a practical guide 2015 england & wales charities · pdf filea practical guide 2015 england...

A Practical Guide 2015

England & WalesCharities

Contents

Introduction to UK200Charities & Education Group

Map of UK200Charities & Education Group members and useful contacts

Charity Governance and Conflicts of Interest

Public Benefit

Charities and Risk Management

Charity Accounting and Financial Reporting

Charity Accounting and Financial Reporting – SORP 2015

Charity Tax

Charitable Incorporated Organisations

Charities and Financial Investment

2

3

4 – 8

9

10 – 15

16 – 19

20 - 29

30 – 34

35

36 – 39

Introduction to UK200Group Charites & Education Group

About the guide

It is becoming increasingly challenging forcharities to keep up to date with the rulesand regulations governing the sector.Changes to the Charities Act andCompanies Act have resulted in a tightercompliance and governance framework,with the drive for greater transparency inoperation and reporting an underlyingtheme.

Further, the Charity Commission isfocussing more on its regulatory role andthis is set against the near halving of itsbudget.

The taxes and VAT regimes are underconstant review, with frequent changesmade to the underlying rules, exemptionsand thresholds. Whilst the introduction ofthe new Charities SORP 2015 (FRS 102),introduces the most significant change toaccounting and financial reporting for thesector in a decade.

The aim of this guide is to summarise the key changes and impact of the newSORP (“Statement of RecommendedPractice”) and to provide an overview ofsome of the key principles impactingcharity taxation and VAT. In addition, theguide reaffirms best practice in charityRisk Management and reviews latestguidance in respect of Conflicts ofInterest, Public Benefit and InvestmentManagement.

Introduction to UK200Group

The UK200Group is a nationwideassociation of independent CharteredAccountants and Lawyers, providingaccess to specialist expertise and crossfertilisation of ideas and experienceacross a wide range of specialist areas.The principle objective of the Group is toprovide the benefits of strength in depthin specialist and technical areas normallyavailable only to the national firms.The UK200Group has a strong Charitiesand Education Group which providestraining and guidance to its members inthe form of seminars, newsletters andtechnical releases. Members are charityspecialists who offer a broad range ofsupport including:

Audit and Accounting

As well as statutory audit, internal auditand year end statutory accountspreparation, we provide guidance andadvice to ensure compliance withregulatory requirements and best practice.

Business and Strategic Planning

Effective strategic planning isfundamental to all organisations.Heightened funding and “commercial”challenges along with the drive towardsgreater transparency, with theintroduction of the requirements of thenew SORP and the Charities Act 2011,have made this particularly pertinent forcharities. Charities are also required topublicly report their strategic goals andobjectives, and their achievementstowards meeting these. We are able toassist organisations in preparing theirplans through facilitated discussion andthe provision of tailored documentation.

Management Accounting and Reporting

Timely and accurate managementaccounting information is essential to theongoing management of any charity. Weare able to support charities by eitherhelping to embed the skills and processesneeded internally or by providing morehands-on assistance with the setting ofKPI’s, budgets and cash flow forecastsand the preparation of monthly orquarterly management information.

Risk Management, Governance andGeneral Compliance

Risk management is a key factor ingovernance and integral to the managementof charities. Our support includes assistingclients with the identification, documentationand on-going review of risk, and compliancewith best practice in governance.

This handbook has been prepared for general interest and it is important to obtain professional advice on specificissues. We believe the information contained in it to be correct. While all possible care is taken in the preparation ofthis handbook, no responsibility for loss occasioned by any person acting or refraining from acting as a result of thematerial contained herein can be accepted by the UK200Group, or its member firms or the authors.

UK200Group is an association of separate and independently owned and managed chartered accountancy andlawyer firms. UK200Group does not provide client services and it does not accept responsibility or liability for theacts or omissions of its members. Likewise, the members of UK200Group are separate and independent legalentities, and as such each has no responsibility or liability for the acts or omissions of other members.

Version 1 – August 2015

2 UK200Group England & Wales Charities 2015

Taxation and VAT

We provide a full range of VAT andtaxation advice. Whilst the area oftaxation is becoming increasinglycomplex, a great many charities are ableto take advantage of exemptions frommost forms of income and capital taxes,but need to ensure that the appropriateconditions are met.

This guide is not intended as a definitiveguide to all aspects of charity accounting,taxation, law or best practice incompliance. Whilst, the guide highlightssome of the key areas requiringconsideration, appropriate professionaladvice should be taken by Trustees as thecircumstances warrant.

Chairman – Andy MalpassUK200Charities & Education GroupPartner at Whittingham Riddell LLP

Andy heads up the Charities andEducation group at Whittingham RiddellLLP and is Chair of the UK200GroupCharities and Education Committee. Heworks with a broad range of charities andeducational organisation, includingAcademies and Independent Schools.Andy has extensive experience of auditand internal audit compliance andprovides advice on governance and riskmanagement, financial planning,budgeting and strategy. He is often calledupon to speak at local and national charityconferences and seminars and regularlywrites for the professional press.

Andy joined Whittingham Riddell LLPfrom Pricewaterhouse Coopers where hespent 13 years working in both the UK andAustralia.

UK200Group Charities & Education Group members

UK200Group England & Wales Charities 2015 3

UK200Charities & Education Group3 Wesley HallQueens RoadAldershotHants GU11 3NPTel: 01252 401050 or 01252 [email protected]

Useful Contacts

The following organisations are usefulpoints of contact for readers wishing toobtain information or clarification onissues covered in this report, either at thedate of publication or in the future.

Charity Commission for England & WalesPO Box 1227Liverpool L69 3UGwww.charitycommission.gov.uk

HM Revenue & CustomsPO Box 205Bootle L69 9AZGeneral enquiries 0300 123 1073www.gov.uk

Office of Scottish Charity Regulator(OSCR)9 Riverside DriveDundee DD1 4NYGeneral enquiries 01382 220446www.oscr.org.uk

Office of the Third Sector2nd FloorAdmiralty ArchSouth SideThe MallLondon SW1A 2WHTel: 020 7276 1234www.thirdsector.co.uk

Seven Investment Management (7IM)125 Old Broad StreetLondon EC2N 1ARTel: 0203 102 9861www.7im.co.uk

LONDON

BIRMINGHAM M

CARDIFF

NEWCASTLE

STIRLING

SCARBOROUGH

BELFAST

BANBURY

BRIDGEND

CAMBRIDGE

CHELMSFORD

CHELTENHAM

CHICHESTER

COLCHESTER

GODALMING

GRIMSBY

HULL

HUNTINGDON

LEEDS

LETCHWORTHGARDEN CITY

LEWES

MIDDLESBROUGH

SALISBURY

SEAFORD

SHEWSBURY

SOUTHAMPTON

STOCKTON-ON-TEES

STRATFORD-UPON-AVON

SWANSEA WATFORD

WITNEY

UK200Charities & Education Group memberfirms, refer to website www.uk200group.co.ukfor full contact details

Charity Governance & Conflicts of Interest

Governance

There is an abundance of guidanceavailable to trustees issued by the CharityCommission and others providing detailsof the numerous responsibilities oftrustees in relation to governance. Twokey pieces of guidance and reporting areconsidered below.

Published in July 2008; The Hallmarks ofan effective charity is still best practicewith regards to governance. It sets outthe standards which help trustees toimprove the effectiveness of their charity,and the principles that the CharityCommission’s regulatory framework existsto support. The six hallmarks are:

Clear about its purposes and directionAn effective charity is clear about itspurposes, mission and values and usesthem to direct all aspects of its work.

A strong boardAn effective charity is run by a clearlyidentifiable board or trustee body thathas the right balance of skills andexperience, acts in the best interests ofthe charity and its beneficiaries,understands its responsibilities and hassystems in place to exercise them properly.

Fit for purposeThe structure, policies and procedures ofan effective charity enable it to achieve itspurposes and mission and deliver itsservices efficiently.

Learning and improvingAn effective charity is always seeking toimprove its performance and efficiency,and to learn new and better ways ofdelivering its purposes. A charity'sassessment of its performance, and of theimpact and outcomes of its work, willfeed into its planning processes and willinfluence its future direction.

Financially sound and prudentAn effective charity has the financial andother resources needed to deliver itspurposes and mission, and controls anduses them so as to achieve its potential.

Accountable and transparentAn effective charity is accountable to thepublic and others with an interest in the

charity (stakeholders) in a way that istransparent and understandable. There are a number of other codes andstandards of good practice which arereflected in guidance created for manydifferent organisations; e.g. NationalHousing Federation’s publication“Excellence in Governance” and, “GoodGovernance: a Code for the Voluntary andCommunity Sector” which is jointlyowned by NCVO, ACEVO, SCC, ICSA &WCVA and supported by the CharityCommission.

The underlying principle which is integralto these codes and standards is theprinciple of equality and diversity;

Equality is about creating a fairer societywhere everyone can participate and havethe opportunity to fulfil their potential.

Diversity is about respecting, valuing andcelebrating aspects that make us uniqueas individuals – recognising that wecontribute to society because of thoseaspects, not in spite of them. Diversityshould be recognised in all its formsincluding age, gender, faith, race, sexualorientation, disability, experience andthinking.

Impact of poor governance

Each year the Charity Commission issuesits report on investigations andcompliance casework. The 2013-14 report‘Tackling abuse and mismanagement’highlighted the most common types ofabuse and mismanagement as:

> Financial mismanagement and financialcrime

> Concerns about safeguarding> The risk of abuse for terrorist related

purposes> Serious governance failures> Concerns about charities’ independence> Concerns about charities abusing their

charitable status> Concerns about fundraising.

The Commission’s Statement of RegulatoryApproach, published in its annual reportand accounts for 2013-14, emphasisesrobust regulation and prioritises theirwork to promote trustees’ compliancewith charity law. It makes clear that theyare enhancing the rigour with which theyhold charities accountable.

An important part of the Commission’snew approach, is that the Commission isbecoming more proactive in identifyingand acting on concerns about charities.

The Commission has:

> Changed its approach to monitoringcharities that have been told to improvetheir compliance and governance

> Improved its work to follow up onconcerns raised during or shortly afterregistration

> Taken steps to recover lost funds,including, where appropriate, takingrestitution action.

Many of the problems identified by theCommission have their roots in basicgovernance failures. Poor governanceexposes charities to risk, hampers them infurthering their aims, and contributes toan environment in which abuse can becommitted and go unnoticed. No systemof control can guarantee a charity is fullyprotected against serious incidents orwilful criminal exploitation. But byfulfilling their duties and putting solidgovernance controls in place, trustees candramatically reduce the risk of abuse,protect their charity from harm andensure it furthers its purposes in line withits governing document.

At the heart of good governance is sounddecision making. Good decision makingmeans:

> Acting in good faith and exclusively inthe charity’s interests

> Acting within the trustees’ powers> Managing conflicts of interest> Being properly informed> Where relevant, seeking appropriate

advice.

Sometimes, concerns arise in connectionwith transactions and dealings betweenthe charity and a trustee or bodies closelyconnected to a trustee, for example loansbetween the charity and a trustee.Concerns can arise, when, for example,there is no record of the transaction beingproperly discussed by the non-conflictedtrustees, no written agreements, noindependent advice taken or where thetransactions are not reviewed for longperiods of time.

When a problem has arisen, trustees must



> Governance

respond appropriately, including reportingthe incident to the Charity Commission.This demonstrates to donors, funders andbeneficiaries that the trustees are notignoring the issues, but protecting theircharity’s interests. It therefore mitigatesthe potential reputational damageassociated with the adverse incident. Iftrustees fail to respond appropriately, thismay be deemed to be mismanagement.

The Commission’s regulatory approach isreflected in the guidance issued to trustees.They have recently consulted on andreissued guidance on conflicts of interest,and also consultated on and revised theCharity Commission’s core guidance ontrusteeship (The essential trustee).

The most significant change proposed to“The essential trustee” is a new explanationof what the Commission expects oftrustees. Commission guidance currentlydistinguishes between legal requirements(what trustees ‘must’ do) and goodpractice (what trustees ‘should’ do). Sometrustees and their advisors have beenunclear whether they need to follow thespecified good practice; some have treatedthis good practice as merely optional.

This was never the Commission’sintention. Many of the examples of goodpractice are applications of wider legalrequirements that trustees must meet.Trustees who don’t follow the specifiedgood practice are at risk of breachingtheir legal duties.

The Commission wants to make it clearerthat it expects trustees to comply withspecified good practice unless they canjustify not doing so (for example bycomplying in a different way). If trusteescan’t justify why they haven’t followedgood practice, the Commission is likely totreat this as misconduct or mismanagement.

It is important that all trustees are familiarwith the guidance available and we wouldconsider the following to be essentialreading.

> Internal financial controls for charities:http://bit.ly/1BQMqVl

> It’s your decision: charity trustees anddecision making: http://url6.org/bDGX

> The essential trustee: what you need toknow: http://url6.org/bDGY

> Conflicts of interest:http://url6.org/bDGZ

> Hallmarks of an effective charity:http://url6.org/bDHa

> Charity Finance Group Charity Fraudguide: http://bit.ly/1AgUNHI

> Fraud and financial crime:http://url6.org/bDHc

Further reading designed to providesupport to trustees in particular areas,includes:

> Protecting vulnerable groups includingchildren: http://url6.org/bDHd

> Safeguarding children:http://url6.org/bDHe

> Charities and terrorism:http://url6.org/bDHf

> Protecting charities from abuse forextremist purposes:http://url6.org/bDHg

> Due diligence monitoring and end useof funds: http://bit.ly/1Ph7lmA

> Holding moving and receiving fundssafely: http://url6.org/bDHi

> Managing charity assets and resources:http://url6.org/bDHj

> Reporting serious incidents - guidancefor trustees: http://bit.ly/1wKG828

> Speaking out: campaigning andpolitical activity by charities:http://bit.ly/1z2keJQ

> Charities, elections and referendums:http://url6.org/bDHl

> Electoral Commission guidance onCharities and Campaigning:http://bit.ly/1oWLlQQ

Report produced by:Sue Foster and Mark Filsell, Knill James

Sue heads the Charities and Educationteam at Knill James, and is on theUK200Group Charities and EducationCommittee. Sue and Mark act for anumber of charities and not-for-profitorganisations together with independentschools and academies providing auditand assurance services and advising ongovernance issues, risk management andinternal control procedures.

