spring charity update seminar -...

SPRING CHARITY UPDATE SEMINAR 20 April 2016

INTRODUCTION AND WELCOME Jon Marchant

Registration and breakfast

Charity Sector Update Jon Marchant

Direct taxation update Phil Waller

Lessons from Kids Company Paul Gibson

Coffee

FRS 102 – Lessons from the first conversions Jon Marchant

HMRC & the National Minimum Wage Vaneeta Khurana

Internal Audit – Adding value to charities Mat Cooling

Data Protection and Direct Marketing Paul Gibson

Conclusion Jon Marchant

Lunch

CHARITY SECTOR UPDATE JON MARCHANT, DIRECTOR

Charity Commission funding frozen

• Until 2020

• £20.3million

• Freeze not cut highlights importance of regulator’s work

• Focus on increasing public trust and confidence in charities

By being strong and effective regulator

• Expenditure on highest risk work

Fraud, safeguarding and counter-terrorism

• However capital funding increased by 10% to help

transform way they work

• Seeking more sustainable funding base

Continue discussions with charities as to how achieved

Tackling Abuse and Mismanagement 2014/15

• 165,000 charities, 943,000 trustees

• 72% of public think charities regulated effectively

• 2,129 serious incidents reported

• 1,569 cases opened, 103 statutory inquiries, 1,024

compliance cases, 442 monitoring cases

• Used legal powers 1,200 times, 154 to direct charities to

take action

• 1,097 reviews of charity accounts

• 3 strategic risk facing charities:-

Fraud, financial crime and abuse

Safeguarding issues

Terrorist related issues


• Financial abuse and mismanagement Commission responsibilities:-

Comply with legal duty to manage resources responsibility

Financial abuse or mismanagement stops

Take steps to ensure does not happen again in the future

• How to prevent fraud and abuse:-

Set business plan and budget and track income and expenditure

Robust and effective financial controls

Senior management team create the right culture leading by

example

Up to date and accurate records

Trustees receive up to date, accurate information about finances

Appropriate safeguards for operations outside UK


• Commission Safeguarding responsibilities:-

Steps trustees take to protect charity and beneficiaries

and comply with duties and manage charity responsibly

Avoid exposing beneficiaries to undue risk

Respond appropriately to concerns when raised

• Commission responsibilities on Terrorism:-

Comply with duties and take steps to protect charities

from being misused

Charity funds and property used appropriately

Tackling Abuse and Mismanagement 2014/15• How Commission helps:-

Prevent abuse occurring

Ensure abuse is reported and stopped and charity better protected in

future

Proactively work with charities working in high risk areas around the

world

Prevent assets being diverted or reputations harmed

Pass on best practice in due diligence and monitoring

• Serious governance failures:-

Unmanaged conflicts of interest, unauthorised trustee benefits,

breaches of governing document

Concerns about charities independence

- Charities can’t have a political purpose

Tackling Abuse and Mismanagement 2014/15• Campaigning and political activity can be valuable:-

Any involvement with political parties must be balanced

Trustees must not use charities as a vehicle to express their

own views

Must weigh up benefits against risks

Acceptable to use emotive or controversial material as long as

justifiable, accurate and evidence based

• Concerns raised about fundraising:-

Crucial bearing on public trust and confidence in charities

Trustee must oversee fundraising:-

Make strategic decisions

Update regularly and fully

Swift action when concerns arise

Charity Fundraising consultation (CC20)

• Consultation on revised guidance

• Trustees must take responsibility for fundraising activities

• Key role to play in setting charity’s approach

• Ensure reflects charity’s values

• Trustees have not overseen fundraising effectively

• 6 key principles:-

Plan effectively

Supervise your fundraiser

Protect your charity’s reputation and other assets

Comply with fundraising law

Follow recognised standards

Be open and accountable

Managing a charity’s finances (CC12)

• Advice for charity’s facing financial difficulties and reducing the risk of insolvency

