[First published in December 2016. A June 2017 update will be published soon]
As there are so many technical developments in the charity sector right now, I thought it would be useful to create some notes for sharing with colleagues. These arise from my attendance at the 2016 ICAEW Annual Charity Conference in November; and also from my ongoing work with charities.
Please note that this is a general briefing, so no liability is accepted for actions taken as a result of reading this blog. You should take professional advice about your own particular circumstances. Nor can any responsibility be taken for the contents of external websites.
1. Improving public trust
Recent research by The Charity Commission, England & Wales (CCEW) indicates that public trust in charities is falling. These are suggested questions for improving in narrative reporting by trustees, in their annual report and accounts:
- How do we address our competitive / collaborative environment?
- How do we explain how we continue to evolve and respond to a changing world?
- How best do we describe why we do what we do (as opposed to anything else we could do)?
- How have we responded to scrutiny by [social] media, of ourselves and the sector?
- How do we link our achievements to our costs?
There is an ongoing challenge for charities to narrate their activities authentically and honestly; and to respond to challenges about their effectiveness. Use of social media can help with this.
2. Digital and Cyber security
The CCEW has published guidance for trustees on going digital. Cyber crime is massively on the increase everywhere. It is a really important issue for charities of all sizes. Ensuring in-house discipline, common sense and vigilance is crucial! Trustees should have a policy that articulates the internal approach (such as HR policies, responses to Ransomware) and external approach, (such as Communications and Serious Incident Reporting to regulators).
Passwords should never be recycled. One top tip is to use the initial letters of a memorable phrase/sentence (or line of a song) involving numbers and symbols, which should be much harder to crack. The ICAEW has published a useful corporate report on this topic. Specialist support may be needed to ensure that appropriate measures are in place.
These are the EU General Data Protection Regulations which come into effect in 2018. For UK entities, this requires compliance with the Information Commissioner’s Office (ICO) regulations. Some charities may be exempt; however, many are not! The view is that charities must have consent to contact donors and potential donors.
The Court of Justice of the European Union (CJEU) officially struck out the so-called Safe Harbour framework in 2015. Since then, work has been underway to agree a new deal to allow the transfer of personal data from the EU to the USA, resulting in the announcement of the EU – USA Privacy Shield in February 2016. Note that Drop Box is hosted in the USA.
The Charity Finance Group (CFG) has co-authored a report entitled Countering Fraud. The CCEW has set up a specific page of advice for the sector. Broadly, the key weaknesses in the sector are the failure to apply controls; or overriding controls; and excessive trust.
Note that there is a declaration in the CCEW annual return that trustees have reviewed their controls. I wonder if this might come back to haunt trustees whose review of controls was somewhat superficial!
5. Fundraising regulations
In 2016, a new fund raising regulator was created. It is (imaginatively!) called the Fundraising Regulator. There will be a consultation and review of the Fundraising code in 2017, which is now held by the new regulator. It is funded by a levy on charities that spend over £100k on generating voluntary income.
There are also proposals for a Fundraising Preference Service (similar to the Mail Preference Service and Telephone Preference Service), which will be considered in 2017.
In 2016, the CCEW published a revised version of CC20 “Charity fundraising: a guide to trustee duties” which contains 6 key principles on Fundraising, which are:
- Planning effectively
- Supervising your fundraisers
- Protecting your charity’s reputation, money and other assets
- Identifying and ensuring compliance with the laws or regulations that apply specifically to your charity’s fundraising
- Identifying and following any recognised standards that apply to your charity’s fundraising
- Being open and accountable
Note that trustees must have strategic oversight of fundraising and an understanding of how these principles are put into practice for their charity.
6. Off payroll workers
There will be a significant tightening in employer payroll compliance responsibilities for entities that are using workers who operate through personal service companies, also known as IR35. The initial focus will be on entities that are publicly funded, with effect from April 2017.
The Charity Tax Group has published a relevant article.
7. Apprenticeship levy
This new scheme is due to start in April 2017. The levy will be 0.5% of the annual pay bill, less an annual allowance of £15k; so it will be applicable for employers with an annual payroll bill of over £3m and will not affect smaller charities. The levy will work via the PAYE system. There have been some additional charity sector concessions in terms of the amount of time allowed for charities to use this pot of funding. Sadly, this pot of funding can’t be used to train volunteers.