Sue and Mark speak at charity, educationaland academy seminars providing trusteeswith updates on technical and governanceissues.

Conflicts of Interest

As the independent regulator for charitiesin England and Wales, it is the job of theCharity Commission to ensure thattrustees comply with the followingresponsibilities:

> Act in the interests of the charity> Operate in a manner consistent with the

charity’s purpose> Act with due care and diligence> Ensure that the charity complies with

relevant legislation.

As such, they have issued guidance toensure that trustees do not putthemselves in any position where theirduties as a trustee may conflict with anypersonal interest they may have. Thefollowing is a summary of theCommission’s guide for charity trustees inrespect of ‘Conflicts of Interest’.

What is a conflict of interest?

A conflict of interest is any situation inwhich a trustee’s personal interests orloyalties could, or could be seen to,prevent the trustee from making adecision only in the best interests of thecharity; for example, if a trustee (or afamily member or business partner):

> Receive payment from the charity forgoods or services supplied, or as anemployee

> Make a loan to the charity> Own a business that enters into a

contract with the charity> Use the charity’s services> Enter into some other financial

transaction with the charity.

Conflicts of interest are common incharities and having a conflict of interestdoesn’t mean that the trustee has donesomething wrong. However, action needsto be taken to prevent them frominterfering with the trustee’s ability tomake a decision only in the best interestsof the charity.

Each charity should:

> Identify conflicts of interest> Prevent any conflict of interest from

affecting a decision> Record any conflict of interest.

Identifying conflicts of interest

Each individual trustee must avoid puttingthemselves in a position where their dutyto act only in the best interests of thecharity could conflict with any personalinterest they may have. Individual trusteesmust identify and declare any conflict ofinterest and the trustee body must ensurethat any conflict of interest does notprevent them from making a decision onlyin the best interests of the charity.

A conflict of interest can relate not only toa trustee’s personal interests but also tothe interests of those connected to them.The list of connected persons is wide andincludes child, parent, grandchild,grandparent, brother or sister and spouseor civil partner.

It is good practice to have a writtenconflicts of interest policy and register ofinterests as these can help individualtrustees and the trustee body to identifyconflicts of interest promptly. The CharityCommission has given guidance as towhat should be included in such a policyand this is included in Table A.

A register of interests should includerelevant business and pecuniary interestsand the Board of Trustees should ensurethat their register of interests is kept up todate through regular review.

The trustee body should considerconflicts of interest prior to appointmentof a trustee. Where prospective trusteesare likely to be subject to serious orfrequent conflicts of interest then thetrustees should consider seriously whetherthat trustee should be appointed.

Conflicts of interest usually arise whereeither:

> There is a potential financial benefitdirectly to a trustee or indirectlythrough a connected person; or

> A trustee’s duty to the charity maycompete with a duty or loyalty theyowe to another organisation or person.

Although declaring conflicts of interest isprimarily the responsibility of the affectedtrustee, the trustee body should havestrong systems in place to ensure trusteesare aware of their duty to declare them.

The Charity Commission expect trusteesto have a standard agenda item at thebeginning of each trustee meeting todeclare any actual or potential conflict ofinterest.

Preventing conflicts of interestfrom affecting decision making

Having identified a conflict of interest,trustees must ensure that any potentialeffect on decision making is eliminated.They would normally do this by:

> Finding an alternative way forwardwhich doesn’t involve the conflict ofinterest

> Take appropriate steps to manage theconflict (see below).

Trustees must follow any legal orgoverning document requirements whichsay how the conflict of interest must behandled.

Trustee benefit – withdraw from decisionmaking

Where there are no legal or governingdocument provisions about managingconflicts of interest, then it is expectedthat a trustee should be absent from anydiscussion that could lead to the trustee’sbenefit. The individual should not voteand should be absent for initialdiscussions, decisions and anysubsequent discussion or decision on theissue.

Conflict of loyalty – withdraw fromdecision making

Where there are no legal or governingdocument provisions and where there is aconflict of loyalty but the trustee does notstand to gain any benefit, then it is up tothe trustees as to the best course ofaction to take. The trustee concerned maybe asked to:

> Withdraw (as above) > Stay in the meeting but not participate> Participate in the discussion.

The trustees should always be able toshow that they have made their decisionin the best interest of the charity.


> Conflicts of Interest

Record the conflict of interest

It is expected that the charity keeps awritten record within the minutes of anyconflict of interest and how it was dealtwith. This would normally include:

> The nature of the conflict> Which trustee(s) were affected> If any conflicts were declared in

advance> An outline of the discussion> Whether anyone withdrew from the

discussion> How the trustees took the decision in

the best interests of the charity.

It is recommended, and in most cases it isa requirement, that details of paymentsand benefits to charity trustees andpeople connected to them are includedwithin the charity’s annual accounts.

If you get it wrong

Problems in charities are often caused bypoorly managed conflicts of interest andabout 90% of Charity Commissioninvestigations involve a conflict ofinterest. If you fail to identify and dealwith conflicts of interest:

> The trustees’ decision may be invalidand could be open to challenge

> Trustees might have to refund anypayment they received from the charity,even if the charity also benefitted fromthe arrangement

> Trustees might have to make good anyloss the charity suffers

> The Charity Commission will takeregulatory action where it’s necessaryto protect the charity from further harmor to deal with any misconduct ormismanagement by the trustees.

Trustees should be aware of thesignificant negative effects that a badlymanaged conflict of interest can have onthe charity’s reputation and on publictrust and confidence generally. Whendealing with conflicts of interest, trusteesshould be aware of how the situation mayappear to someone from outside thecharity, and make sure that policies andprocedures are in place which will allowtrustees to demonstrate that suchsituations have been dealt with properly.


Conflict of Interest Policy - Table A*

As a minimum, a conflicts of interest policy should:

> Define conflicts of interest> Explain that trustees have a personal responsibility to declare conflicts of

interest if they are to fulfil their legal duty to act only in the best interests ofthe charity

> Give an account of what the charity’s governing document says about conflictsof interest

> Define all interests that trustees should declare, including business andpersonal interests and those of their spouse, partner, family and close relatives

> Define trustee benefits and highlight the requirement to obtain legal authoritybefore any transaction involving trustee benefit is undertaken

> Include guidance on the procedures to follow when a trustee is subject to aconflict of interest, such as: l Recording trustee interests in the charity’s register of interestsl Declaring interests at the beginning of each meetingl Removing the trustee concerned from the decision making processl Recording details of the discussions and decisions made

> Set out how and by whom the policy will be monitored and enforced> Be widely communicated and understood within the charity> Be part of a wider policy framework, for example a trustee handbook.

* is an extract from the Charity Commission Guidance




Report produced by:David Robertson, Partner with AndersonBarrowcliff LLP

David is a member of the UK200GroupCharity and Education committee andchairs the UK200Group Academiesnational training day. He has over 20years’ experience of auditing and advisingcharities and not-for-profit organisationsand specialises in education; academies,independent schools and Sixth Form andFE colleges. He is an audit committeemember at his local university and afinance advisor for a FE College.

Addressing a conflict of interest: Checklist*

Q1. If a trustee has identified that a conflict of interest exists, has the trusteebody considered whether the conflict is so serious that it should be removed orthey should seek authority for it. If the trustees have decided against removingthe conflict of interest or seeking authority for it, go to Q2.

Q3. Is the benefit authorised:- by the charity’s governing document?- by a statutory provision such as section 185 of the Charities Act?- specifically, by the Charity Commission?

If no, the trustees must apply to the Commission for authority for the benefit.Go to Q5.

If yes, have the charity’s trustees complied strictly with the terms of theauthority. Go to Q5.

Q4. Even though there is no trustee benefit, are there procedures in place toensure that the decision can be made only in the best interests of the charity?

If no, the charity’s trustees should take advice on their decision, and for thefuture, ensure that suitable conflicts of interest procedures are put in place andfollowed.

If yes, go to Q6.

Q2. Has the conflict of interest come up because the trustee concerned willreceive a benefit as a result of the decision? If yes, go to Q3, if not, go to Q4.

Q5. Have the charity’s trustees checked whether they are required to disclosethe trustee benefit in the annual report and accounts. Go to Q6.

Q6. Have the charity’s trustees made a record of the conflict, their approach todealing with it and their decision?

q

q

q

q

q

* is an extract from the Charity Commission Guidance

Public BenefitThe Charities Act 2006 refers to the factthat all charities must provide a publicbenefit and must satisfy the public benefittest. However, the legislation contains nostatutory definition of public benefit.

Whilst there is no statutory guidance onthe public benefit “test”, the CharityCommission was given a new regulatoryobjective – known as the public benefitobjective – which involves promotingawareness and understanding of theoperation of the public benefit requirement.

Revised Guidance was issued at the endof 2013, following a decision of the UpperTribunal in a case involving the IndependentSchools Council as a result of which theGuidance previously issued by the CharityCommission had to be amended andsections of that guidance withdrawn.

The current Public Benefit Guidanceissued by the Charity Commission is splitinto three as follows:

1 The first part explains the legalrequirements that a charity’s purposesmust be for the public benefit

2 The second part explains the meaningof public benefit in the context ofrunning a charity

3 The third part explains the requirementfor a charity trustee to report on howthey have carried out the charity’spurposes for the public benefit.

The three part Guidance does not laydown the law but rather explains how thelaw is interpreted and applied by theCommission. Individual decisions arebased on the facts of a given case.Charity trustees must be aware of theCommission’s Public Benefit Guidanceand have taken it into account, where it isrelevant, and only depart from it wherethey have good reason. Taking each partof the revised current Guidance in turn:

1 What Public Benefit Means

Charities have to have charitablepurposes only:

i) These are set out in the descriptions inthe Charities Act 2006; and

ii) A charitable purpose must be for thepublic benefit. This is split into two:

a) The “benefit aspect” whichmeans that the purpose must be

beneficial and any detriment must notoutweigh the benefit. If it is not clearthat a purpose is beneficial theCommission may ask for evidence

b) The “public aspect” by which itmust benefit the public in general or asufficient section of it. Whether asufficient section of the public benefitmay depend on the specific purposeand in some cases people living in aspecific geographical area will besufficient. It is also possible to decidewho can benefit by reference to“protected characteristics” such asage, disability or religion. TheCommission will decide whether asection of the public is “sufficient” ona case by case basis and there aredifferent rules for poverty charitieswhich may not require the “public”aspect of the test to be satisfied.

Further, any personal benefits receivedshould be no more than “incidental” tocarrying out a charity’s purpose.

2 What Public Benefit Means in theContext of Running a Charity

Charity trustees have a duty to carry out acharity’s purposes for the public benefit.That the charity’s purposes are beneficialshould be understood by the trustees andthe purposes should be carried out so asto benefit the public in that way.

In doing this:

i) The risk of harm should be identifiedand minimised; and any harm whicharises should be a minor consequenceof carrying out the purpose

ii) Trustees should know who canproperly benefit and give properconsideration to the full range of waysin which the charity’s purposes can becarried out. This includes havingproper reasons for so doing, notexcluding the poor and making surethat the decision is within the rangethat trustees could make. There arespecial considerations for membershipcharities and for charges for serviceswhere charges should generally beaffordable to people of modest meansand the level of provision for the poor“must be more than minimal or token”.

There are also special considerations with

regard to physical access to a charity’sfacilities and whether these can berestricted.

3 The Requirement to Report

This sets out the duty that charitytrustees must report on how they havecarried out the charity’s purposes for thepublic benefit. This must be reported inthe trustees’ annual report and there aredifferent rules for “smaller” charities thanfor “larger” charities.

For smaller charities, charity trusteesmust include a brief summary of the mainactivities undertaken by the charity tocarry out its charitable purposes for thepublic benefit and a statement as towhether they have had regard to theCommission’s Guidance when exercisingany powers or duties to which it is relevant.

For larger charities there are moredetailed requirements.

This third requirement means that thepublic benefit requirement is reported byreference to the charity’s purposes and itis for the trustees to demonstrate that therequirements have been fulfilled.

Recently the Charity Commission haspublished its letter to the IndependentSchools Council stating its position onissues relating to the public benefit ofindependent schools. The Commissionmakes it clear that it does not favour anew statutory duty for independent schoolsbut rather that it is considering its Guidanceand the inclusion of more examples ofreporting on sharing sports, arts or musicfacilities so that charitable schools areencouraged to consider what they aredoing and how they report in this area. Itis understood that this revised guidancewill be published and promoted to charitableschools. This emphasises the approach ofthe Commission that trustees are free tomake decisions about how they carry outtheir legal duties in a way which isappropriate for the individual circumstancesof their charity, and that the Commissiondoes not wish to be prescriptive.

Report produced by:Mark Lewis – Lodders Solicitors LLPBio on page 35



Charities and Risk Management

The management of risk forms a key partof the day to day operation of a charityand is fundamental to the wider strategicconsiderations of the Board of Trustees.The formal consideration of and reportingof risk by charities, is not only consistentwith good governance and good practicebut, is also a legal requirement for thosecharities which require an audit.