• Guidance explains:-

• Trustee duties to protect charity’s assets

• Trustees need to have good knowledge of charity and charity’s finances

Review financial position and performance against budgets and

projections at least once a month

Analysis of financial trends and changes in budget predictions may

assist in early identification of financial difficulties

• Trustees need to know about the charity’s assets and if any’s use is restricted

• That may face insolvency if unable to pay debts

Plan for orderly shutdown

• Trustees may be liable for any debts

Steps trustees should take if they believe they are insolvent

Charity reserves – Building resilience (CC19)• What reserves are and how to develop and report a reserves

policy

• Resilience against drops in income or demand for new project

• Policy explaining approach important

• No single level or range is appropriate

• If don’t have reserves think need must proactively address this

• Any target should reflect particular circumstances of charity and be explained in policy. E.g. Holding no reserves

• Guidance:-

• What reserves are

• Importance of having a reserves policy

• How to develop a reserves policy

• Requirement for publishing and reporting on it

• What trustees need to do to keep proper oversight of reserves - Review level regularly not just annually

Charity governance, finance and resilience – 15 questions trustees should ask

• What effect is the current economic climate having on our charity and its activities

• Are we financially strong enough to continue providing services to our beneficiaries

• Do we know what impact the social and economic climate is having on our donors and support for our charity

• What is our policy on reserves

• Are we satisfied with our banking arrangements and our current and future investment policy

• Have we reviewed our contractual commitments

• Have we reviewed our contract to provide public services

• If we have a pension scheme have we reviewed it recently

• How can we make best use of any permanent endowments investments we hold

Charity governance, finance and resilience – 15 questions trustees should ask

• Are we an effective trustee body

• Do we have adequate safeguards in place to prevent fraud

• Are we making best use of the financial benefits we have as a charity

• Are we making the best use of our staff and volunteers

• Have we considering collaborating with other charities

• Are we making the best use we can of our property

Changes to Gift Aid & HMRC Attitude to Compliance

Phil Waller

Partner

• Gift Aid declaration updated wording

validity of old versions

• HMRC compliance checks

Gift Aid claim reviews

impact of digital accounts

• Apprenticeship Levy

• CRS

Recent developments

• Corporate Gift Aid is a distribution through reserves

• Over payments pre 1 April 2015 will not be penalised

• Repayments to the subsidiary will not be taxed

• Rectification can occur in line with annual profits

• Gift Aid for APs commencing 1 April 2015 or later must comply

with the new guidance

Corporate Gift Aid update

THE LESSONS OF KIDS COMPANYPaul Gibson, National Charity Specialist

Kids Company – the context

A charity working with children and young people in vulnerable

circumstances in London, Bristol and Liverpool, founded 1996

High profile individuals, Camila Batmanghelidjh (CEO), Alan

Yentob (Chair), donors and senior political figures

Kids Company closed on 5 August 2015 after questions over its

finances and allegations of physical and sexual abuse

(allegations since subsequently dropped)

Kids Company – the final days

Kids Company received £42 million of Government funding since

1996

Funded by the Department of Education until 2013, when the

Cabinet Office took over responsibility for funding, as Kids

Company did not meet the criteria for competitive grant funding

The Cabinet Office paid funding of £4.3 million in April 15

And a further £3 million in August 15, a week before the charity

collapsed and closed

Kids Company – House of Commons report

The Public Accounts Committee published a very critical report

in November 2015

http://www.publications.parliament.uk/pa/cm201516/cmselect/cm

pubacc/504/50402.htm

‘It is staggering that the government has given over £40 million

to Kids Company over the past 13 years and still has no idea

what it was getting for taxpayers’ money. It was not part of this

inquiry to assess the outcomes of Kids Company’s work.’

http://www.publications.parliament.uk/pa/cm201516/cmselect/cmpubacc/504/50402.htm



in November 2015

‘We object to the obvious unfairness of central government

directly funding a charity which operated in only two London

boroughs for most of its existence, with around £4 million a year,

at the expense of other charities and young people across the

country. Despite repeated warnings and concerns about Kids

Company’s financial situation and the impact it was achieving,

funding to the charity continued and was never seriously

questioned, let alone stopped.’



in November 2015

‘An extraordinary catalogue of failures of governance and control

at every level – trustees, auditors, inspectors, regulators and

government.’