8. Senior Management/Executive remuneration
In 2015, an NCVO report was published, which gives guidance on how to set staff pay policies. It is endorsed by the CCEW. The report also recommended that key information should be only 3 clicks away from the home page on a charity’s website! Disclosure is now a SORP 2015 requirement; and staff pay policy is now a point of confirmation in the annual return; so trustees should ensure that they have addressed the report’s recommendations.
There are new simpler Gift Aid (GA) declaration wordings. Increases over the last few years in the Personal Allowance will mean that there are more people with income below who aren’t tax payers. The GA Small Donations Scheme (GASDS) threshold increased to £8k with effect from April 2016. Will contactless payments be considered as cash soon? If you need specific advice on a charity taxation point, please contact our director of tax, Gerry Jackson.
There are several ongoing cases between tax payers and HMRC, including:
- Longridge Thames case – charging for services has affected VAT recovery on a building/capital project
- Caithness RFC – controls over and the availability of a community asset
- Halle Concert Society – philanthropic VAT exemption where a charity provides services to members in return for a subscription
- LIFE Services – exemption for the supply of welfare services
If you need specific advice on a VAT point, please contact our Head of VAT, James Sherbourne.
In what appeared to be a post Kids Company reaction, revised CC19 guidance was issued in January 2016 by the CCEW. Justification of reserves should be by reference to continuation & risks of unplanned closure. This latter point is contentious amongst some people and professionals working in the charity sector. Nonetheless, charities need to be able to justify reserves and explain what steps are being taken, if reserves are too low or too high; they are unlikely to be just right.
12. Pension scheme deficits
These continue to be an issue for charities, due to low bond yields and/or increases in RPI & CPI. Consider your charity’s options for managing and addressing the covenant proactively. The CCEW last published guidance on this in 2014.
13. Trading subsidiaries
Revised guidance has been issued by the ICAEW on payments by trading subsidiaries to parent charities. This broadly aligns with distributable reserves guidance for companies, regarding the payment of dividends with reference to distributable reserves.
14. Statement of Recommended Practice for Accounting by Charities (SORP) - 2019 revision
Just as the sector is getting to grips with SORP 2015, along comes another version! The current consultation closes (or closed depending on when you are reading this) on 11 December 2016 with an exposure draft due in 2018. There is a desire to make annual reports and accounts more useful. Suggestions include:
- Narrative reporting – better integration with accounts; adding a “Key Facts” summary; better narrative on risk management and going concern
- Financial transactions – more specific definitions; capital v revenue; enhanced analysis of expenditure
It would be helpful if the profession’s work in the commercial sector on decluttering annual reports could be applied to charities, which tend to have less resource for year-end reporting than their commercial peers.
Eagle eyed finance people will be aware that the enabling regulations for SORP 2015 are still not in place, so a “carve out” in sections 7 & 8 of CC15 gives the authority for SORP 2015.
15. Reporting matters of material significance
This is about charity auditors and independent examiners who are obliged to “whistle blow” on concerns arising from their work, to the CCEW.
A consultation closed in September 2016 which sought comments on amendments to the existing guidance; and added 3 more areas which would require to be reported:
- A non-standard audit opinion, including emphasis of matter;
- Management letter points that haven’t been dealt with satisfactorily (this could become a contentious area); and
- Conflict of interest issues.
The revised guidance is due early 2017, once it has gone through CCEW, OSCR & CCNI. The ICAEW response is here.
16. Independent Examination
Following the increase in the income audit threshold from £500k to £1m for accounting periods ending 31 March 2015, a consultation has been held on Independent Examinations. Revised guidance (CC32) is due to be published early in 2017. New elements will probably be around:
- Conflicts of interest;
- Related party disclosures; and
- Going concern/financial sustainability.
17. Common Reporting Standard (CRS)
Some charities may be regarded as “Financial Institutions” so will be required to file a return with HMRC in respect of the year ending 31 December 2016 by 31 May 2017. Charities most likely to be affected (broadly) are:
- Charities with more than 50% income from “financial assets” and discretionary investment mandate; and
- Trusts – likely higher due diligence and reporting burden
This article published by Investec (other investment managers are available!) explains more. Grant making trusts are among the charities most likely to be affected.