The risks which charities face will varyaccording to their size, nature and thecomplexity of their activities andoperations, whilst the finances of a charitywill also have a significant bearing on riskin the wider sense. The larger and morediverse the operations of a charity, themore difficult the identification, recordingand management of risk becomes.Accordingly, the risk managementprocesses will need to be tailored to thespecific circumstances of each individualcharity. This guidance considers:

> The Basics of Risk Management> Legal Reporting Requirements> Types of Risk> Identifying and Managing Risk> Recording Risk Assessment – example

risk registers.

The Basics of Risk Management

Identifying and managing risk is essentialto the trustees achieving their keyobjectives and sustaining the charity’sfinancial wellbeing and safeguarding itsunderlying assets. By managing riskeffectively, trustees can help ensure that:

> Significant risks are known andmonitored, allowing trustees andmanagement to make informeddecisions

> Opportunities can be explored anddeveloped on an informed basis

> Strategic planning can be enhancedand improved as broader consequencesare considered and evaluated.

Legal Reporting Requirements

The ultimate responsibility for themanagement and control of a charity sitswith the trustees and their involvement inthe risk management process is essential.Whilst, aspects of the risk managementprocess will be delegated within most, ifnot all charities, trustees should consider

and review the key aspects of the riskmanagement process on an ongoing basisand formally minute their considerationsat least annually.

Charities that are required by law to havetheir accounts audited must make a riskmanagement statement in their trustees’annual report confirming that: “thecharity trustees have given considerationto the major risks to which the charity isexposed and satisfied themselves thatsystems or procedures are established inorder to manage those risks”.

Smaller charities which fall below the auditthreshold, whilst not required to make arisk management statement in theirTrustees’ Annual Report, are encouragedto do so as a matter of best practice.

Business Review

Incorporated charities, other than smallcompanies as defined by company law,must also include a business review intheir annual directors’ (i.e. Trustees’)report for accounting periodscommencing on or after 1 January 2016.To be a small company at least 2 of thefollowing conditions must be met:

> Annual income must be £10.2m or less(previously £6.5m or less)

> Total assets on the balance sheet mustbe £5.1m or less (previously £3.26m orless)

> The average number of employees mustbe 50 or fewer.

The business review must contain adescription of the principal risks anduncertainties facing the charitable company.

Purpose

The purpose of the risk managementstatement is to give the readers of theannual trustees report an insight into:

> How the charity approaches themanagement of risk

> An understanding of the major risks towhich the charity is exposed

> Proposals for further developments inthe management of risk.

Form and content

The form and content of the risk

management statement will reflect thesize and complexity of the charity but as aminimum should include:

> An acknowledgement of the trustees’responsibility

> An overview of the risk identificationprocess

> An indication that the major risksidentified have been reviewed andassessed

> Confirmation that control systems havebeen established to manage those risks.

The level of involvement by trusteesshould be sufficient for them to be able tomake the required risk managementstatement with reasonable confidence.

Detailed approach to reporting

Larger charities and those with morecomplex activities may, as a matter ofbest practice, wish to adopt a moredetailed approach to reporting in theannual report. The Charity Commissionguidance on the structure and principleswhich those adopting a more expansiveapproach to reporting should consider isas follows:

> A description of the major risks faced> The links between the identification of

major risks and the operational andstrategic objectives of the charity

> Procedures that extend beyond thefinancial risk to encompass operational,compliance and other categories ofidentifiable risk

> The link between risk assessment andevaluation to the likelihood of itsoccurrence and impact should theevent occur

> A description of the risk assessmentprocesses and monitoring that areembedded in management andoperational processes

> Trustees’ review of the principal resultsof risk identification processes and howthey are evaluated and monitored.

Types of Risk

All charities face a level of risk both interms of their day to day operation and inthe wider sense of their existence. Majorrisks are those risks that would have amajor impact on the charity and aprobable or highly probable likelihood ofoccurring.


> Charities and Risk Management

There are many examples of riskclassification which charities can adopt inhelping them to identify the major risks towhich they are exposed. The followingrisks categories provide a guide to thesort of categories that trustees would beexpected to consider:

> Mission/objectivese.g. aims/objectives do not accord withconstitution, activities and futuredevelopments restricted by objects,inappropriate/lack of strategy andforward planning.

> Governance and managemente.g. inappropriate organisationalstructure, difficulty recruiting trustees,poor relationship between trustees andmanagement, conflict of interest,inadequate reporting to trustees.

> Law and regulation (compliance)e.g. failure to operate within objects,objects not considered charitable, adverseCharity Commission visit, penaltiesimposed, breach of statutory requirements(Health and Safety Legislation, CharitiesAct, Companies Act etc.).

> External factorse.g. political change, social anddemographic changes, public perception,adverse publicity, Acts of God.

> Operational factorse.g. poor service quality, competitionand pricing, supplier/customerdependency, contract risk, security ofassets, lack of operational planning andcontrol, lack of written policies andprocedures.

> Human resourcese.g. loss of key members of staff,difficulty in recruitment, poor staffvetting procedures, low staff morale,lack of formal terms and conditionspoor training.

> Environmentale.g. planning applications, contamination.

> Technologye.g. need to invest in new technology,failure of key software/hardware, poorsystems selection, lack of IT disasterrecovery planning, over reliance onsupplier.

> Financiale.g. weak/ineffective financialprocedures and controls, inadequatebudgeting and reporting, lack of capitalexpenditure planning.

> Taxatione.g. breach of trading limits forCorporation Tax and or VAT, poor GiftAid procedures, lack of VAT planning.

> Funds and fundraisinge.g. lack of reserves policy, fundingdeficit, falling income levels, failure tocomply with donor requirements, poorcontrol over fundraising, lack ofinvestment policy.

> Fraude.g. lack of consideration of fraud risk,poor staff education and training,inappropriate response to fraud, poorinternal controls, lack of segregation ofduties.

The categorisation of risk and the specificrisks attributed will vary according to thesize and complexity of the charity andsmaller charities may consider simplifyingtheir risk model by combining some of thecategories.

Identifying and Managing Risk

There are many models/exampleprocesses which trustees’ may adopt infulfilling their obligations. They are allsimilar in that they set out a number ofstages to be considered and trusteesmust select the model which is mostsuited to the particular circumstances oftheir charity. The stages which trustees’must work through should effectivelyaddress the specific requirements of thestatement which they are required tomake annually. These are as follows:

Establish a risk policy

Risk is inherent in all activities and mayarise as a consequence of a positivedecision to do something, or from inaction.Charities will have differing risk profilesaccording to their size, nature and thecomplexity of their activities, andoperations will have different capacities toabsorb or tolerate risk. Not only will acharity need to understand its toleranceto risk but will also need to understand itsoverall risk profile, the balance between

higher and lower risk activities.

These considerations will form the basisof the trustees decision making in respectof the level of risk they are willing toaccept, and from a starting point of whichto undertake the initial risk assessmentand determine the policy in respect ofrisk. The trustees will need tocommunicate the boundaries and limitsset by their policy to ensure that there is aclear understanding through theorganisation of acceptable andunacceptable risks.

Identify the major risks

The identification of risks is best achievedby involving the trustees and members ofmanagement and staff who have adetailed knowledge of the day to dayoperations of the charity. The wider theinput the more comprehensive theassessment is likely to be. Achievingstructured input can be difficult and maybest be achieved by holding a series ofworkshops to gather information andideas. If the charity has subsidiaries orbranches, risk identification must extendto them.

Examples of the general types of risks towhich a charity may be exposed are listedabove, and these can be used as astarting point/checklist. However, it isimportant that the process of riskidentification is specific to the charity andnot simply viewed as a generic exercise.

Assess the impact of identified risks

The requirement for trustees to report onrisk management is focussed on “major”risk. Accordingly it is important that oncerisks have been identified they are putinto perspective in respect of their relativeimportance by considering the severity ofimpact and the likelihood of occurrence.There are various models which considerthis. The following scoring matrix onpage 12, which is included in the CharityCommission guidance, is one such modelwhich attempts to give an overall scorefor each risk identified.



IMPACT

Description Score Example

Insignificant 1 l no impact on service/reputationl complaint unlikelyl litigation risk low

Minor 2 l slight impact on service/reputationl complaint possiblel litigation possible

Moderate 3 l some service disruptionl potential adverse publicity – avoidablel complaint probablel litigation probable

Major 4 l service disruptedl adverse publicity not avoidablel complaint probablel litigation probable

Extreme/Catastrophic 5 l service interrupted for significant timel major adverse publicity not avoidablel major litigation expectedl resignation of senior management and boardl loss of beneficiary confidence

LIKELIHOOD

Description Score Example

Remote 1 l may only occur in exceptional circumstances

Unlikely 2 l expected to occur in a few circumstances

Possible 3 l expected to occur in some circumstances

Probable 4 l expected to occur in many circumstances

Highly Probable 5 l expected to occur frequently

The “heat map” categorises the assessedrisks as:

Major Risk – score 15 and above

Moderate Risk – score 8 to 14

Minor or Insignificant Risk – score 7 and below

Identify Controls, Actions andResponsibilities

Where major risks are identified thetrustees will need to assess what controlsand procedures, if any, are in place tomanage those risks to an acceptable levelby reducing the likelihood and or impact.This review should include an assessmentof the adequacy of those controls andprocedures which are already in place.

Once the existence and adequacy ofexisting controls and procedures has beenassessed the trustees will then be able tobuild up a plan of additionalactions/controls which need to be put in


There are a number of different ways in which the overall risk can be determined. Whilst equal weighting can be given to thelikelihood and impact scores, many examples apply a greater weighting to impact. Applying the formula xy+y, where x is likelihoodand y is impact, this can be achieved and is modelled in the “heat map” below.

IMPACT

LIKELIHOOD

Extreme/Catastrophic

Remote Unlikely Possible Probable HighlyProbable

Major

Moderate

Minor

Insignificant

10 15 20 25 30

8 12 16 20 24

6 9 12 15 18

4 6 8 10 12

2 3 4 5 6

1 2 3 4 5

5

4

3

2

1

place to lessen the likelihood of an eventoccurring, or lessen its impact if it does.In doing so, it is important that the personresponsible for each new action/control isidentified, to ensure that there is clarity ofownership, and that a timetable forimplementation is also drawn up. It is thisassessment and action plan(appropriately documented) which willenable trustees to make a riskmanagement statement in accordancewith the regulations.

Risk management is aimed at reducingthe “gross level” of risk (initial risk) to areduced level of “net risk”. Exampletemplates for recording the riskassessment are set out on pages 14 and 15.

The implementation of new controls andprocedures to manage risk needs to beconsidered in the context of cost benefit.Clearly, there would be little point inimplementing a highly complex andexpensive series of controls if the impacton risk reduction was minimal.Conversely, the process may help trusteesidentify existing control and procedureswhich provide little value and addunwanted cost.

The identification of major risks and thecontrols which exist to manage them,along with the preparation of an actionplan for the implementation of additionalcontrols and procedures where required,will enable trustees to make a positivestatement in respect of risk managementin the Trustees’ Annual Report.

Regular Monitoring andAssessment

The identification and assessment of riskand associated controls must not berelegated to a one-off event. Themanagement of risk is on-going and anyprocess employed must ensure that newrisks are identified and addressed as theyarise and that established risks arereassessed on a regular basis. As aminimum, the risk assessment should berevisited on a formal basis at least once ayear, but the processes employed shouldallow for ongoing assessment andreporting of risk. Many charities have riskand risk management as a standingagenda item for all trustee andmanagement meetings.



Recording Risk Assessment

In order for risk management to be effective and allow trustees to formally evidence their assessment of risk, it is essential that theassessment is appropriately recorded. Many charities do so by adopting a form of risk register/matrix. There is no prescribed formatwhich charities must adopt and the form and content will vary depending upon the size of a charity. The following are examples ofrisk register templates which have been adopted:

Example Format 1

Structure,skills andconduct of theBoard ofTrustees andmanagementcommittees isinappropriate

Weak orineffectivefinancialcontrols andinadequatefinancialplanning andforecasting

1

2

5

4

10

12

NoneFormal reviewandassessment ofBoardstructure,training andskills – annually

Formal review of strategy –annually

Formal Reviewand approval of budgets –annually

Formal review of managementaccounts andvariance analysis -monthly

Board ofTrustees

FinanceManager/Board ofTrustees

Low

Low

Review of structureand constitutionalchange to ensurethat the Boardcontains thenecessaryexperience andskills/skills audit

Terms of referenceand reporting linesclearly defined

Appropriate trainingand advisorysupport in place

Recruitment process

Organisation chartand clearunderstanding ofroles andresponsibilities

Budgets linked tobusiness planningand objectives

Timely and accuratemonitoring andreporting

Proper costingprocedures forproduct or servicedelivery

Adequate skillsbase to produceand interpretbudgetary andfinancial report

Procedures toreview and actionbudget/cash flowvariances

Risk Factor Risk Risk Gross Control Net Responsibility Monitoring Further Likelihood Impact Risk Procedure Risk Process/

1 - 5 1 - 5 Score L/M/H Review Date

e.g. Governance and Management

e.g. Financial



Example Format 2

Risk area/risk identified Governance and management:

Structure, skills and conduct of the Board of Trustees and management committees is inappropriate

Likelihood of occurrence (1-5) 1

Severity of impact (1-5) 5

Overall or “gross” risk 10

Control procedures Review of structure and constitutional change to ensure that the Board contains the necessary experience and skills/skills audit

Terms of reference and reporting lines clearly defined.

Appropriate training and advisory support in place.

