both the appellant and HMRC agreed that the FTT had ‘made and error in law’ when it had concluded that the appellant, a community amateur sports club, was ‘established’ for a subsidiary purpose of providing social facilities when the pavilion was constructed, the UT remade the decision finding that, at the material time, evidence and legislation (which had not been argued before the FTT) indicated that the CASC was established for the charitable purpose of the advancement of amateur sport.

The case relates to the VAT zero-rating of a pavilion which HMRC had denied on the basis that CASCs are not charities for the purposes of the Charities Act 2011, and therefore, by reference to that Act in the tax definition of a charity, they were also not charities for VAT purposes.

However, as a result of the case management ruling which has determined that the CASC had been established for a charitable purpose, this means that the appellant would actually have succeeded in its appeal to the FTT. Consequently, the case will now proceed to a full hearing of an appeal before the UT, albeit the roles will now be reversed with HMRC now becoming the appellant and the CASC becoming the respondent.

Although CASCs do qualify for VAT reliefs relating to fundraising events, developments in this case will be interesting as a success for the CASC at the full hearing could result in a change of HMRC policy entitling CASCs to qualify for other VAT reliefs specific to charities.

Updated HMRC guidance defining grants and contracts for VAT purposes

When deciding whether a payment is within the scope of VAT each agreement must be considered on its own merits. In principle, for a transaction to fall within the scope of VAT, there must always be a supply, consideration for that supply, and a direct link between the two. A payment is not consideration for a supply if one of these factors is missing.

HMRC has published updated guidance on the VAT treatment of grants and contracts, and has highlighted a number of points to help in deciding whether a payment is consideration for a supply for VAT purposes:

  • Does the grantor receive anything in return for the payment?
  • Are there any conditions attached to the payment that go beyond merely having to mention it in account statements?
  • What will the payments be used for?
  • If the funder does not benefit directly, does any third party receive a benefit?
  • Is there a contract and what are the terms and conditions?

More detailed HMRC analysis is provided in the link above but, if charities are in any doubt, they should contact their VAT advisor.

Seminars and publications

RSM Charity events

RSM hold regular seminars, training and events at our offices around the UK. More information on our latest events can be found here.

Decoding the Charity Governance Code

The Charity Governance Code for England and Wales was last updated in July 2017. It sets the seven principles and recommended practice for good Governance. It demands accountability by those who are responsible for the effective running of a charity and provides a crucial reference point for charities to follow to keep themselves well-managed and future proofed. The Scottish Code of Charity Governance was issued in November 2018 and while this should be separately considered, many of our findings are relevant to Scottish charities too.

To understand what impact the Governance Code has had on the sector, RSM analysed 85 charities of various sizes and activity areas to see how the Code is being applied and what the common failings are. Some of our key findings were:

  • of the 85 charities analysed, approximately 44 per cent acknowledged the Code within their annual reports;
  • average governance ratings for charities which stated their alignment to the Code was nearly 10 per cent higher then those that did not acknowledge its adoption; and
  • 31 per cent of charities, by our scoring methodology, demonstrated excellent Governance.

While there were many excellent examples of compliance with most of the seven principles, there were several areas that require attention across the sector. Improvement is needed most noticeably with diversity, as we found:

  • of our sample, only 19 charities provided diversity statements;
  • 22 per cent adhered to guidance relating to these statements; and
  • 55 per cent showed no clear evidence of its consideration at all.

In a sector that has experienced high-profile scandals in recent years, charities must be striving to achieve the best possible Governance standards, to continue enjoying the trust of their funders and the general public alike.

To learn the common failings which need to be avoided and how to improve your charity’s governance, the full report can be obtained here.

Charity reserves

In turbulent times, financial resilience helps charities stay flexible and adaptable so they can continue to fulfil their commitments to beneficiaries. A well-thought-out reserves policy is now critical to weathering uncertainty. 

Reserves are much more than a statement about the financial health of your charity. Amid growing media and public interest in fundraising practices, a robust reserves policy will send a clear message to donors and beneficiaries that you are well-led, well-managed and well-run. 
 
Charity Audit and Finance Committee Effectiveness

In a time of financial anxiety charities must improve decision making and become more accountable for the way funds are raised. Audit, finance and risk committees have an important role to play. But with little central guidance, how can charities make sure their committees are fit for purpose and contribute to good governance?


Charity Governance 2020

Good governance has always been key in all sectors, but nowhere is governance more important than in the charity sector. Those with ultimate responsibility in not for profit organisations are giving their time voluntarily, but this does not absolve them from blame if things go wrong. Therefore the systems and structures within which they operate have to be especially clear and robust. Charity Governance 2020 is about being as effective as possible. Raising average to good and good to outstanding, to enable a rise in the standards of delivery and outcomes.