‘A litany of allegations of inappropriate ‘therapies’, lavish

spending and abuse of power within the organisation.’



in November 2015

‘Batmanghelidjh was able to captivate some of the most senior

political figures in the land, by the force of (her) personality as

much as by the spin and profile she generated for the charity.’

‘The trustees ‘ignored repeated warnings about the charity’s

financial health, failed to provide robust evidence of the charity’s

outcomes and did not adequately address increasing concerns

about the suitability of its programmes and behaviours of staff .’

Kids Company – Lessons for charities

BBC One documentary on 3 February 2015, ‘Camila’s Kids

Company: The Inside Story

The business model was ‘demand driven’, yet the charity had a

very low and inadequate level of reserves

The Charity Commission failed as regulator to protect the public

The trustees and auditors failed to make a Serious Incident

Report to the Charity Commission

Kids Company – Lessons for charities

Over-reliance on funding from Government and wealthy

philanthropists

Poor financial control over expenditure

Mitigation when more than one risk arises at the same time

Dominant founder/CEO and oversight by trustees

A lack of focus on outcomes and impact

Kids Company – Wider lessons

Actions or non-actions by trustees and staff are a reputational

risk for the sector

Negative headlines in the press are a reputational risk for public

trust and confidence in charities

Rightly, there are calls for ever-tighter regulation of charities

But the way forward lies in better governance of charities

FRS 102: LESSONS FROM THE FIRST CONVERSIONS Jon Marchant, Director

What were the key issues we anticipated? • Mixed use property

• Income recognition

• Classification of investment gains

• Holiday pay accrual

• Defined benefit pension schemes in deficit

• Lease incentives

• Long term loans

• Governance costs

• Cashflow statement

• Trustees expenses disclosure

• SOFA presentation

• Trustees report

• Key management salaries

The key issues

• Mixed use property

Split between tangible fixed assets and investment property

depending on intention for use

Revalue element considered to be investment

• Income recognition – changed criteria

Recognise when receipt is “probable” (previously “virtually

certain’

Impact on legacies

• Classification of investment gains/losses

Originally intended to be shown within operating result

Charity Commission example accounts show a subtotal before

investment movements…

The key issues

• Holiday pay accrual

Calculate accrual / prepayment at 31 Dec 2013, 2014 and

2015

Decide whether or not to adjust if not material

• Defined benefit pension schemes with recovery plans in place

Accrual for full committed payments under the deficit reduction

plan

• Treatment of lease incentives

Recognise over term of lease not time to break clause

Intercompany & Concessionary loans

Long term intercompany balances

• Includes any other long term interest free loans

• Held at “discounted cash flow” value

BUT…

• ‘Concessionary loans’ in public benefit entities are held at cost

under FRS 102 s 34.88

• Conditions as follows

Must be between public benefit entities (or to an

beneficiary)

Interest rate must be below market rate

Can’t be repayable on demand (documentation needed)

Must further objectives of the charity

FRS 102 and SORP 2015 updates….

• Statement of Cash Flows

FRS 102 reinstated the ‘small companies’ exemption (income <

£5.6m, assets < £3.26m, <50 employees; 2 of 3 must be met)

SORP 2015 update leaves threshold at £500,000 …

• Governance costs

Reallocated across expenditure categories… BUT

SORP 2015 now requires that the total governance costs must

be disclosed despite reallocation across categories

• Trustees’ waived expenses

SORP 2015 states that this is now only required if material to

total expenditure

Presentation changes

• SOFA must include all fund categories for comparatives

Options…

Include extra columns on the SOFA

Show comparatives on individual notes

Include a note showing the full comparative SOFA and

reference this to the comparative totals

• Trustees’ report

Financial impact of key activities

Risks – include key risks and strategy for mitigating

Remuneration policy for ‘key management personnel’

• Key management personnel

Must be defined (by role not name)

Total salary must be disclosed

FRSSE or FRS 102 SORP?