Recruitment process

Organisation chart and clear understanding of roles and responsibilities

Retained or “net” risk Low

Monitoring process Formal review and assessment of Board structure, training and skills

Responsibility Board of Trustees

Further action required None

Date of review Annual

Report produced by:Andy Malpass BA FCA, Partner withWhittingham Riddell LLP




Charity Accounting and Financial Reporting

Introduction

Charity accounting and reportingrequirements applicable to England andWales are primarily dictated by theCharities Act 2011 and the Statements ofRecommended Practice (known under theacronym SORP).

The SORP issued in 2005 has beenreplaced by SORP 2015 and the detailedreporting requirements have beenamended to be in line with changes to UKGenerally Accepted Accounting Principles(GAAP) imposed by the adoption ofFinancial Reporting Statement 102 (FRS102). The new provisions apply foraccounting periods beginning on or after 1 January 2015. The details of SORP 2015and the changes it introduces are set outin the section of this handbook entitled“Charity accounting and financialreporting – SORP 2015”.

The areas covered in this section are asfollows:

> Accounting records > Annual statutory accounts and trustees’

annual report> Annual return> Summary of accounts and report

production and filing requirements> External scrutiny.

Overriding principle

In order to benefit from the special taxstatus granted to charities and to fulfil theprinciples of public accountability andtransparency required of them, allcharities are required to not only maintainaccounting records and prepare accounts,but also to make the accounts available tothe public on request.

(If the particular charity is also required toprepare a trustees’ annual report then thishas to be made available too.)

This duty is in addition to any other filingrequirements under the Charities orCompanies Act or by any other principalregulators (exempt charities). To assist indefraying the cost of the provision above,the trustees are permitted to make areasonable charge to cover incidentalssuch as copying and postage.

Accounting Records

All charities must comply with thefollowing requirements in respect of thepreparation and maintenance ofaccounting records:

> Prepare and maintain accountingrecords. These records which willinclude cash books, invoices, receipts,bank statements, wage details etc mustbe retained for at least 6 years (as setout in the Charities Act)

> Where gift aid payments are received,records must be maintained for six yearsincluding the details of substantial donors,in accordance with HMRC requirements.

Annual Statutory Accountsand Trustees’ AnnualReport

Requirement to prepare and fileaccounts

All Charities are required to prepareannual accounts in some form and areobliged to make them available to thepublic, upon request, together with, ifrequired, a trustees’ annual report. Theavailability to the public of the accountsand the trustees’ annual report is neededto underpin the principle of publicaccountability and transparency of Charities.

Also as a matter of public record, certaininformation has to be filed with theCharity Commission. The amount ofinformation depends entirely on the levelof income of the Charity, apart fromCharitable Incorporated Organisations(CIOs) which are required to file an annualreturn, trustees’ annual report and accountsregardless of the level of their income.

Basis of preparation of accounts

Receipts and Payments Accounts

Receipts and payments accounts can beprepared by non-company Charities witha gross income of £250,000 or lessduring the financial year with thefollowing items contained within them:

> Receipts and payments account> Statement of assets and liabilities

> Notes to the accounts (where appropriate)> Trustees’ annual report.

Charities with a gross income of £250,000or less can opt to prepare accounts on anaccruals basis.

Charity Commission guidance on thepreparation of receipts and paymentsaccounts, in the form of its ‘receipts andpayments accounts pack (CC16)’ isavailable on the Commission website.

Accruals Accounts

All charitable companies, non-companyCharities with a gross income exceeding£250,000 and those Charities whererequired by their underlying constitution,must prepare in each financial year anannual report and accounts based uponthe accruals concept with the followingkey components:

> Statement of Financial Activity (“SOFA”)(including an income and expenditureaccount - where appropriate)

> Balance sheet (also known as thestatement of financial position)

> Cash flow statement (where required *)> Notes to the accounts> Trustees’ annual report.

* SORP 2015 effective from 1 January 2015has been initially designed in 2 partsallowing small charities to take advantageof the FRSSE and not prepare a cash flow,however this standard is being withdrawnin 2016 and after that date all charities willneed to follow the new FRS 102 formatwhich includes a requirement for a cashflow – (refer to page 20 for section onSORP 2015).

Such accounts for Charities are normallyrequired to show a true and fair view.Charities are required to apply themethods and principles of the SORP andthe regulations when preparing theirfinancial statements.

Charity Commission guidance on thepreparation of accruals accounts in theform of its ‘accruals accounts pack (CC17)’is available on the Commission website.

Group Accounts

Under the provisions of the Charities Act2011, Charities with subsidiaries must


prepare group accounts to consolidate theaccounts of the Charity and any subsidiaries,if the income of the group, after eliminatingintra-group transactions and consolidationadjustments, exceeds £1,000,000 foraccounting periods ending on or after 31 March 2015 (previously £500,000).These accounts are prepared on theaccruals basis and in accordance with theSORP and comprise:

> Group SoFA> Group income and expenditure account

– if appropriate> Group and charity only balance sheet> Group and charity only cash flow –

where required > Notes to the accounts> Trustees’ annual report.

Trustees’ Annual Report

All registered charities must prepare atrustees’ annual report (TAR). Some ofthe basic contents are mandatory for allcharities but the bigger the charity themore comprehensive the informationshould be. The purpose of the TAR is toexplain the aims of the charity and how itis going about achieving them. It does nothave to be complicated, particularly forthe smaller charity, but it should enablethe reader of the accounts to understandhow the money was raised, spent and,crucially, what difference it made.

The TAR is structured under the followingheadings for all charities:

> Reference and administration details ofthe charity, its trustees and advisers

> Structure, governance and management> Objectives and activities> Achievements and performance> Financial review> Any funds held as custodian trustees on

behalf of others – if appropriate> Public benefit.

In addition for larger charities, (thosesubject to statutory audit) must include:

> Plans for future periods

and for group accounts:

> Relationship between the charity andrelated parties including subsidiaries

> Significant activities through thesubsidiaries (under objectives andactivities)

> Differentiation in achievements andperformance between the charity andthe subsidiary

> Financial position of the charity andsubsidiary (under financial review).

The detailed legal requirements for thetrustees’ annual report are set out in theCharities (Accounts and Reports)Regulations 2008 which underpins therecommendations of the Charities SORP.

Excepted and Exempt Charities

These charities are not required to file theirtrustees’ annual report or accounts with theCharity Commission, but may be requiredto file elsewhere in accordance with theirprinciple regulators (exempt charities).The basic requirements to keep accountingrecords and to prepare accounts whichare available to the public on request do,however, have to be met.

Annual Return

Charity trustees, by law, must keep thecharity’s registered details up-to-date.

Small charities with a gross income of£10,000 or less do this utilising an annualinformation update form. If the charity’sincome is more than £10,000, an annualreturn must be completed. The annualreturn should be compiled when theaccounts for the period are finalised andsigned using the information contained inthem to complete the form.

Annual Information Update

This requests basic information about thecharity including trustee details anddetails of its area(s) of operation.

Annual Return

This comprises the following basicinformation:

> Registered charity number (andcompany number if applicable)

> Charity’s bank or building society details- account name, number and sort code

> Trustees’ details - names, dates of birthand contact details

> Details of the main contact at the charity > Number of volunteers and employees at

the charity.

The following additional information isalso required:

Financial information

> Start and end dates of the financialperiod you are reporting on

> Total income and spending for the period > The amount spent outside England and

Wales.

Information on aims and activities

> A description of activities in thereporting period (around 100 words)

> Information about what the charity does> Locations where the charity worked in

the period.

Where the charity’s income is > £25,000the following digital copies (PDF format)will also be required:

> The charity’s accounts, agreed by thetrustees

> Independent examiner or auditor’s report> Trustees’ annual report> A list of any serious incidents that took

place in the year, even if alreadyreported to the Charity Commission.

There is no longer any requirement forlarger charities to complete the SummaryInformation Return (SIR).

Summary of Changes to Annual Return

For the annual return for 2015 the CharityCommission is introducing three newquestions to be answered by all charitiesthat complete the annual return.

> In the reporting period how muchincome did you receive from:

l Contracts from central or local government to deliver services

l Grants from central or local government

> Does your charity have a policy onpaying its staff?

> Has your charity reviewed its financialcontrols during the reporting period?

The Charity Commission have producedguidance to accompany these newquestions.


> Charity Accounting and Financial Reporting

Filing Deadline

Charity Commission

The deadline for filing accounts and reports with the Charity Commission is within 10 months of the end of each financial reportingperiod.

Companies House

Incorporated charities must also file their accounts and trustees annual report with Companies House within 9 months of the year end.


Summary of Accounts and Report Production and Filing RequirementsSet out below is a table summarising the accounts and report production and reporting requirements for Charities of different sizes:

1 Registered charities with income below £10k are asked to complete and file an update form.

2 Accrual basis of accounts preparation if corporate charity, income >£250k or required by governing document.

There is a link on the charity commission website for information on, and to access, the annual return which is as followshttp://bit.ly/1ylbmMk

Reporting Requirements Prepare Prepare File Annual File Annual Report Serious Receipts and Accounts Annual Report & Return Incidents PaymentsReport Report Accounts Accounts

IncomeCIOs Y Y Y Y - <£250k

Other charities:

Unregistered Y - Y - - Y

Income < £10k Y Y - Y - 1

Income £10k to £25k Y Y Y Y - Y

Income £25k to £250k Y Y Y Y Y Y

Income £250k to £1m* Y Y Y Y Y 2

Income 1m* Y Y Y Y Y 2




Income level Requirement Note

Up to £25,000 None Unless governing documents require independent examination or audit*

£25,001 to £250,000 Independent examination Unless governing documents require audit*

£250,001 to £1,000,000** Independent examination Unless governing documents require audit*And gross assets < £3.26m by qualified examiner only

£250,001 to £1,000,000** Statutory auditAnd gross assets > £3.26m

> £1,000,000** Statutory audit

* Incorporated charity – In addition to governing document, 10% of members can request an audit

** For year ends on or before 30 March 2015, the upper threshold was £500,000.

Report produced by Eric Williams FCA,Principal with Edmund Carr LLP andTheresa Rees, Partner at ReesRussell LLP

Eric Williams FCA, Principal withEdmund Carr LLPEric heads up the Charities department atEdmund Carr LLP and is a member of theUK200Group Charities & EducationCommittee. He has had experience of abroad range of Charities and not-for-profit organisations and has extensiveexperience in audit services.

Theresa Rees, Partner at ReesRussell LLPTheresa is a member of the UK200GroupCharities & Education Committee hasworked with a wide range of charitiesencompassing the very small to charitieswith a national presence. Her charityclients operate across a broad sector andinclude those focussed on people (theyoung, the sick and the disadvantaged),places (areas of natural beauty both in theUK and overseas) and churches & faithbased activities.

External Scrutiny

Charity Accounting and Financial Reporting – SORP 2015

Introduction

The new Charity Statement ofRecommended Practice (“SORP”) bringsthe first significant change to accountingand financial reporting for the charity andnot-for-profit sector in a decade.

In 2013 the Financial Reporting Councilissued a new accounting standard, FRS102, to replace all existing accountingstandards. Since the SORP puts theaccounting standards into the specificcontext of the charity and not-for-profitsector, revisions to the existing SORP(SORP 2005) were needed.

The new Charities SORP, “Charities SORP(FRS 102)”, applies to all charities thatprepare their financial statements on theaccruals basis, unless they are small, andchoose to, adopt the “Charities SORP(FRSSE)”.

The Financial Reporting Standard forSmall Entities (“FRSSE”) is a less onerousaccounting standard which is available forsmall entities. To reflect this standard anadditional SORP (Charities SORP(FRSSE)) was also issued.

For most charities the first reportingperiod for which the new SORP will applywill be the year ending 31 December 2015or 31 March 2016. The first set of financialstatements compiled under the newSORPs will need to include comparativeswhich are restated for the new accountingregulations, as well as reconciliations ofthe opening comparative balance sheet,the closing comparative balance sheetand the comparative surplus/(deficit)reported under the current SORP andthose reported under the new SORP.Additionally, each change in accountingpolicy will need to be described andexplained in the notes to the financialstatements.

The SORP is in a modular format withrequirements for larger charities beingincluded in a separate section. Terms usedthroughout are “must”, should” and “may”making its requirements easilyunderstandable.

Choosing to adopt theFRSSE

The SORP (FRSSE) can be used bycharities who meet the small companythresholds, as set out below:

A charity qualifies as small where anytwo of the following three criteria aremet in both the current and precedingfinancial years:

> Gross income of less than £6.5m> Balance sheet total of less than

£3.26m> Average number of employees less

than 50.

Whilst the requirements of the SORP(FRSSE) are much less onerous (see keyareas of change below) the FRSSE (andconsequentially the SORP (FRSSE)) willbe revised shortly which could result infurther changes for those who choose toadopt this SORP. Therefore many charitiesthat are eligible for adopting the SORP(FRSSE) may in fact choose to adoptSORP (FRS 102) instead.

Charities should seek professional advicewhen deciding which SORP to adopt,where the choice is applicable.

The Trustees’ Annual Report

The new SORP continues to stress theimportance of Trustees’ providing abalanced annual report, covering theimpact, as well as the outputs of thecharity during the year.

The main changes noted for all charitiesare:

> An explanation of the policy forholding reserves, including stating theamount of the reserves held and thereasons for holding them. Actualreserves should be compared to thepolicy and any differences explained.Where funds are in deficit, the reportshould explain why and set out thesteps being taken to eliminate thedeficit

> A separate category of identifiedreserves can be established withinunrestricted reserves. Where Trusteeshave decided that holding reserves isunnecessary, the report must disclose

this fact as well as providing thereasons behind this decision. Thisfollows the good practice which manycharities have already established

> For any charities with more than 50Trustees, all Trustees names must nowbe disclosed.

