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ACIE Scottish Conference 2012
Scottish Charity SectorAn Update
August 2012
Adrienne Airlie
Martin Aitken & Co
Glasgow
The Scottish Charity Sector
Income Distribution of Scottish Charities
More than 84% of all Scottish Charities have income below £100,000 p.a.
Sources:OSCR Scottish Charities 2008
70%
<£25,000
14%<
£100k
11%
<£500k
5%
>£500k
OSCRCharity Sector Update
As at 31/3/2011 23,288 Charities 70% of Charities < £25,000 income* 84% of Charities < £100,000 income* 5.6% of Charities > £500,000 income* 5.6% of Charities = 93.7% of total sector income* 4.7% of Charities > £500k = 90% (excl cross border)*
*Source - OSCR “Scottish Charities 2008”
The Scottish Charity Sector Key players
OSCR Scottish Government SORP Committee
ASB/CC/OSCR HMRC Accounting Standards Board (ASB) Charity Commission Other Professional bodies Trustees/Beneficiaries/Fundraisers General Public
Agenda 2012
Basic Refresher Thresholds, Income & Expense recognition
Scottish Government Public services Reform (Scotland) Act 2010 The Charities Accounts (Scotland) Amendment Regulations
2010 Charity Reorganisation ( Workshop 2A) SCIOs
The Scottish Charitable Incorporated Organisations 2011
General Regulations & Dissolution Regulations 2011OSCR processes – “SCIO’s a guide”
HMRC Gift Aid Fit & Proper/ Finance Act 2010 VAT
Agenda 2012 (cont)
Charitable Trading & VAT issues Current/ future issues
Disclosure SORP Concessions Support costs
Governance Internal controls Risk Management Board structure/ succession planning/skills
ASB/ Future of the SORP Scotland Office consultation on law reform for Unincorporated
Associations
Charity Accounts Unincorporated From 1 April 2011
Small Up to £250,000 SORP*
Accruals or
R&P
Large Up to
£500,000
SORP*
Accruals
Audit Over
£500,000
Full SORP
Accruals
* Concessions exist in the SORP for charities under Audit threshold of £500,000
“Audit” & Governing Documents
Constitution, Trust Deed, Memo & Articles Reference to “audit” Consider change to “the accounts should be
subject to external scrutiny in line with the relevant requirements of legislation” *
Check permitted, funders, notify OSCR within 3 months.
*OSCR reporter June 2012
The Charities Accounts (Scotland) Regulations 2006 – Company Thresholds From 1 April 2011
Company Gross Income
Company Gross Assets
Company Requirements – External Scrutiny
< £500,000 < £3.26m Independent
Examination
> £500,000 > £3.26m Audit
The Legislation – From 1 April 2011
Company Trust/
Unincorporated
SCIO
The Companies Act 2006
The Scottish Charitable Incorporated Organisations Regulations 2011
& The Scottish Charitable Incorporated Organisations (Removal from the
Register and Dissolution) Regulations 2011
The Charities Accounts (Scotland) Regulations 2006
& The Charities Accounts (Scotland) Amendment Regulations 2010
Charities and Trustee Investment (Scotland) Act 2005
& Public services Reform (Scotland) Act 2010
Statement of Recommended Practice –
Accounting by Charities 2005
Flowcharts – Accounts Preparation Decision Tree
Is the charity a company?
Prepare true and fair accounts in accordance with the Charities SORP.
Prepare accounts on a receipts and payments basis in accordance with regulation 9 of the 2006 accounting regulations (as amended).
Does the charity’s constitution (or other founding documents) or any enactment say it should produce true and fair accounts or have the trustees decided that it should?
Does the charity have a gross income of £250,000 or more?
YES
YES
YES
NO
NO
NO
External Scrutiny Decision Tree For Non Company Charities
Does the charity’s constitution or any enactment say that an audit should be undertaken, or have the charity trustees decided that an audit should be undertaken?
Is the gross income of the charity £500,000 or more?