• There is an option for small charities to use the FRSSE SORP in

2015/16 and then transition to FRS 102 in 2016/17

Criteria: Income < £6.5m, assets < £3.26m, <50 employees; 2

of 3 must be met

Disclosure substantially the same as FRS 102 for charities

Means making two sets of changes in successive years

• Trustees’ decision which to use if eligible BUT

May be easiest to go straight to FRS 102

So… how did the first conversions go?

• It is a learning curve … which we are still on

• Fewer numerical adjustments than we expected

• Biggest challenges…

Key management personnel

Accounting policies

Related party transactions

Donated stock

Accounting Policies

Are your current policies

appropriate:

• Revenue recognition -

legacy recognition

• Financial instruments

• Going concern

• Estimates and

judgements

• Reconciliation to old

GAAP

Related party transactions

More than you think !

• Waived Trustee

expenses

• Donations from

Trustees

Capturing information is

the key

Donated stock

Recognise the stock at its

value.

Adjust stock against

sales when sold

What do you need to do now?

• Identify issues and make key decisions

Work through our checklist to identify the issues

• Calculate adjustments

• Identify and capture extra disclosure information

• Update accounts document and restate comparative

figures if necessary

• We are here to help and are happy to discuss issues and

review the accounts before the audit

Should I make the adjustments?

YES

YES CONSIDER

(PROBABLE) CONSIDER

(POSSIBLE)

PROBABLY

NOT

EMPLOYMENT TAXES AND THE NATIONAL MINIMUM WAGE Vaneeta Khurana, Director Employment Tax Services

Employment Taxes

• Update from Budget 2016

• Changes from 6 April 2016

• Year end expenses and benefits

• HMRC activity

National Minimum Wage (Again)

• From 1st April, NMW for over 25’s is set at the level of National Living Wage

• Effective 50 pence rise – or almost 7.5%

• Plans to increase to £9 by 2020

Age Brackets and Rates

National Minimum

Wage

National Minimum

Wage (from 01 October

2016)

National Living Wage

(from 01 April 2016)

25 and over £7.20

21-24 £6.70 £6.95

18-20 £5.30 £5.55

Under 18 £3.87 £4.00

Apprentice (16 to 18) £3.30 £3.40

National Minimum Wage – Other points

• Sleeping at work - Whittlestone v BJP Home Support Ltd and Esparon v

Slavikovska (2013 and 2014)

• HMRC view - any employee who effectively bears work related

responsibilities whilst being allowed to sleep (in contrast to not working but

available for work during a time when workers are allowed to sleep)

• European Court - Workers without fixed place of work – Travel to first and

travel from last place of work is working time

• Recent case – 8 March 2016 – Director of children’s nursery, failed to pay

NMW, company fined £5k and director disqualified for 6 years

• “Secret” amnesty - the ‘NMW Campaign’ – last date to register of 29 Nov

2015, arrears to be paid by 31 Jan 2016 – Very little publicity

• Crackdown and higher penalties after amnesty?

Gift Aid• Headline in THE TIMES Wednesday March 16 2016

• “JustGiving messages cost charities millions in tax”

• Donation must be of donor’s own money

• Claims refused where message referred to more than one people or implied

funds from a group – “from Mum and Dad” “From everyone at the Red Lion”

• Other grounds – Signature illegible

• Care of address – “Sonia care of The Health Centre”

• Paid with someone else’s debit or credit card

• Address unspecific – “Tower Bridge House”

• Suggests money in return for goods or services – “From the sale of fairy cakes”

• Enquiries invariably retrospective – Gift aid claim allowed but later reclaimed by

HMRC

• More cost effective for HMRC to challenge several years at once – but the

arrears can finish the charity

INTERNAL AUDIT: WHEN DOES A CHARITY NEED AN INTERNAL AUDIT FUNCTION AND WHAT VALUE CAN IT ADDMAT COOLING, MANAGER

Outline

• What is Internal Audit?