The main changes noted for largercharities are:

> An explanation of social investmentpolicies, explaining how anyprogramme related investment hascontributed to the achievements of thecharity’s aims and objectives

> In addition to reporting the significantcharitable activities undertaken, anexplanation of the financial effect ofsignificant events is required

> A description of the principal risks anduncertainties facing the charity, asidentified by the Trustees, together witha summary of their plans and strategiesfor managing those risks

> Arrangements for setting the pay andremuneration of key managementpersonnel1 and any benchmarks,parameters or criteria used in settingtheir pay

> A charity which makes largefundraising payments in advance mustexplain the basis upon which thepayments are made and the effect onfundraising ratios must be qualtified.


1 Key management personnel are “thosepersons having authority andresponsibility for planning, directing andcontrolling the activities of the charity,directly or indirectly, including anyDirectors of the charity. This definitionincludes Trustees and those seniormanagement personnel to whom theTrustees have delegated significantauthority or responsibility in the day-to-day running of the charity.

The Statement of FinancialActivity (SoFA)

The basic structure of the SoFA remains acolumnar presentation, distinguishingbetween the classes of funds held, whereapplicable (unrestricted, restricted andendowed). One change introduced is therequirement to now include this analysisfor the comparative period either on the

face of the SoFA or within the notes tothe accounts. Additionally, whereconsolidated accounts are produced theparent entity SoFA will also need to beincluded in the financial statements of thegroup as well as the consolidated SoFA.

The main change to the SoFA relates tothe headings which have been reducedand the wording simplified to provide aclearer description of the nature of the

income and expenditure. There will befewer expenditure headings, withgovernance costs2 no longer beingseparately disclosed on the face of theSoFA and gains/losses on investmentassets being shown before the netincome/expenditure. This is highlighted inthe summary below:


> Charity Accounting and Financial Reporting – SORP 2015

2005 SORP FRS 102 SORP

> Voluntary income> Activities for generating funds> Investment income> Incoming resources from charitable activities> Other incoming resources

Total incoming resources

> Costs of generating voluntary income> Costs of fundraising> Investment management costs> Resources expended on charitable activities> Governance costs> Other resources expended

Total resources expended

Net incoming/outgoing resources before transfers

Gross transfers between funds

Gains on revaluation of fixed assets for the charity’s own use

Gains/losses on investment assets

Actuarial gains/losses on defined benefit pension schemes

Net movement in funds

> Donations and legacies> Other trading activities> Income from investments> Income from charitable activities> Other income

Total income and endowments

> Expenditure on raising funds

> Expenditure on charitable activities> Other expenditure

Total expenditure

Net gains/(losses) on investments

Net income/(expenditure)

Transfer between funds

Gains/(losses) on revaluation of fixed assets

Actuarial gains/(losses) on defined benefit pension schemes

Other gains/(losses)

Net movement in funds

2 Under FRS 102 SORP governance costs are now considered akin to support costs and are to be allocated and apportioned to charitable activities.


The Balance Sheet

The format of the balance sheet isunchanged under the new SORP otherthan the definitive requirement to presenta revaluation reserve on the face of thebalance sheet where such a reserve exists.There is also an opportunity to include areserve fund (continuity fund) as aseparate unrestricted fund and anydefined pension benefit surplus/deficitcan be disclosed as a separate pensionreserve.

There are, however some changes to howbalance sheet items should be accountedfor and the details of these are included inthe summary of key changes (later in thissection).

Transitional arrangements

SORP 2015 provides a one-offopportunity to simplify the preparation ofthe opening balance sheet andcomparative figures, when reportingunder it for the first time. In particular, acharity may elect to measure a fixed asset(including buildings) on the date oftransition at its fair value and use that fairvalue as its deemed cost at that date.

Charities will need to weigh-up the cost ofobtaining such valuations and the likelyincreased depreciation charge against thepotential benefit.

Cash Flow Statement

Unlike the previous SORP, FRS 102 SORPdoes not contain an exemption for smallentities from preparing a cash flowstatement. Therefore, unless a charity isable to, and chooses to adopt the FRSSESORP, it will have to prepare a cash flowstatement.

Subsidiaries of charities (whether tradingor charitable) are able to take advantageof the disclosure exemptions permitted byFRS 102 and not prepare a cash flowstatement.

A template for the cash flow statementand associated notes as required underthe new SORP is shown below:


Total funds £ Prior year funds £ Note

Cash flows from operating activities: x x Note 1

Net cash provided by (used in) operating activities A A

Cash flows from investing activities:> Dividends, interest & rents from investments X X> Proceeds from the sale of property, plant & equipment X X> Purchase of property, plant & equipment (x) (x)> Proceeds from sale of investments X X> Purchase of investments (x) (x)

Net cash provided by (used in) investing activities B B

Cash flows from financing activities:> Repayments of borrowing (x) (x)> Cash inflows from new borrowing X X> Receipt of endowment X X

Net cash provided by (used in) financing activities C C

Change in cash and cash equivalents in the reporting period =A+B+C =A+B+C

Cash and cash equivalents at the beginning of the reporting period X X Note 2

Change in cash and cash equivalents due to exchange rate movements X X

Cash and cash equivalents at the end of the reporting period x x Note 2

Statement of cash flows



Current year Prior year£ £

Net income/(expenditure) for the reporting period x x(as per the statement of financial activities)

Adjustments for:

> Depreciation charges x x

> Gains/(losses) on investments x x

> Dividends, interest & rents from investments (x) (x)

> Loss/(profit) on sale of fixed assets x x

> (Increase)/decrease in stocks (x) (x)

> (Increase)/decrease in debtors (x) (x)

> Increase/(decrease) in creditors x x

Net cash provided by (used in) investing activities x x

Note 1 – Reconciliation of net income/(expenditure) to net cash from operating activities

Current year Prior year£ £

Cash in hand x x

Notice deposits (less than three months) x x

Overdraft facility repayable on demand x x

Total cash and cash equivalents X X

Note 2 – Analysis of cash and cash equivalents

Prior year Cash flow Other non-cash changes Current year£ £ £ £

Cash at bank and in hand x x x x

Debt:

Finance leases x x x x

Due within one year x x x x

Debt falling due after more than one year x x x x

Net Funds x x x x

Analysis of changes in net funds


Disclosure of Trustee andStaff Remuneration,Related Party and OtherTransactions

The main changes in the FRS 102 SORP are:-

Related parties

> Use of the Charities Act definition of arelated party - the new SORP clarifiesthat any transactions involving aTrustee or other related party must nowalways be regarded as materialtransactions, potentially meaningfurther disclosures. Additionally, thenew SORP requires disclosure of theterms and conditions of any relatedparty transactions, and states that arelated party transaction should not bedescribed as being ‘at arm’s length’unless this can be substantiated

> Clarification that Trustee expenses doinclude reimbursed costs and costs paiddirectly to third parties

> The total amount of Trustee donationswithout conditions made must bedisclosed – there is no requirement todisclose this individually for eachTrustee

> The total amount of expenses waivedby Trustees must be disclosed, unlessimmaterial.

Staff Remuneration

> Contributions to a pension fund for thebenefit of employees

> Details of redundancy and terminationpayments for staff

> Disclosure of the numbers of staff paidmore than £60,000 in £10,000 bandsfrom £60,000 upwards

> The total remuneration paid to keymanagement personnel.


Key Areas of Change

Summarised below are the main areas of change between the treatment under the current SORP and the new FRS 102 SORP (2015).

SORP 2005 FRS 102 SORP

Income recognition(including legacies)

Donated goods forresale

Donated tangiblefixed assets

Net investmentgains/losses

Governance costs

Mixed use properties(own use and held forrental capitalappreciation)

Financial instruments

Multi-employerdefined benefitpension schemes

Income is recognised in the financialstatements when the followingcriteria are met :> Entitlement> Certainty (virtually certain)> Measurement

Income from the receipt of donatedgoods for sale was recognised oncesold, and goods for distribution ondistribution

Should be recognised at their currentvalue at the date of the gift

Disclosed below net income figure

Disclosed separately in the notes andon the face of the SOFA

Mixed use properties were classifiedbased on the main use of theproperty

Disclosure only

Recognition of contributions/payments in the year

Income is recognised in the financial statements when thefollowing criteria are met :

> Entitlement> Probable (more likely than not)3

> Measurement

The fair value of donated goods received for resale ordistribution should be accounted for within donations andlegacies on receipt, unless it is not practical and/or thecosts of recognition outweigh the benefit of thisinformation to the user of the accounts and the charity.Any profit/loss on eventual sale should be accounted for asincome from other trading.Where donated goods are not accounted for on receipt theincome should be recognised when they are sold ordistributed

Recognised at fair value

Included within net income figure, but may include anadditional sub-total

As for support costs, they are allocated and apportionedacross the other categories of expenditure

A mixed use class of assets has been introduced with theproperty being apportioned between its investment useand operational use. Where this is impractical it is treated asa tangible fixed asset

Detailed disclosure now required for concessionary loans,complex interest rate swaps, options and forwardcontracts, some foreign exchange arrangements and morecomplex advanced fee schemes

Deficit recovery plans on multi-employer scheme will resultin the recognition of a liability on the balance sheetMore detailed disclosure requirements

3In the context of legacy income, receipt is considered to be probable when there has been grant of probate, the executors have

established that there are sufficient assets in the estate, after settling any liabilities, to pay the legacy and any conditions attached tothe legacy are either within the control of the charity or have been met.




Government grants

Trustee benefits

Donations made byTrustees

Staff costs

Ex gratia payments

Investment properties

Group properties

Holiday pay accrual

Retail gift aid

Heritage assets

Disclosure requirement based on nature of grant

Disclosure required of trustees benefits andrelated party transactions

No requirements

Aggregate staff costs and numbers of staffshould be disclosed. Where a charity is subjectto a statutory audit then the notes should showthe number of employees whose emolumentsfor the year (including taxable benefits in kindbut not employer pension costs) fell within eachband of £10,000 from £60,000 upwards

Disclosure of ex-gratia payments required to bemade in notes

Investment properties are measured initially atcost then at fair value at the year end, using“any reasonable approach” to obtain a marketvaluation

Previously recognised as freehold properties

No mention

No mention

Explicit definition with reference to charity’sobjects

Additional disclosure requirements for thosecharities in receipt of government grants

Greater disclosure required regarding Trusteebenefits and related party transaction includingrequirements to state “none” if there are nobenefits

Disclosed in aggregate

Additional disclosure required including theaggregate pay of key management personneland more detail regarding redundancy andtermination payments

Disclosure of ex-gratia payments required to bemade in notes.Small ex-gratia payments such as flowers andchocolates are not to be regarded as ex-gratia

Valuations at the year-end are to be made by anindependent expert or disclosure is required thatthis has not been done

Property which is let by or occupied by anothergroup undertaking must now be treated as aninvestment property

An accrual is required for the liability for paidannual leave’ if material

Treated as a donation

Definition redefined to remove reference to thecharity’s objects




Fixed assetrevaluation

Lease arrangements

Lease incentives

Major judgementsimpacting accounts

Prior yearadjustments

Cash flow statement

Strategic report

Tangible fixed assets (other than investmentassets) do not need to be revalued unless thecharity adopts a policy of revaluation. Wheresuch a policy is adopted, whilst it need not beapplied to all fixed assets, it must be applied toentire classes of fixed assets

Rebuttable presumption that where the presentvalue of the minimum lease payments is 90% ormore of the fair value of the asset, then thelease is a finance lease

Lease incentives are released over the periodup to the first rent review

No specific reporting requirement

Occur as a consequence of a fundamental error

Not required for smaller charities

Required for some corporate charities basedon size

First time adopters may elect to:

> Measure an item of property or equipment onthe date of transition to SORP 2015 (FRS102)at its fair value and use that value as itsdeemed cost at that date; or

> Use a previous GAAP revaluation of an item ofproperty or equipment at, or before, the dateof transition to SORP 2015 (FRS102) as itsdeemed cost at the revaluation date; or

> Measure an item of property or equipment onthe date of transition to SORP 2015 (FRS102)at its brought forward cost less depreciation

No rebuttable presumption that where thepresent value of the minimum lease payments is90% or more of the fair value of the asset, thenthe lease is a finance lease

First time adopters of SORP 2015 may elect todetermine whether an arrangement existing atthe date of transition to the new SORP containsa lease on the basis of the facts existing at thatdate, rather than when the arrangement wasentered into

Lease incentives are released over the lease termas opposed to the period up to the first rentreview.A first time adopter is not required to apply thenew rules on lease incentives provided that theterm of the lease commenced before the date oftransition to SORP 2015

Need to be set out in the notes to the accounts

Occur as a consequence of a material error

Now required

Required


The new SORP also contains new guidance relating to group accounts, specifically:

> Parent entity SoFA disclosure> Merger accounting> Associates> Joint Ventures



Key Differences Betweenthe FRSSE SORP and FRS102 SORP

Whilst many of the requirements of theFRSSE and FRS 102 SORPs are the same,there are also some significant differences.The more significant differences areconsidered below, with reference to theuseful Helpsheet produced by the CharityCommission and its Scottish counterpartOSCR.

Trustees Report

The requirements of the FRSSE SORP andFRS 102 SORP are identical. Both SORPsrequire more information to be provided bylarger charities. Larger charities are thosethat are subject to statutory audit undercharity law.

SOFA

There are a number of key differences:

> Gains and losses on investment assetscount towards net income/expenditure inthe FRS 102 SORP but are excluded fromnet income/expenditure in the FRSSESORP

> An additional category of ‘other gainsand losses’ is present in the FRS 102SORP only.

The FRSSE requires the separate disclosureof ‘exceptional items’ which are exceptionalby virtue of size or incidence whereas theFRS 102 requires the separate disclosure of‘material items’. FRS 102 has an additionalcategory of ‘extraordinary items’ which falloutside of ordinary activities and are of anabnormal nature and unlikely to recur;these must be disclosed separately in theSoFA after striking the total for netincome/expenditure.