Does the charity have assets (before deduction of liabilities) of more than £3,260,000?
Is the gross income of the charity between £250,000 and £499,999?
Does the charity prepare true and fair accounts?
Independent examination by someone with the requisite skills under regulation 11(1) of the 2006 accounting regulations (as amended).
Audit carried out by a registered auditor.
Independent examination by a member of a professional accounting body or a full member of the Association of Charity Independent Examiners or another person eligible for appointment under regulation 11(2) of the 2006 accounting regulations (as amended).
YES
NO
NO
NO
NO
NO
YES
YES
YES
YES
External Scrutiny Decision Tree For Charitable Companies
Do the charity’s founding documents or any enactment say an audit should be undertaken, or have the charity trustees decided that an audit should be undertaken?
Does the charity qualify as small under the Companies Act 2006?
Is the gross income of the charity £500,000 or more?
Does the charity have gross assets (before deduction of liabilities) of more than £3,260,000?
Independent examination by a member of a professional accounting body or a full member of the Association of Charity Independent Examiners or another person eligible for appointment under regulation 11(2) of the 2006 accounting regulations (as amended).
Audit carried out by a registered auditor.YES
NO
NO
YES
YES
YES
NO
NO
Income Recognition
Standard SOFA Headings Incoming resources from generated funds
Voluntary income Activities for generating funds Investment income
Incoming resources from charitable activities Other incoming resources
Income Recognition
Income – FRS 5 detailed explanations Entitlement Certainty Measurement
Conditions Certain & controllable Lack of related expenditure is not a reason for deferral
Grant /Performance Related / Service Contract?
Income – example of timing of recognition
Big Lottery award – £150,000 Received 1/3/11 - 50% part funding of outreach worker & office costs p.a. Case 1 - Outreach worker & office exist√ Entitlement√ Certainty√ Measurement
Action - Recognise as a restricted fund in total y/e 31/3/11 AccountsCase 2 - No Worker & no office in place yet× Entitlement √ Certainty√ Measurement
Action - Defer Income into y/e 31/3/11, until conditions met
Income identification
Important to identify type of income: Grant : for a project/purpose, no performance
criteria but return of surplus Performance : donor measured performance
criteria and return of surplus Contract : donor specified services, no return of
surplus
Income – long term funding examples
Incoming resources Year end 31 March, 2011 Receipt / approval 1 March, 2011 2 Year project Costs Year 1 £10,000
Year 2 £50,000
Year 3 £60,000
Example: Long term funding
*2013 requires an additional provision for repayment of surplus, eliminating the £30,000 net income (or renegotiate terms).
Grant2011 2012 2013
£ £ £ £Incoming resources 150,000 0 0 150,000
Costs 10,000 50,000 60,000 120,000Provision 30,000 30,000Net incoming resources 140,000 (50,000) (90,000) 0
Funds 140,000 90,000
Liability 30,000
Example: Long term funding
Performance related2011 2012 2013
£ £ £ £Incoming resources 10,000 50,000 60,000 120,000
Costs 10,000 50,000 60,000 120,000
Net incoming resources 0 0 0 0
Funds
Liability 140,000 90,000 30,000
Example: Long term funding
Contract2011 2012 2013
£ £ £ £Incoming resources 6,250 75,000 68,750 150,000
Costs 10,000 50,000 60,000 120,000
Net incoming resources (3,750) 25,000 8,750 30,000
Funds (3,750) 21,250 30,000
Liability
Memo: Income recognised pro-rata. 2011 = 1/24 months, 2012 = 12/24 months, 2013 =11/24 months
Expenditure
Remember: Analyse based on objectives and mirror the
related income Support costs are included under Costs of
Voluntary and Costs of charitable activity Governance costs are purely constitutional and
non-activity based
Expenditure recognition