• Charity Commission Context

• A Sector perspective

• Assurance Framework

• Risk Management

• Example Internal Audit Approaches

• Value of Internal Audit

What is Internal Audit?

• External audit is a regulated activity and refers to the statutory audit of the accounts. An audit is undertaken by a person who is eligible under the Charities Act 2011 and who is normally a statutory auditor for company law purposes. The auditor has to express their professional opinion as to whether the accounts are ‘true and fair’ and undertake procedures necessary to form that opinion in accordance with International Standards on Auditing (UK and Ireland)

• Internal audit is part of the internal control arrangement…… Internal auditors look at all the risks facing an organisation and what is being done to manage those risks. An internal auditor might look at reputational risk, operational risk or strategic risk.

Extract CC8 - Internal Financial Controls for Charities (July 2012)

• Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organisation's operations. It helps an organisation accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes.

Definition of internal auditing – Global Institute of Internal Auditors

Charity Commission Context

• No regulatory requirement for Internal Audit

• Trustee duties …. Manage your charity’s resources responsibly - The essential trustee: what you need to know, what you need to do (Updated July 2015)

• Risk Management - By law, non-company charities with incomes of £500,000 or more (and charities with incomes above £250,000 plus assets worth more than £3.26 million) must include a risk management statement in their trustees’ annual report. But it’s good practice for smaller charities to report on their risk management activities too. CC26 – Charities and Risk Management (June 2010)

• Importance of internal financial controls, but just one element-CC8 - Internal Financial Controls for Charities (July 2012)

A Sector perspective• No hard and set rule

• Absence of any sector wide, published information.

Charities Internal Audit Network (CIAS) “has over 140

members working in a wide range of charities, many of

which are household names.” http://www.cianonline.org.uk

165k registered charities, around 2k >£5m income pa, 71%

Annual Sector Income.

If you add charities >£500k income pa, represents around

11k, 90% of Annual Sector Income. • Scale and complexity of operations

• Legal structure and stakeholder requirements (i.e. exempt charities)

• Trustee and Senior Management experience

• Organisational change and corresponding challenges

• Means of delivery of service (In-house, co-sourced, outsourced)

http://www.cianonline.org.uk/

Assurance Framework

• Taking a step back…. What level of assurance do Trustees and Senior Management require regarding discharge of their statutory and other duties?

• Risk management statement and underlying Risk Register in place including identified risks and mitigating controls

• What confidence is there that what needs to be done is being done?

• Risk of over-confidence (nothing negative has happened…), complacency

• Assurance can be defined as “an objective examination of evidence for the purpose of providing an independent assessment on governance, risk management and control processes for the organisation” Global Institute of Internal Auditors

Assurance Framework

• Assurance can be defined as “an

objective examination of evidence

for the purpose of providing an

independent assessment on

governance, risk management and

control processes for the

organisation” Global Institute of

Internal Auditors

• Mapping involves identifying and

recording the key sources of

assurance on the effectiveness of

key controls to manage risk

• Sources of assurance typically

assessed using the three lines of

defence model

Assurance Framework

• Provides clear picture of activities undertaken and the types of

assurance currently obtained

• Indicates whether assurance is effective and efficient

• Identifies gaps in assurance or where assurance is duplicated, or

disproportionate to the risk

• Identifies areas where existing controls are failing

• Informed decision making and better focus for existing assurance

resources including for e.g. need for internal audit

• Improved evidence base for Risk Management statement

Risk Management

• Charity Commission requirement for most charities

• Guidance somewhat dated, all be principles remain valid

• Integral to development of Assurance Framework

• Absence of any documented, up to date policy and procedure

• Tired, incomplete, dated risk register

• Statement on risk management does not vary from year to the

next

• Good starting point for Internal Audit whether one-off assignment,

or a foundation for future service

Example Internal Audit Approaches

Value of Internal Audit

• Source of assurance for Trustees and Senior Management

• Independent and objective

• Scope encompasses risk management, internal control, and

governance processes across the organisation

• Contributes to raising awareness and promoting a good internal

control culture

• Identification of control weaknesses, associated risks with Action

Plans with prioritised recommendations, owners and target dates

• Insight and best practice

DATA PROTECTION, DIRECT MARKETING AND FUNDRAISINGPAUL GIBSON, NATIONAL CHARITY SPECIALIST

Outline

• EU Data Protection reform, Zach Thornton, Direct Marketing Association

• Changes to fundraising best practice, John Mitchison, Direct Marketing Association