Balance Sheet

The format of the balance sheet is commonto both SORPs but there are somedifferences in terminology.

There are also differences of detailedaccounting treatments, including:

> The FRSSE does not permit revaluationof intangible fixed assets

> Under FRS 102 capitalised goodwill is

assumed to have a life which does notexceed 5 years (except where theeconomic life can be reliably measured)whilst under the FRSSE the life ofcapitalised goodwill is not to be morethan 20 years

> The options of including tangible fixedassets and stock at a fixed amount(where certain criteria are met) are onlyavailable under the FRSSE

> FRS 102 does not permit the exclusionfrom the category of investmentproperty, properties which are let andoccupied by another group undertaking

> Under FRS 102 unlisted investmentsshould be measured at fair value wherepracticable, whereas an alternateapproach is permitted under the FRSSE

> Under FRS 102 any contractualobligation to make additional paymentsto a defined benefit pension schememust be recognised.

There are also differences in the approachtaken to disclosure. FRS 102 SORPrequiring greater disclosures in relation to:

> Fixed assets> Investments> Stock> Liabilities.

The disclosure requirements also differ inrespect of contingent items. The FRSSErequires disclosure of amounts to do withcapital expenditure whilst FRS 102 requiresan indication of uncertainties and anyreimbursement.

Cash Flow Statement

The cash-flow statement is optional underthe FRSSE and its format is based on oldGAAP with three sections:

> Cash generated from operating activities> Cash flows from other sources> Application of cash.

A cash flow statement is mandatory underthe FRS 102 SORP and is based on the newGAAP. It has three sections as follows:

> Cash flows from operating activities> Investing activities> Financing activities.

Accounting policies, concepts andprincipals

There are differences between terminologyand definitions, some of the mostsignificant being:

> Whilst both SORPs require trustees toassess going concern, the FRS 102 SORPspecifies that their review covers at least12 months from the date the accountsare approved

> The FRSSE SORP refers to prudence andaccruals which is not specificallymentioned in FRS 102

> The FRSSE takes a different approach todetermining accounting policies thanFRS 102 with users of the FRSSE ‘havingregard’ to FRS 102 as ‘current practice’

> The FRS 102 requires more disclosuresthan the FRSSE.

Other differences

Donated goods, facilities and services

Both SORPs take the same approach to thecriteria for income recognition with thedefinition of entitlement, measurement andprobable (receipt is more likely than not)essentially the same, except for donatedtangible fixed assets. The FRSSE requiresdonated tangible fixed assets to berecognised at their current value whereasFRS 102 requires recognition at their fairvalue.

Holiday pay accrual

The FRS 102 SORP requires a provision tobe made for paid annual leave (holidaypay) and paid sick leave, where material.This is not required by the FRSSE.

Disclosure of trustees and staffremuneration, related party and othertransactions

The FRS 102 SORP requires additionaldisclosures as follows:

> The aggregate value of unconditionaldonations made by trustees

> Disclosure of a charity’s contributions to apension fund for the benefit of employees

> The terms and conditions of transactionswith, and the details of any guaranteegiven or received from, related parties

> Additional information on the nature,accounting policy and funding of



termination payments> Disclosure of the total amount of

employee benefits received by keymanagement personnel.

Financial Instruments

The FRSEE has a much less detailedapproach to financial instruments withmuch less disclosure required.

Retirement benefits/retirement and post-employment benefits

Where a charity is participating in a multi-employer defined benefit pension schemeand is required to make additionalcontributions but its share of any actuarialpension liability cannot be identified, theFRSSE SORP permits a charity to continuewith its existing accounting policy whereasthe FRS 102 SORP requires the presentvalue of any additional repayments due topast service to be recognised as a liability.The FRS 102 SORP requires moredisclosure for defined contribution anddefined benefit pension schemes.

Group Accounts

The FRSSE SORP permits a charity tocontinue with its existing accountingpolicies provided those policies reflectaccepted practice. Otherwise charitiesfollowing the FRSSE should adhere tocurrent practice which is the same as thatrequired of charities following FRS 102.

Report produced by Clair Moelwyn-Williams, DirectorWhittingham Riddell LLP

Clair is a charities specialist, providingadvice and support to a broad spectrumof charities and not-for-profitorganisations. Her guidance and supportincorporates audit and accounting,systems and controls, governance, riskmanagement and reporting. Clair has alsoacted as a charity trustee and experiencedthe demands and challenges facingcharities from an internal perspective.


Action plan

> Confirm which SORP you are goingto apply (where a choice isavailable)

> What further information will berequired? Are your systemsgathering that information now andwill it still be available whenneeded?

> Review your accounting policiesand select suitable policiescompatible with the new SORPapplied

> Are any external valuationsrequired?

> Financial statement templates willneed to be updated to cover all ofthe new compliance requirements

> Consider whether additionalaccounting or auditing work will berequired and ensure this isbudgeted for

> Do your internal managementaccounts need to be “re-mapped”to reflect the presentationalchanges which will impact thefinancial statements?

Charity Tax

Taxation Notes forCharities

Surely charities don’t need to worryabout tax, do they?

Yes they do! The very first thing forcharities to understand about tax is thatthey cannot simply ignore it. By this wemean that charities do not have a blanketexemption from taxes: there are of coursegenerous tax reliefs for charities but theonly safe starting point is to recognise thatcharities are treated for tax purposes inexactly the same way as everyone elseunless the precise terms of some specificexemption or relief are satisfied. So, forexample, a charity which carries on a tradeis subject to tax unless the trade fulfils oneof several alternative conditions which welook at in more detail below; a charitycarrying on a business or having rentalincome may be liable to account for VATon its turnover; and a charity whichemploys people is going to be subject tothe same PAYE obligations as any otheremployer. A charity which has taxableincome is required to notify HMRC and tofile a tax return in exactly the same way asany other taxpayer and is liable to the samepenalties if it fails to meet its obligations.

Who gets the exemptions?

Only bodies recognised by HMRC ascharities qualify. If you are recognised as acharity by the Charity Commission or theOffice of the Scottish Charity Regulator(“OSCR”), HMRC will usually accept thatyou are a charity for tax purposes.Occasionally, because Scottish law differsfrom UK tax law, things may not be quiteso straightforward for a Scottish charity;but this will be rare.

Some charities are not registered with theCharity Commission or with OSCR. Thismay be because the charity is excepted orexempt from registration or if its incomeis below the income threshold. Suchunregistered charities are still able toaccess tax reliefs and exemptions butthey must establish their charitablecredentials with HMRC by submittingdetails of their governing documentationand charitable objectives and activities.

What exemptions are available?

Provided the income is applied only forcharitable purposes, charities are exemptfrom UK tax on most types of investmentincome (including income from investmentsoverseas) and on rental income fromproperty. Where tax has been deducted atsource from exempt income, charities areable to claim repayment of the tax; theyare not, however, any longer able toreclaim payment of tax credits in respectof dividends. Charities are also exemptfrom Capital Gains Tax provided theproceeds of disposal are used forcharitable purposes only.

It is in relation to non-investment income(in particular, trading income) that the maincomplications arise. There is no blanketexemption from tax for such income, thoughthere are no fewer than five separateexemptions which might apply: if none ofthose are available it may be advisable toconsider trading through a subsidiary (non-charitable) trading company.

How do trading reliefs work?

There are five possible exemptions fromIncome Tax (or Corporation Tax if the charityis a company). In each case there is acommon requirement that the profits mustbe used for charitable purposes only. Theexemptions are briefly described below:

1 “Primary purpose” trading

This is trading which is carried out in thecourse of carrying out a primary purposeof the charity. Examples might include anindependent school or a museum – thetrade is carried out not to raise funds forthe primary purpose of the charity but isitself the primary purpose. This exemptionalso extends to trading activity which is notitself part of the charity’s primary purposebut which is ancillary to the “primarypurpose” trading. An example would be amuseum running a café to cater forvisitors to the museum or sale of necessarytext books to students of an independentschool run by a charity. Something towatch out for here is that trading may bepartly ancillary to primary purposetrading and partly not. For example, ashop associated with a museum may sellboth goods related to the primaryeducational purpose of the charity (booksabout the exhibits, for example) and purefund-raising items (such as mugs, pens

and other souvenirs). Subject to deminimis rules, such mixed trading maylead to the partial loss of exemption.

2 “Beneficiary” trading

This is trading where the work is mainlycarried out by beneficiaries of the charity– for example, a workshop for the disabledselling goods produced in the workshop islikely to qualify; the exemption is stillsometimes referred to as the “blindbasket weavers” exemption. Anotherexample would be a catering schoolrunning a canteen open to the publicwhere the food is prepared and served bystudents as part of their course.

3 Minor trading

Where neither of the main exemptionsapplies in full, profits may be exempt ifthe gross turnover (NB not the profit fromthe trade) is less than 25% of the charity’sannual income and is also less than£50,000. However, regardless of the levelof the charity’s income, a trade with aturnover of less than £5,000 will alwaysbe exempt. This can be combined withthe main exemptions: so if for example, atrade is largely covered by the “primarypurpose” exemption but a small part isnot, the non-exempt part may be coveredby the minor trading rules.

4 Fund-raising events

Profits from events which are undertakenby a charity are exempt from Income Taxor Corporation Tax if they meet thedefinition of “VAT-exempt” events. Formore detail of “VAT exempt” events, seebelow. One rather confusing point toremember is that although the VAT reliefcan apply to bodies which are notcharities, the corresponding direct taxrelief is restricted to charities.

5 Lotteries

If a charity organises a lottery to raisefunds, any profits are exempt from taxprovided the lottery is promoted andconducted in accordance with the termsof a lottery operating licence.

What about sponsorship income?

The tax treatment of sponsorship incomemay require careful examination. If thecharity gives nothing substantial in return



for a donation from a business, the donationwill retain its character as a gift, even if abusiness donor seeks and obtains goodPR from the gift and indeed may see it asthe main benefit of the gift. However,where the charity provides some goods orservices in return for the sponsorship thismay be regarded as amounting to a trade,which will not usually fall within any of thetax exemptions; and it can sometimes bedifficult to know where the line is drawn.Where an event promoted by a charity issponsored by a business, the sponsorshipwill not amount to a receipt of a trademerely because there is a simpleacknowledgement of the sponsorship inthe programme for the event. But a morefulsome acknowledgement, perhapsincluding prominent display of the sponsor’slogo or a description of the sponsor’sbusiness may well be regarded as theprovision by the charity of advertisingservices, which would (subject to theexemptions above) be a taxable business.Other services which a charity mightprovide in return for business sponsorshipmight include some form of productendorsement or recommendation, orperhaps access to the charity’s mailinglist: either of these might well give rise totaxable income. This area is particularlyfraught and great care needs to be takenat the margins.

Trading companies

Rather than trade itself, a charity mayestablish a company in which it owns allthe shares as a vehicle through which alltrading is conducted, with a view toprocuring that the company pays all itsprofits to the parent charity under GiftAid. There are two main reasons for this.First, the charity may not wish to expose allits assets to the commercial risks of trading;second, if there are non-charitableactivities for which the charity would notbe entitled to relief, this does not matter:taxable profits will be “washed out” bythe Gift Aid payment. There is a specialrelaxation of the Gift Aid rules forcompanies owned by a charity wherebypayments made within nine months of theend of the company’s accounting year canbe “related back” to the accounting year:this will make it easier to ensure that thefull amount of profit for the accountingyear is paid up as Gift Aid rather thanhaving to make an educated guess.

Because a charity is at risk of losing someor all of its tax reliefs if it makes any loansor investments which are “non-qualifying”,it is important to ensure that anyinvestments which a charity makes in atrading subsidiary are commerciallyjustifiable: for example any loan shouldcarry a reasonable rate of interest whichshould actually be paid. Charities will alsoneed to bear in mind the constraintsimposed by charity law, which arecovered elsewhere in these notes.

Gift Aid

How does Gift Aid work?

Both companies and individuals can makepayments under the Gift Aid scheme,although the detailed rules differ. Fromthe charity’s perspective the importantpoint is that Gift Aid receipts fromindividuals (but not companies) aretreated as if they had had basic rate taxdeducted from them, which tax isrepayable to the charity. Thus with basicrate tax at 20% a Gift Aid receipt from anindividual of £100 will be treated as a giftof £125 from which tax of £25 has beendeducted and will generate a taxrepayment of £25 for the charity. Mostcharities will be familiar with the basic GiftAid procedures for cash donations and weshall not cover those here. But there aresome complexities…

Gifts of money

Gift Aid relief can be claimed only on giftsof money (though there are special rulesabout gifts of shares, securities and land).This includes cash, cheque, credit/debitcard and all other forms of moneytransfer, and the gift can be in sterling orforeign currency (though to make a GiftAid payment the payer must be liable topay UK Income Tax or Capital Gains Tax ofat least the amount which is treated asdeducted from the payment).

How to claim Gift Aid

The donor must provide a Gift AidDeclaration, examples of which areavailable on the HMRC website. This isconfirmation that they have paid, or willhave paid, sufficient income or capitalgains tax to cover the amount of Gift Aidthe charity will reclaim from HMRC. The

declaration need not be written, and maybe made by telephone or over theinternet, providing the donor’s name andaddress is obtained and detailedauditable records are maintained.

The charity then submits their Gift Aidclaims online to HMRC by way of asummary spreadsheet attached to theclaim form. The original declarations arenot required to be submitted, but must beretained by the charity in case they needto be checked by HMRC.