FRS 12 “Present obligation (legal or constructive) from a past event”
If avoidable by future actions then no expense
Circumstances giving rise to cost must exist at balance sheet date
Use of Designated Funds
As expenditure has these restrictions…
Important for charities to consider pre year end, designating funds for future projects
Have it minuted in the last Trustees’/Board meeting of the year
Ring fence an element of unrestricted funds: To remove apparent surplus funds To demonstrate pro-active funds management
Designated Funds/Income Recognition
Legacy: Charity informed 1/5/11 of death on 1/3/11 and assets in estate cover legacies and bequests.Case 1 – fixed legacy from estate £50,000√ Entitlement√ Certainty√ Measurement
Action - Recognise as income in total y/e 31/3/11, designate for a project/purpose?Case 2 - share in residue (value unknown at signing accounts)√ Entitlement √ Certainty× Measurement
Action - Defer Income into y/e 31/3/12, once amount established
Public Services Reform (Scotland) Act 2010 Part 9
Amendments to CTI 2005 – operational from 1/8/10
• S30 Variation, revocation & review of directions• S34 (5) OSCR application to Court of Session deemed removal
of trustees• S30 (removal) & S70 (disqualification) non delegated functions • S39/40/42 Reorganisation, wider constitution changes • S70A Appointment of charity trustees• S68A TII excluded as remuneration, only if approved in
constitution & insurance does not cover fines/ penalties• Website references
• S43 Reorganisation restricted funds – OSCR & Charity – Workshop 2A• The Charities Reorganisation( Scotland) Amendment Regulations 2012• The Charities Restricted Funds Reorganisation( Scotland) Amendment
Regulations 2012
• Effective 1/11/12
The Charities Accounts (Scotland) Amendment Regulations 2010
• FY beginning 1/4/2011• Reg1(2) Gross Income & liability definitions• Reg1(2) Expendable and permanent
Endowments• Reg 8 & 9 amended as Accruals threshold
increases from £100k to £250k• Reg 10 Asset threshold £3.26 million at y/e• Reg 10 Consolidated accounts need audited
SCIOs – An update
Bespoke form of incorporation, charities only, based solely under Scottish charity law The Scottish Charitable Incorporated Organisations 2011
General Regulations 2011/Dissolution Regulations 2011 S 55(7) CTI if SCIO ceases to be a charity it ceases to be a SCIO
Benefits of incorporation without complexities of Coy Law OSCR processes – “SCIO’s a guide”
New applications & conversions Matrix Duties & Requirements of a SCIO -v- Non SCIO – excellent Practical issues arising – Alan Eccles MMS
General Regs Constitution Register of members & trustees Members Meetings & Responsibilities
Voting & duty of care Property Transfer
Duty to report to OSCR
This relates to the Whistle blowing section of the CTI Act 2005 at Section 46 and states that an individual must inform OSCR if, whilst acting in the capacity of the examiner of a charity he/she becomes aware of any matter relating to the activities or affairs of:
The charity or any institution or company connected to the charity and which the Independent Examiner has reasonable cause to believe is likely to be of material significant for the purpose of the exercise by OSCR of its functions under Section 28, 30 or 31
Continuing Reporting Duties to OSCR
2 Duties Mandatory – Sections 28/30/31 as above Discretionary – other areas of OSCR’s work
Discretionary – wide ranging e.g. Cumulative impact of not following professional advice Large redundancy packages/ non contracted
payments e.g. maternity pay Smaller admin or financial issues Exp outwith charity’s purpose (cum effect if not
material) Considerable intelligence value for OSCR, part of its
wider Monitoring & Compliance function
Gift Aid
The Small Charitable Donations Bill was introduced to Parliament on 21 June. The Bill will legislate the Gift Aid Small Donations Scheme (GASDS) which was announced at Budget 2011 and will be implemented from 6 April 2013.