• What should charity trustees be doing about fundraising?

EU data protection regulation – What the

future holds

Zach Thornton, External Affairs Manager, DMA

@DMA_UK

[email protected]

mailto:[email protected]

EU Data Protection reform – where are we?

• Dec 2015 Political agreement reached on text

• Summer 2016 Text published in Official Journal

• Summer 2016 Regulation becomes law

• Summer 2018 Regulation comes into force

Information Commissioner and Minister’s views

• Limit business costs while respecting

individual’s data protection rights

• Implementation of text will be complex and

demanding

• Support organisations to make changes

• Powerful driver to good practice in treating

consumers well

• Building long term business rather than

quick buck

• ICO will deal with rogues and use fining

powers proportionately and appropriately

John Mitchison

Changes to fundraising best practice,

legislation and the FPS

v September 2015

v 3 October 2015UK Fundraising

John MitchisonHead of Preference Services, Compliance and Legal

[email protected]


What should charity trustees be doing?

‘’The Charity Commission will relaunch its CC20 fundraising guidance in response to events over the summer (2016)”, its chief executive Paula Sussex has said.

She said that fundraising was currently a “very difficult issue for all charities”.

“Fundraising is a self-regulatory activity but in our part, we are relaunching our fundraising guidance to make it stronger and more impactful as to what exactly trustees’ responsibilities are,”she said.

So, what is the new Charity Commission guidance likely to say?

Anticipated new Charity Commission guidance?

At a high level:

• Trustees are responsible for fundraising, as part of their legal duties

• Trustees are responsible, whoever carries out the fundraising

• Trustees must ensure compliance with fundraising law and fundraising standards

How do trustees do this?

Anticipated new Charity Commission guidance?

How do trustees meet their fundraising responsibilities?

• Effective planning

• Supervise fundraisers

• Protect the charity’s reputation

• Comply with fundraising law and standards

• Being open and accountable

Fundraising in practice, FEAST

From the FEAST webpage:

‘’FEAST (For Education and Social Transformation) is a charity based near Nagercoil in the very south of India. It was founded in 1988 to support the poor children of the mainly Christian fishing families in the Kanyakumari district – an area that was later greatly affected by the tsunami.

This support has been extended to serve the poor, irrespective of caste or religion and now includes Hindus, Christians and Moslems.’’

Fundraising in practice, FEAST

‘’Born to a poor fishing family, Fr. Jeremias experienced first hand

the experience of poverty and the life-changing value of education.

Since 1988, FEAST has helped 3,000 poor children to go to school.’’

CONCLUSION

Should you require any further information,

please do not hesitate to contact:

The contents of this presentation are confidential and not for distribution to anyone other than the recipients of this document. Disclosure to third

parties cannot be made without the prior written consent of Mazars LLP.

Mazars LLP is the UK firm of Mazars, an international advisory and accountancy organisation, and is a limited liability partnership registered in

England with registered number OC308299. A list of partners’ names is available for inspection at the firm’s registered office, Tower Bridge House,

St Katharine’s Way, London E1W 1DD. Registered to carry on audit work in the UK and Ireland by the Institute of Chartered Accountants in England

and Wales. Details about our audit registration can be viewed at www.auditregister.org.uk under reference number C001139861.

© Mazars 2016

Tracy Satherley 0117 928 1700

[email protected]

Jon Marchant 07881 283568

[email protected]

Paul Gibson 07896 508088

[email protected]




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