Retail Gift Aid

A particular Gift Aid issue can arise inrespect of the sale of donated goods. If adonor gives goods worth say £10 for salethrough the charity’s shop the proceedsof sale are of course tax-free and thecharity receives £10. If the donor sells thegoods himself and donates the cashproceeds to the charity, the donation canbe gifted-aided and becomes worth£12.50 to the charity. For this reasonvarious “Retail Gift Aid” schemes haveevolved whereby the charity purports toact as undisclosed agent for the donor inselling the goods and in receiving thecash proceeds of sale which are then (ascash gifts) donated to the charity underGift Aid. These schemes can certainlywork, but only if they are meticulouslyplanned and carefully implemented: theyare full of pitfalls for the unwary.

Gifts with strings or a quid pro quo

Gifts “with strings” do not count: so GiftAid would not apply to “gifts” which arein any circumstances repayable; or giftsmade on behalf of other people. “Gifts”which are in fact payment for goods orservices are not within Gift Aid; but theprovision of benefits which are of smallvalue relative to the gift are acceptable.For gifts up to £1,000 the value of thebenefit must be less than £25 and lessthan 25% of the gift; for larger gifts itmust be less than £2,500 and less than5% of the gift. There are, however, specialexemptions of which the main one (theso-called “National Trust” exemption)operates to permit Gift Aid in respect ofannual subscriptions affording the giverfree or reduced-rate admission to viewproperty the preservation of which iswithin the charity’s charitable purposes.

> Taxation Notes for Charities

Buying the benefit

Where a Gift Aid payment would otherwisefall foul of the “benefit” rule, it is possiblefor the donor to make a separate paymentfor the benefit (“buying the benefit”) andonly to claim Gift Aid on the remainder ofthe payment. This can be done only where:

> The benefit is available to be purchasedseparately (i.e., is commercially available)

> The donor is aware of the value of thebenefit at the time he makes the payment.

This can be helpful at charity auctions,but only where the item sold is in factcommercially available. The problem withmany charity auctions is that the lotsoffered are unique and are notcommercially available; as for example afootball shirt signed by a star player or ahandbag donated by a celebrity. It is notthen possible to identify separateelements of donation and payment for thebenefit and Gift Aid cannot apply to anypart of the payment - even though theamount of the successful bid will almostalways have been inflated by an intentionto benefit the charity.

Gift Aid Small Donations Scheme (GASDS)

In some circumstances Gift Aid “top-up”payments can be claimed in respect ofindividual donations of up to £20 even ifthe donor has made no Gift Aiddeclaration or if you do not know theidentity of the donor. Typically this mayapply to street collections or donationsmade at meetings (such as churchservices). The maximum which can beclaimed under the GASDS for a year is 10times the amount claimed under the mainscheme, and there is a separate £5,000limit for each “community building” inwhich collections are made and ondonations collected other than in a“community building” such as streetcollections.

Gift Aid can be an attractive propositionfor potential donors, who will like to seemaximum value received for theirdonation. Higher rate taxpayers areentitled to offset their donation againstincome charged at their highest ratemeaning that the net cost of theirdonation is even lower.


In summary, Gift Aid can provide thefundraising boost that is needed to makeappeals successful. An appeal target of£100,000 for new equipment may seemunachievable but, when a £20,000contribution from HMRC through Gift Aidis included, the target becomes muchmore easily attainable.

Charity Tax report produced by:David Whiscombe Head of Tax at BKL Tax

David Whiscombe is Tax TechnicalDirector at UK200Group firm BKL andheads the firm’s Tax Consultancy businessBKL Tax. A Fellow of the CharteredInstitute of Taxation and a former DistrictInspector of Taxes, he advises on thewhole range of taxes affecting owner-managed businesses and their owners aswell as advising in the charity and not-for-profit sector.

Gift Aid report produced by:Simon Ellingham – Partner at Fawcetts

Simon offers a broad range ofaccountancy services to his clients,including accounting for charities – aspecialism in which he qualified for aDiploma in Charity Accounting (DChA),awarded in 2008. Aside from charities,including schools, Simon’s client baseincludes manufacturing and serviceorganisations, farming and associatedtrades, retail and distribution companies,construction companies and privateclients to whom he offers tax advice.

> Taxation Notes for Charities

Charities and VAT

Legislation

Prior to March 2012, the definition of acharity for VAT purposes followed theCharities Act 2011 and its predecessorswhich set out broad tests of charitystatus. Schedule 6 of Finance Act 2010which came into force on 14 March 2012provides a definition of a charity for taxpurposes and adds jurisdiction,registration and management conditions,narrowing the availability of some of theVAT exemptions and exceptionscontained in the VAT Act.

VAT overview for charities

When considering their VAT position,charities have two principal factors toconsider: whether their activities are byway of business or non business; and if byway of business whether those activitiesfall within any of the VAT exemptions orzero rates or are taxable at the standardor reduced rates. For simplicity, I shallrefer to these as business/non businessand taxable/non taxable.

Setting aside the special schemesavailable to certain Government fundedbodies such as academies, museums and,from April 2015, hospices and search andrescue charities, which allow them torecover VAT paid on expenditure relatingto non business supplies, most charitiescannot claim this VAT and, if they makeonly non business supplies, cannotregister for VAT.

Charities which make business suppliesare subject to the same VAT registrationrequirements as other businesses andmust register if their taxable businesssupplies exceed the VAT registrationthreshold. They can also choose toregister voluntarily if they make taxablesupplies under the registration threshold.

Charities making a combination ofbusiness and non business supplies aresubject to the same registrationrequirements and must apportion theirexpenditure to claim only that partrelating to business supplies.

Business/non Business

Probably the most difficult issue facingcharities is the categorisation of theiractivities as business/non business, inparticular in the context of grant funding.The pertinent legislation is contained inSections 1, 4 and 5(2) of VAT Act 1994which define ‘supply’, ‘taxable supply’ and‘consideration’ but, as there is nothingbeyond this in legislation, the tests ofbusiness have been drawn from historicCase Law and are as follows:

> Is the activity a serious undertakingearnestly pursued?

> Is the activity an occupation or functionwhich is actively pursued withreasonable or recognisable continuity?

> Does the activity have a certainmeasure of substance in terms of thequarterly or annual value of taxablesupplies made?

> Is the activity conducted in a regularmanner and on sound and recognisedbusiness principles?

> Is the activity predominately concernedwith the making of taxable supplies fora consideration?

> Are the taxable supplies that are beingmade of a kind which, subject todifferences of detail, are commonlymade by those who seek to profit fromthem?

These tests are not a checklist but theyhave been used to form a picture of thenature of a charity’s activities.Added to this, when considering grantfunding, the following tests have been setout and continue to form the basis of thebusiness/non business consideration:

> Does the donor receive anything inreturn for the funding?

> If the donor does not benefit, does athird party benefit instead? And if so, isthere a direct link between the moneypaid by the funder and the supplyreceived by the third party?

> Are any conditions attached to thefunding, which go beyond therequirement to account for the funds(commonly referred to as ‘goodhousekeeping’)?

The above can usefully be summarisedwith the phrase ‘are the services carriedon for the payment or with the payment’.(TJ Tolsma v Inspecteur der


Charity Tax – VAT

Omzetbelasting Leeuwarden [1994] 2CMLR 908). The former ‘for the payment’indicates consideration for a supply andtherefore business whilst ‘with thepayment’ indicates non business.

Taxable/non Taxable

Having established that supplies are madeby way of business, there are a number ofVAT exemptions into which suppliescommonly made by charities may fall.

VAT exemption means that VAT is notchargeable on the supply but that anyVAT incurred on expenditure relating tothe supply is not recoverable. The effect isthe same as making non business suppliesalthough a de minimis limit does apply toexempt input VAT which allows charitiesmaking predominantly taxable supplies toreclaim VAT on their exempt supplies.

It is worth repeating that there is no deminimis limit for non business supplies soany charity making non business supplieswhich doesn’t fall into one of the specialschemes referred to above will sufferirrecoverable VAT cost on at least part ofits expenditure.

Broadly the exemptions available tocharities are: education; health & welfare:subscriptions to trade unions, professionaland other public interest bodies; sports,sports competition and physicaleducation; fundraising events; and culturalevents.

Each of these exemptions derives from adifferent Group within VAT Act 1994Schedule 9 and there are differentqualifications for eligibility, somespecifically referring to charities andtherefore requiring that the charity meetsthe definition in Finance Act 2010Schedule 6 whilst some refer to qualifyingor eligible bodies and set out differentcriteria. Most exemptions are restricted tothe charity or qualifying body but some,such as the fundraising event exemption,extend to a trading subsidiary.

The fundraising event exemption is agood example of why it is important forcharities to consider VAT as part of itsplanning process. This exemption isrestricted to events with the predominantpurpose of fundraising and is limited to 15of the same type of event in the same


location in any one financial year. A deminimis of £1000 gross income per eventapplies and the exemption does not coveritems sold at the event such ascommemorative brochures.

In addition to the VAT exemptions there isa very beneficial zero rate available to thesale by a charity of donated goods, whichalso applies to charity auctions if theauction items have been freely given. Zerorating is VAT utopia in that no VAT is dueto HMRC on the supplies made but VATon related expenditure can be recovered.As most VAT registered charities arepartly exempt, zero rated suppliescontribute to taxable turnover and raisethe proportion of overhead costs whichthe charity can reclaim.

Purchases

The final group of concessions forcharities are those items which can bepurchased without VAT. These are inaddition to the zero rates available to allbusinesses such as printed materials, foodand childrens’ clothing.

There are of course eligibility criteria forthese VAT free purchases, some requirecertification and some are only available ifthe charity is wholly or predominantly(80% +) making non business supplies.

Broadly these are: construction work;rent; advertising; aids for the disabled;medical, veterinary, scientific and rescueequipment; drugs and medicinal products;supplies of staff between charities; goodsfor use when collecting donations; andtalking books and newspapers.

In addition, charities benefit from thereduced 5% rate of VAT on purchases offuel and power although the reduced ratefor the installation of energy savingmaterials was withdrawn following ECinfraction proceedings.

Finally

VAT for charities is about as complex as itgets and, added to this, changes withsome frequency. The removal of the VATzero rate for listed building work in 2012 isan example of a major financial setbackfor charities whilst the 2015 concessionsfor hospices and search and rescuecharities are hard fought for and much

needed boosts to the sector. Staying ontop of charity VAT law, planning fortransactions and events are key toavoiding costly mistakes and making thebest of what is available.

Report produced by:Debra Dougal – VAT Partner at Haslers

Debra provides high level VAT consultancyon a full range of VAT issues, advising ontransactions and structures across allbusiness types, both in the commercialand not for profit sectors. Debra has builtup an extensive technical knowledge overmore than 25 years’ specialising in VATand takes a practical approach, which hassuccessfully argued against HMRCachieving substantial VAT savings andcompensation for clients.

A very experienced VAT lecturer, Debradelivers seminars to clients, businessgroups and other professionals and alsosupports other accountancy and law firmswith their high level VAT requirements.

> Taxation – VAT


Charitable Incorporated Organisations

A charitable incorporated organisation(CIO) is an incorporated form of legalentity which is registered and regulatedby the Charity Commission andspecifically applies to charities. It is analternative to setting up a charity as anunincorporated entity, either by way of atrust or an unincorporated association, oras a company limited by guarantee underthe Companies Act.

Practical Experience

Since 2 January 2013, when registrationbecame possible, there have been around3,000 registered.

The view from the Government seems tobe that it is most applicable for micro tosmall charities – and it has beensuggested that this means those charitieswith an income of up to £500,000 oreven £1 million per annum.

Advantages

The main advantages of the CIO are thatit affords the benefit of limited liability aswell as creating a vehicle with legalpersonality to hold property and enterinto contracts in its own name. Otheradvantages as against companies limitedby guarantee are:

1 That registration is with the CharityCommission which regulates CIOs. Soaccounts and annual returns only needto be submitted to the CharityCommission and not also to theCompanies Registry

2 That CIOs are not subject to companylaw

3 It is possible to have a constitution inwhich the charity trustees are themembers (see below)

4 The accounts may be prepared on areceipts and payments (rather than onan accruals) basis if the gross incomeof the CIO is less than £250,000

5 It can be more straightforward forcommunications with members to beelectronic

6 There are other special features whichapply to CIOs only.

Set against the advantages of the CIO aresome differences (when compared withcompanies limited by guarantee). Theseinclude those set out below.

1 The main distinction which hasattracted attention is that there is nocentral register of charges as a resultof which it is considered that lendersmay be less willing to lend to CIOsthan to companies

2 There is no income threshold for theregistration of a CIO whereas it is£5,000 for charitable companies

3 The CIO has to have charitable statusso unlike a company it will cease toexist if it loses that status. This pointmay be somewhat artificial as it isunlikely that a charitable companywould lose its charitable status andremain operating

4 Various features of a company whichautomatically apply do not in the caseof a CIO such as, for example, theright to appoint a proxy and toremove a director. However, theserights can be incorporated in theconstitution of a CIO

5 Each member of a CIO must exercisehis or her powers in the way suchmember decides in good faith is mostlikely to further the CIO’s purposes

6 There are different rules in relation toconflicts of interest which apply toCIOs including an obligation todisclose any material interest in anarrangement or transaction enteredinto by the CIO before it is enteredinto.

Two constitutional forms

There are two main constitutional forms,the one where trustees are the onlymembers and the other where there is awider membership than just the trustees.Model documentation for both types hasbeen produced by the CharityCommission and for the various reasonsspecified by the Commission it isrecommended that the Commission’smodel documentation is used. Thisshould also make the registration processsimpler.

As already mentioned the foundationmodel for charities whose only votingmembers are the charity trustees is aparticular feature of CIOs and useful forunincorporated charitable trusts which donot have members currently.