HMRC – Gift Aid
Recap Reclaim tax from HMRC on gross equivalent of donation Only claimable on gifts of money from individuals, sole
traders or partnerships Donor must pay at least as much UK tax as amount being
reclaimed from HMRC Must keep a record evidencing donation is given under gift
aid showing name, address and details of donation Need to nominate an authorised official and register with
HMRC to reclaim – use form R68 Time limit of four years for making claim
HMRC – Gift Aid
Budget changes * Small donations scheme – GA on individual donations of
up to £10 to a total of £5,000 without having to collect declarations
Gift Aid benefit limit increased from £500 to £2,500 End of transitional relief – 3p per £ supplement ended 5
April 2011 Online filing system from 2012/13
All future repayments made by BACS
*The Small Charitable Donations Bill was introduced to Parliament on 21 June. Gift Aid Small Donations Scheme (GASDS) and will be implemented from 6 April 2013.
HMRC – Gift Aid
Benefit limits 25% of donation up to £100 £25 for donations between £100 & £1000 5% of donation above £1000 up to a maximum
benefit of £2,500 Split payments
Donor aware of value of benefit at time of donation
Quantifiable market value
HMRC – Gift Aid
Example calculation Dinner ticket costs £100, value of meal provided is £25. Donor is advised at time of purchasing that value of meal is
£25 and signs a form agreeing to donate proceeds under gift aid
Benefit is 25% of donation therefore whole amount is subject to gift aid (note that if meal cost £26 it would not be)
the charity claims back the basic rate tax of 20 per cent from HMRC on the donation.
So the charity is able to make a repayment claim of £25 (£100 divided by 4)
HMRC will add an additional transitional relief of £3 for claims up to April 2011, making a total payment of £28.
HMRC – Gift Aid
Auction items Item is commercially available
e.g. football top signed by player is not commercially available Donor is aware of price when making a successful bid Example in notes
VAT Donation outside scope of VAT if no significant benefit Split payments – may be a business supply for VAT
purposes Fundraising exemption may apply to events/auctions
HMRC – Fit & ProperFinance Act 2010
A new definition for tax purposes of charities, CASC’s etc entitled to UK charity tax reliefs
Satisfy “management condition” Applies to Gift Aid from 1/4/2010 Will apply to other reliefs later
“Management condition” - managers must be “Fit & Proper”
No definition, HMRC guidance Charities procedures on appointment Sham charities & fraudsters HMRC basic guide & model declaration - attached
HMRC – Fit & ProperFinance Act 2010 (cont)
Revised Guidance Feb 2011
HMRC assumes that all people appointed by charities are fit & proper unless they hold information otherwise.
Recruitment steps. If HMRC find a manager is not a fit & proper person charity will not
necessarily lose entitlement to the charity tax reliefs. Reliefs not withdrawn during an enquiry. Repayments however may be withheld. HMRC recommends that all staff complete the fit & proper helpsheet
& sign the declaration. Evidence of charity support.
Charity Trading
Incidental trading exemptions £5,000 < £25% of total income ( up to £50k max)
Set up a company to avoided tainted activities & tax arising
Transfer of profit by gift aid – accepted by HMRC
Segregates income streams although increases admin costs
VAT issues VAT not linked to charity structure VAT advantages very limited & complex Taxable supplies, register - £77k
Non Business – prov of services at no charge Outside the scope - grant income Exempt – Fundraising
Direct Input VAT re a non business supply can never be reclaimed – no de minimus limit
Partial exemption De minimus limit, Irrecoverable VAT – non Bus – Blocked Other input VAT split - Exempt & Taxable, Annual Adjustment
Voluntary VAT registration – do the advantages re input VAT recovery outweigh the following ?1. Admin Costs2. VAT burden to customers / service users
Current Issues 1. SORP – Small Charity concessions
Appendix 5 – Accounting for smaller charities Below Audit threshold ( <£500k ) SOFA – Resource classifications (incoming &
expended) to suit their circumstances SOFA – Notes restricted as above e.g.
Support cost/ apportionment/ Income analysis Notes – Staff emoluments not needed in £10k bands
from £60K upwards Trustees Annual Report (TAR ) as follows…
Current Issues1. SORP – Small CharitiesTAR Reference & Administrative Details
[Registered] Name Other Names used Registration Number [Charity] [Company] Principal office address Registered address [charitable company] Charity Trustees [up to date of report]……………………Audit Threshold………..…………………………………………
Senior Staff Name & Address of Professional Advisers [Bank]
[Solicitor] [IE] [IFA]
SORP – Small Charities TAR Structure Governance Management
Nature of Governing Document and how constituted Recruitment method for trustees…………………………………..Audit Threshold…………………………………….
