Charity requirements update…making life easier?

The Charities Act 2006, which became effective earlier this year, made considerable changes to charities' requirements.

The latest guidance from the Charity Commission for England and Wales (CC15 - Charity Reporting and Accounting: The essentials) issued in May 2007, reinforces the need for an effective framework for accounting for all charities. This recognises the significant differences in the size and shape of charities. There are over 190,000, most are small with income less than £10,000.

There is also guidance to address the dual reporting issue where accounts are required to meet the Charity Commission's requirements as well as to satisfy the Companies Act.

The trustees are still responsible for ensuring the appropriate returns are submitted. These are accessible publicly on the Charity Commission web-site to encourage openness and accountability. There are new thresholds for submitting accounts as well as for audit that apply from next year. Overall the new requirements are aimed at reducing the burden on charities.

Accounting framework

To establish the type of accounts that are required depends on the following:

  • Whether the charity is a company
  • Current year income
  • Value of assets
  • The need to be a registered charity.

The charity also needs to consider:

  • The type of accounts that are required
  • Information needed for the annual report
  • The need for independent examination or audit
  • Information required by the Charity Commission.

The returns to the Charity Commission need to be made by 10 months after the year end. They ideally should be provided at the earliest opportunity so that the most current information is available.

All charities are required to prepare accounts. Those with income in excess of £10,000 are required to submit them to the Charity Commission.

The accounting basis depends on the size of the annual income. If the charity has less than £100,000, the accounts can be prepared on a receipts and payments basis. These should be comparatively simple showing the receipts and payments as well as the asset and liabilities at the year end.
All charitable companies and others with income over £100,000 are required to prepare the accounts on an accruals basis. They need to be in accordance with the SORP (Accounting and Reporting by Charities: Statement of Recommended Practice 2005); with statement of financial activities and balance sheet.

Annual returns

As well as the accounts, charities in excess of £10,000 are legally required to submit an annual return. This will include details of:

  • Financial information
  • Trustees
  • Contact details
  • Details of its constitution
  • How the decision process work
  • The reserves policy
  • Plans to address any deficits
  • Risks
  • Future plans.

The Annual Information Update form and the Annual Return will be provided to charities each year by the Charity Commission for completion by the trustees.

Audit or examination

Charities with income below £10,000 are no longer required to have their accounts independently examined. However, some may still do so if the trustees so wish or are required by their governing document.

For charities with income up to £500,000 and total assets up to £2.8m, then an independent examination is required. Where income exceeds £250,000, the examination is required to be undertaken by an accountant. However, trustees may prefer an audit to be undertaken instead, particularly where the transactions and accounts are complex.

Where income exceeds £500,000 or the assets exceed £2.8m, an audit is required. This is an increase from £250,000 and the asset value has been brought into the non-companies audit for the first time. This is similar to the arrangements for charitable companies.

The financial thresholds apply to accounts for years' beginning 27 February 2007, i.e. for accounts that end next year from 27 February 2008.

Take care to appoint an examiner who has sufficient knowledge and experience of accounts and the charities requirements.

Annual report

The annual report is a mandatory requirement and all annual reports must be made available to the public. The annual reports vary considerably and there are many that do not fully meet the requirements.

The SORP provides guidance that confirms that an annual report should cover detail such as:

  • The aims and objectives
  • How well the charity has done, its successes
  • Its plans including potential difficulties
  • Benefits to the public.

It does not need to be particularly lengthy but should provide a fair and balanced view of the charity's position. It needs to be borne in mind that the readers of the report are not just the trustees but all stakeholders including the public. Of course the Trustees' report should be quite different to the Directors' report for a company.

Charitable companies

There are some differences that apply to charitable companies. The SORP applies to all charitable companies, this requires:

  • Directors' report and accounts in accordance with the companies act
  • Accounts to be filed at Companies House
  • Accounts prepared on accruals basis

The audit arrangements differ too:

  • Where income is over £500,000 or assets exceed £2.8m, then an audit is required.
  • Where gross income exceeds £90,000 (but less than £500,000) accountant's report is required.
  • No scrutiny required where income is less than £90,000.

The Companies Act 2006 will introduce new provisions that will make the accounting requirements for companies and non-company charities very similar. The main change is that the company charities that are small companies under the Companies Act will become subject to the Charities Act independent examination and audit regime. Further guidance will be provided by the Charity Commission once this in place.

Registration thresholds

Only charities with income in excess of £5,000 will be required to register, this has increased from £1,000. Charities presently registered below the threshold can apply to the Charity Commission to be removed from the register.

Exempt charities

Exempt charities are not required to submit returns to the Charity Commission as they are required to meet other statutory accounting frameworks, such as for housing associations. They have their regulator who is the 'principal regulator' and is required to ensure the body has met the charity's requirements. Where there is no regulator the intention is that they will then become registered, the Charity Commission is reviewing these arrangements.

Excepted charities

Excepted charities are either; excepted by Order or Regulation, very small with less than £1000 income or registered places of worship. Trustees can register the excepted company voluntarily and meet the requirements like any other charity. An annual report is not required but accounts must be maintained. The Charity Commission can ask for a report in exceptional circumstances.

Providing public benefit

The Charities Act 2006 defines a charity as a body which is for a charitable purpose and is for the public benefit. The Charity Commission is seeking to raise awareness of the 'public benefit' aspect and is developing guidance on this issue for charities, before it becomes effective in 2008.

What to do now?

All charities need to carefully consider how these changes will impact on them. Begin to plan now for preparing the accounts, and consider the audit arrangements. Assess the annual reports, are they fit for purpose?

Watch out for further guidance from the Charity Commission on charitable companies as well as on many other areas.

There is considerable guidance and advice available on the excellent Charity Commissions' web-site: www.charity-commission.gov.uk.

Ian Wallace, FCCA
Manager - Public Sector, Tait Walker
www.taitwalker.co.uk

PAYE worries?

Your employees will be one of the most important assets of your organisation. PAYE regulations are complex and if your organisation does not comply it could be faced with further tax assessments, interest charges and penalties. 

Our Public Sector and Employment Tax Group have developed a diagnostic tool to comprehensively review the effectiveness of your PAYE systems and processes. The tool is based on H M Revenue & Custom’s own systems and reviews areas such as: 

Benefits: company cars and vans, home telephones, round sum allowances, clothing allowances, relocation expenses, long service awards, transfer of assets, beneficial loans, employer provided accommodation and staff entertaining.
Expenses: travel and subsistence payments, client entertaining and reimbursement of other business expenses.
Employment status: employed or self employed and examination of accepted policies.
Salary sacrifice schemes: in relation to childcare, smart pension and home computers
Construction industry scheme: monthly returns and verification processes
PAYE Settlement Agreements and Dispensations: are they relevant? 

At the end of the Review you can expect a report that clearly sets out the potential risks with appropriate recommendations. 

If you would like further information on how we could assist you avoid the risk of incurring tax penalties, please contact me at the Gosforth address and telephone number below, or alternatively email me on ian.wallace@taitwalker.co.uk