Incorporating an existing charity

If the charity is not being formed fromscratch there are two routes for anexisting charity depending on its currentstatus:

1 First, transferring the assets of theliabilities of a trust or unincorporatedassociation to the newly formed CIO -there is no automatic conversionmechanism

2 Converting an existing charitablecompany using the automaticconversion mechanism. However, theregulations for this have not yet beenissued and it is expected that they willnot be available until later this year.

Conclusion

Companies limited by guarantee are triedand tested and charitable incorporatedorganisations are a new vehicle whichhave yet to stand the test of time.Nevertheless as the registration figuresdemonstrate there is every indication thattheir popularity will increase and that theywill become an increasingly prevalentvehicle for charities.

Report produced by:Mark Lewis – Lodders Solicitors LLP

Mark is a member of the UK200GroupCharities & Education Committee. Heheads up the Lodders Charity Law Teamand has extensive experience of a widerange of charities and not-for-profitorganisations.

Mark’s experience of charitable workincludes advising on the formation andincorporation of charities, the restructuringand mergers of charities, as well as adviceon charity law and advising on governanceissues and drafting commercial agreements.He also provides trustee training.

Mark was for many years an editor ofButterworths Corporate Law Service,contributing editor to the ButterworthsCompany Law Guide; and is the consultingEditor of the Law Society’s Book on theCompanies Act 2006 and a member ofthe Charity Law Association.

Charities and Financial Investments

Introduction

All charities can invest and do so toachieve a return so they can further theircharity’s aims. However, investing exposescharities to risks which, if not properlymanaged, can affect not just the charityitself but the public’s trust and confidencein the sector more generally. Accordingly,it is paramount that charities managetheir exposure to risk and operate withinthe law.

Trustees are required to play an activerole in the management of the charity asa whole which includes the investment ofcharitable assets and resources. It isunderstood that most trustees are notexpert in such matters and the CharityCommission is clear that:

“[if] trustees have considered the relevantissues, taken advice where appropriateand reached a reasonable decision, theyare unlikely to be criticised for theirdecisions or for adopting a particularinvestment policy.”

In this section of the report, considerationis given to:

> The legal framework and trusteeresponsibilities

> Setting an investment objective and aninvestment policy

> Investment management and selectinginvestment managers

> Monitoring investment andperformance.

The information provided includesguidance set out in the CharityCommission publication “Charities andInvestment Matters: A guide for trustees”which can be accessed on theCommission website: http://bit.ly/1cLJjT0

Legal Framework

The purpose of financial investment is toyield the best financial return within thelevel of risk considered to be acceptable -this return can then be spent on thecharity’s aims.

All charities can make financialinvestments.

Most unincorporated charities have a

‘general power of investment’ whichallows trustees to invest the charity’sfunds in any asset that is specificallyintended to maintain and increase itsvalue and/or produce a financial return.The charity’s governing document mayset out additional provisions, restrictionsor exclusions on the types of investmentsthe charity can make; these may takepriority over, or affect, the general powerof investment.

The investment powers available totrustees of ‘charitable companies’ arenormally set out in its articles ofassociation and are usually similar to thegeneral power of investment referred toabove. Where a charitable company actsas a trustee of an unincorporated charity,the ‘general power of investment’ applies

Trustee Responsibilities

Trustees have overall responsibility for theinvestment of a charity’s funds but, giventhe veritable maze of rules andregulations to take into consideration justto manage the monies, never mindorganise and oversee the use of these forthe charity’s aims and objectives, theymay choose to delegate day to daydecisions about investments to anappropriately experienced/qualified thirdparty.

In managing investments trustees must:

> Use their skills and knowledge in a waythat is reasonable in the circumstances(‘the duty of care’)

> Consider how suitable any investment isfor their charity

> Consider the need to diversifyinvestments

> Take advice from someone experiencedin investment matters where theyconsider they need it

> Review their investments (and theirinvestment manager) from time to time,changing them if necessary.

Investment Objectives

Trustees must be clear about theobjective of the investments they enterinto. This will include consideration ofwhat to invest in, how to invest and thetimescales for investment and generatingreturns.


Specifically, trustees need to consider:

Availability of funds

The funds they can afford to invest,having taken into consideration mattersincluding:

> Immediate financial needs> Budgeted/forecast spending> Longer term objectives> Reserve for unexpected expenditure.

£


> Charities and Financial Investments

RISK TyPE MANAGING RISK

Capital> Loss in capital value> Volatility in value

Liquidity> Ability of charity to meet its expenditure obligations when

they fall due. Some investments are more readilyconvertible in to cash

Market> Includes: inflation, interest rate, exchange rate & regulatory

Valuation> Some valuations are estimates (e.g. property) which may

vary according to timescales involved

Tax> Some investments may be treated as non-qualifying

expenditure, with tax consequences

Environmental, Social and Governance> Inappropriate impact of organisations on climate,

employment practices, sustainability, human rights,community impact

Diversified portfolio of investment assets

Consider investment types (e.g. shares, property etc) andshort term financial needs

Awareness of exposure to these risks of different asset types

Investment in regulated markets

Be aware of the basis of valuation and potential timescales forrealisation

Check HMRC guidance

Consider importance and agree investment guidelines retypes of organisations in which to invest

Investment Policy

All charities should have a documentedinvestment policy which will vary in detailand sophistication according to the sizeof the charity and the availability of fundsto invest. This should ideally include:

> The scope of its investment powers> Investment objectives> Attitude to risk> Funds available for investment, timing

of returns and liquidity needs> The types of investment it wants to make

(may include ethical considerations) > Who can take investment decisions > How investments will be managed and

benchmarks and targets set by whichperformance will be judged

> Reporting requirements for investmentmanagers.

Deciding what to invest in

Possible types of investment include:

> Cash deposits in bank or buildingsociety accounts

> Shares in a listed company > Bonds or gilts> Buildings or land> Common investment funds (pooled funds)> Non traded equity in private companies> Hedge funds, commodities, derivatives.

Collective investment schemes areinvestment vehicles where the assets ofindividual investors are pooled togetherwith those of other investors to achieveappropriate levels of diversification.

A collective investment scheme that manycharities use is called a Common InvestmentFund (CIF). CIFs are regulated charities intheir own right and only charitiesestablished in the UK can invest in them.They give charities of all sizes the ability toinvest in a tax efficient way in a range ofinvestments to achieve a professionallymanaged, diversified and balanced portfolio.However, diversification through pooledfunds does not eliminate all investment risks.

Consideration of Risk

Trustees should consider what is the appropriate level of risk that they want to, or are able to, accept. As part of their duty of care, thetrustees must be satisfied that the overall level of risk they are taking is right for their charity and its beneficiaries. Trustees shouldconsider and manage the different risks, including:

Investment Management

A charity’s trustees have overallresponsibility for investment decisionsand must take and consider advice fromsomeone experienced in investmentmatters before making investments andwhen reviewing them. Subject to itsinternal resources and expertise and thenature of its investment portfolio, thetrustees of a charity may be able tomanage the portfolio (making decisionsas appropriate) without reference to athird party expert.

However, for many it will be necessary totake external advice from an investmentmanager/investment advisor. When usingan investment manager, a charity mayeither:

> Use an investment manager or astockbroker to advise them inmanaging their investments (advisoryinvestment manager)

> Give the investment manager somepowers to make decisions about theirinvestments on their behalf(discretionary investment manager).

Responsibilities

When using an investment manager tomanage the charity’s investments theremust be:

> A written contract with the investmentmanager

> An investment policy which clarifies theresponsibilities and remit of theinvestment manager and must requirethe manager to follow an investmentpolicy in line with the charity’s policy.

The trustees have overall responsibility forthe charity’s investments. Preparation ofthe policy statement is the responsibility ofthe trustees and can’t be delegated to theinvestment manager. However, trusteeswill not be liable for any act or default ofthe investment manager unless they havefailed to comply with their duty of care inoverseeing the charities investments andthe management thereof.

Selecting an investment manager

It is best practice for charities selecting aninvestment manager to go through a

formal tendering process, inviting anumber of firms to tender their services.The selection decision will be based upon:

Proven experience

When choosing an external manager ormanagers, trustees need to be sure thatthe managers will manage the assetseffectively to produce the returnsrequired and at the same time make surethat the investment policy laid out by thetrustees is adhered to. It is important thatthey can trust the chosen manager toachieve the returns that the charity needsto operate effectively in accordance withits plans and that the firms already haveproven experience in managing charitymonies. This is to ensure that theinvestment managers in questionunderstand the investment environmentfor charitable operations. This will includeconsideration of approach to ethicalinvestment and flexibility in adhering tothe requirements of the charity.

Performance record

Furthermore, the trustees need to feelthat there will be a consistent series ofreturns. Whilst it is reassuring therefore,to see that potential managers have had agood performance track recordindependently verified, it is important toremember that past performance is not aguide to future performance. As a resultthe trustees will want to consider therigour and depth of the firm’s investmentprocess, to see just how past returns havebeen arrived at and to ensure that theprocess is repeatable.

Firm’s robustness

In addition, as a standard part of the duediligence process it is normal for trusteesto look at several years’ of the potentialmanager’s annual report and accounts inorder to discover whether there might beany risks to the charity from anystructural or financial problems at thepotential manager. Whilst looking at themanager in depth, it is also a good idea toconsider just how the firm operates, whatmanagement controls are in place andwhat general standards of governanceexist within the prospective manager. Inbeing truly rigorous, trustees might wishto see auditors’ reports regardingmanagement controls as well as make

enquiries about the firm’s regulatoryrecord.

Fees and charges

When it is established that the firms meetthe trustees’ required standards, the finalbut by no means least important, point forconsideration is the level of charges theprospective manager proposes. It istempting sometimes to just go with thecheapest manager, but this may notalways be the wisest course of action. Thelevel of service given to the charity interms of reporting, alongside adherenceto the trustee’s investment strategy isanother key factor which may have a realbearing on costs, as will provision ofadditional services if required - such ascustody for the charity’s securities. It isin these sections of the search operationthat external consultants can be veryhelpful in assessing what managers areoffering.

At the end of the consideration process,which can take quite some time tocomplete, trustees need to feel a highlevel of confidence and trust in theirchosen investment manager in order thatthey can be seen to be proper stewards ofthe funds under their charge.

Reporting arrangements

Trustees are required to monitor theperformance of the investments and theinvestment manager on an ongoing basis.Therefore, the basis of reporting(including face to face meetings or not),the format of reporting, the regularity ofreporting and benchmarks and targetsused along with the flexibility of themanager to accommodate reasonablerequests made by the charity must alsobe taken into account to ensure that theseaccord with the objectives of the charityand are sympathetic to the overallmanagement of the charity’s affairs.Many charities appoint more than oneinvestment manager as a way to diversifytheir portfolio and managing risk.

Monitoring Investment andPerformance

Trustees must regularly review theirinvestment portfolio and subjectperformance to formal review periodically



through the year. Reviews shouldconsider:

> Performance of investments (againsttarget returns set in the investmentpolicy/benchmarks)

> Performance and service of theinvestment manager

> Internal arrangements for managing theinvestments

> Frequency of formal review (e.g.quarterly, semi-annually).

Reporting in the Trustees AnnualReport

Charities which prepare a Trustee’sAnnual report and are subject to auditmust include the following details:

> Outline of the charity’s investmentpolicy

> A statement about the performance oftheir investments

> Explanation if an ethical approach hasbeen adopted.

Total Return Approach

Legislation was introduced with effectfrom 1 January 2014, making it easier forcharities whose capital is permanentlyendowed to adopt a Total ReturnApproach. Section 4 of the Trusts(Capital and Income) Act 2013 amendsthe Charities Act 2011 to give permanentlyendowed charities the power to adopt atotal return approach to investment,whilst preserving the charity's permanentendowment. This means that in additionto spending income trustees can nowspend some of the capital gains,providing the initial capital rises withinflation over the long term.

Detailed guidance can be obtained on theCharity Commission website following thelink http://bit.ly/1zrFr3u

Other Types of Investment

Whilst financially based investments aremost familiar, many charities areincreasingly investing in ProgrammeRelated Investments and Mixed MotiveInvestments. The requirementsassociated with such investments are alsosummarised in the Charity Commissionpublication “Charities and Investment

Matters: A guide for trustees”.

The information contained above providesa summary of the areas which charitytrustees must consider when managinginvestments. It is not an absolute orcomprehensive guide and trustees musttake appropriate advice.

Report produced by:Ros Price Chief Investment Strategist of 7IM

Ros has over 35 years’ experience ofinvestment management with a variety ofleading investment houses. Most recently,she held the position of European EquityStrategist for Citibank Private Bank, whereshe developed an asset allocation strategyprocess that was based on individualclients’ risk / return profile. Prior to this,Ros took responsibility for entireinstitutional portfolios and pension funds,including the Civil Aviation AuthorityPension Fund (CAVIAPEN), and forEuropean portfolios at GFM InternationalInvestors Ltd (the international asset armof the US insurance companyMetropolitan Life).

Andy Malpass BA FCA, Partner withWhittingham Riddell LLP






Notes

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This handbook has been prepared for general interestand it is important to obtain professional advice onspecific issues. We believe the information contained init to be correct. While all possible care is taken in thepreparation of this handbook, no responsibility for lossoccasioned by any person acting or refraining fromacting as a result of the material contained herein canbe accepted by the UK200Group, or its member firmsor the authors.

UK200Group is an association of separate andindependently owned and managed charteredaccountancy and lawyer firms. UK200Group does notprovide client services and it does not acceptresponsibility or liability for the acts or omissions of itsmembers. Likewise, the members of UK200Group areseparate and independent legal entities, and as sucheach has no responsibility or liability for the acts oromissions of other members.

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