Trustee induction and training policy/procedure Organisation structure and how decisions are made Relationship with wider networks Major risks
SORP – Small CharitiesTAR Objectives and Activities
Summary of objects in governing document…………………………………..Audit Threshold…………………………………….
Aims and differences seek to make Main objectives in the year Strategies to achieve these Details of significant activities
Tie in with ‘charitable activities’ note Grant making policies Programme Related Investment policies Use of volunteers
SORP – Small CharitiesTAR Achievements and Performance
Main achievements in the year……………………………………………….. Audit Threshold……………………………………. Performance against objectives
Qualitative Quantitative Indicators Measures
Charitable activities
Fundraising performance Material expenditure for future years
Investment performance
Matters outside charity’s control
SORP – Small CharitiesTAR Financial Review
Reserves policy Funds in deficit
………………………….Audit Threshold……………………………………. Principal funding sources How expenditure supported key objectives Investment Policy
SORP – Small CharitiesTAR Plans for future periods
…………………….Audit Threshold……………………………………. Aims and key objectives Planned activities
SORP – Small CharitiesTAR Funds held as Custodians
Assets held Name & objects of charity on whose behalf held
and how this fits in with their objects Arrangements for safe custody and segregation
Current Issues2. Internal Controls & Governance
OSCR guidance – Who’s in Charge 2011 CC 8 – Internal Financial Controls, June 2010
All sizes of charity covered Checklist to follow
All Income areas Purchases/expenses Assets & investments Electronic banking/ tiered authority Restricted Funding Great advice source for all advisers/ trustees & directors
CC 10 – Hallmarks of an Effective Charity 1. Clear about purposes & direction 2. A Strong board 3. Fit for purpose 4. Learning & improving 5. Financially sound & prudent 6. Accountable & transparent
Current Issues3. Risk Management
No OSCR guidance CC26 – Charities & Risk Management
SORP requirements for Risk Management Model of risk management Risks – detailed analysis
Governance. Operational. Financial. External Compliance – Annex 1 & 2
Worked examples Disaster Recovery Planning Heat Map
Future issues4. Succession Planning – Board Structures
Skills Audit & matrix for the Board Leadership Strategic Leadership Communication Interpersonal skills Technical/ Educational skills Understanding Finances/ Legal /HR Meetings Creativity/ Lateral thinking
NCVO Website – Good Practice in Trustee Recruitment
Future issues5. ASB – Future of UK GAAP Project
Applies only to True & Fair accounts – accruals AP ending on or after 1/1/2014 Current format
Tier 3 - Small entities – FRSSE – no change Other larger charities will use FRSME and a new
FRSPBE. Charity SORP will be revised and provide sector
specific guidance.
Future issues 5. ASB – What happens with the SORP?
SORPs still needed : Charities, Education & Housing SORPs
Will be update to reflect changes under IFRS convergence project
FRSME & FRSPBE will take precedence over SORP Download and print relevant sections thus assisting
smaller charities - modular Timescale – target 2015 to align with implementation of
IFRS convergence Draft modules to be developed, will only be issued for
public consultation when all modules completed – not in stages.
Current deadline is AP beginning on or after /1/15
Future issues6. Law Reform, Unincorporated Associations
Criteria met – SALP, Scottish Association with Legal Personality Can opt out SALPS – Limited liability, protects office bearers Culpable office bearers still liable Assets & liabilities are transferred to the SALP, not automatic SALP - > 2 members, official address & mainly operate in Scotland Minimum specified conditions in constitution Can lose SALP status. Issues -
Automatic Opt in ? Add’n responsibilities ? SALP wind ups Cross Border HMRC interaction with Corporation Tax