18. Persons with Significant Control (PSC) regime
This is another additional reporting requirement for charitable companies which came into effect on 6 April 2016. This register is necessary to submit the confirmation statement (previously known as the annual return). This Third Sector article gives some further general information.
19. CCEW proactive accounts review projects
The regulator is being more proactive and is undertaking these review projects, using digital search techniques, the findings of which are reported publicly. Examples include non-standard audit and independent examination reports; quality of public benefit reporting; quality of annual reports. Anomalous findings have resulted in compliance visits. Expect more projects like these in future.
20. CCEW updates and publications
Trustees who have made available their email address to the CCEW should be receiving their quarterly newsletters – the most recent one is issue 55. Alternatively, you can sign up for the alerts service. The inquiry case reports always contain useful learning for the rest of the sector and its professional advisors.
At the 2016 ICAEW charity conference, a CCEW representative said that “Poor governance is at the heart of most inquiry cases”. Trustees are expected to know about, understand and ensure compliance with the CCEW guidance. Here is a list of key updates to CCEW guidance published during 2016 (some of which has been referred to already in this blog post):
- CC12 – Managing a charity’s finances
- CC14 – Charities and investment matters: a guide for trustees (which was updated following the C(P&SI) Act 2016 – see point 23 below
- CC17 – FRS102 SORP – Accruals accounts pack for small charities (income <£500k)
- CC19 – Charities & Reserves
- CC20 – Charity fundraising: a guide to trustee duties
- CC35 – Trustees trading and tax: how charities may lawfully trade
- CC38 – Litigation
- CC3 – The essential Trustee – what you need to know. Ok, this was revised in 2015 but an understanding of Trustees’ responsibilities is relevant, especially given the increased powers of the CCEW – see point 23 below.
Last but not least, the chair of the Charity Commission has indicated that the regulator will hold a consultation in 2017, on plans to raise £5m from the sector to pay for regulation. Might the Commission's funding all be raised from fees charged to the charity sector in the future? Watch this space!
This will be an ongoing area of uncertainty for some time to come. Trustees should be actively considering the potential impact, on strategic plans, of issues such as:
- Financial instability for donations; investment income; STG/currency fluctuations; and inflation
- EU contracts and grants/funding
- Right to work in the UK status, which may be relevant in the care and education sectors
- Other legislative changes e.g. procurement; VAT.
22. Charitable Incorporated Organisations
At the moment, only new CIO registrations are possible; so existing charities wishing to use this relatively new legal form have to set up a new CIO and transfer their activities from the old entity into the new one. Following a consultation in 2016, it is hoped that new regulations will become available in 2017, to allow conversions to CIO for existing charities that are currently companies limited by guarantee.
23. Charities (Protection & Social Investment) Act 2016
This Act has been coming into force during 2016, to include:
- Additional protection powers for the CCEW. There was a consultation from May to August on power to disqualify from acting as a trustee; with outcomes due soon. There is a new statutory power to issue an official warning to a trustee or to a charity, from November 2016. It is not clear if / how this would impact on senior management
- Social Investment powers and duties – permits mixed motive and mission related investing activity (in addition to previous version of CC14 on financial investment and programme related investment). I think this area will evolve as more charities get to grips with the pros and cons of this funding stream
- Fundraising regulations, which came into effect in November. The regulator has published a list of FAQs on this
24. Law Commission
There has been a review of the 2011 Charities Act. It contained a clause requiring a review 5 years on. Consultation may result in a further Charities Bill. Points up for discussion include:
- Amendment to powers of charities – these vary depending on whether a charity is incorporated or not
- Regulation of dealings with charity land – the possibility of relaxing the current statutory regime and giving trustees more autonomy
- Rules about permanent endowment and where this can be disposed of
- Technical points such as the issue of legacies where a donee charity merges with another charity – some legacies have failed, so trustees often keep the old charity alive as a "shell".
All in all, there have been many changes, the pace of change looks set to continue.
We hope this blog will be a useful checklist for our clients and contacts who work in the charity and non-profit sector.