Key legislative and regulatory matters to be addressed
Reza Motazedi - the key is to use the sections of the Companies Act that make the administration of a charity easier, whilst at the same time keeping sight of the changes that are more restrictive.
The charity and not for profit sectors have had more than their fair share of accounting and legal developments in the last decade or so. This however is not surprising as the sectors rely heavily on public donations, volunteers and other public sources of financial and other support.
It is for this reason that most legal and accounting developments have concentrated, one way or another, on making the sectors accountable and transparent.
One of the most significant developments in the legal field affecting the sectors is the new Companies Act 2006. This Act is being introduced on a piecemeal basis and the latest instalment is the "5th commencement order" which was laid before parliament on 17 December 2007.
This will come into force on a variety of dates over the next year. Of particular note, the Companies Act will only affect organisations which are incorporated as companies (usually limited companies by guarantee).
"Like the Companies Act 2006, the new Charities Act is being introduced on a piecemeal basis."
As a significant number of organisations in the sectors are incorporated by a deed or Royal Charter, the Act will not affect every charity or not for profit organisation.
The aim of the statute is to simplify and consolidate the law. Areas that have already come into force include:
- Communication issues — for example, notice of general meetings can now be posted on a website.
- Directors' duties — to exercise independent judgment and reasonable care.
- Proxy voting.
- A charitable company is no longer required to hold an AGM unless required to do so by its Articles.
- It is no longer necessary to have signatures of all members for a written resolution.
- Private companies no longer have to have a secretary unless required to do so by their Articles.
- The period for filing accounts has been reduced from ten to nine months.
In October this year more sections regarding directors' duties will come into force and in the following October there will be a number of "constitutional changes" including a new short form Memorandum and longer form Articles of Association.
The key, I believe, is to use the sections of the Act that make the administration of a charity easier (e.g. those relating to AGMs, notices and communications), whilst at the same time keeping sight of the changes that are more restrictive (e.g. the reduced period for filing accounts).
Of even greater relevance in the legal field are developments in connection with the Charities Act 2006.
This will directly impact charities of all sizes in one way or another.
Like the Companies Act 2006, the new Charities Act is being introduced on a piecemeal basis. The most important developments affect the following:
- The definition of "public benefit" (see below).
- Remunerations of trustees.
- Charitable incorporated organisations.
- Powers and status of the Charity Commission.
"The key is to demonstrate that public benefit is being provided and charities must devise proper systems to ensure that the message is delivered consistently and regularly to the public at large."
In April 2008 the Charity Commission published the long awaited guidance on public benefit. Previously, four general categories of charities existed:
- Relief of poverty.
- Advancement of education.
- Advancement of religion.
- Other purposes beneficial to the community.
A presumption of public benefit applied to the first three categories.
There are now thirteen new definitions of charitable purposes:
- Prevention or relief of poverty.
- A religion which involves belief in more than one God.
- A religion which does not involve belief in God.
- Health or the saving of lives.
- Citizenship or community development.
- Arts, culture, heritage or science.
- Amateur sport.
- Human rights.
- Environmental protection.
- Relief of need.
- Animal welfare.
- Promotion of the efficiency of the armed forces.
- Other beneficial purposes.
Whilst the common law definition of public benefit remains, the presumption that "a purpose...must be for the public benefit if it is to be a charitable purpose" has been removed.
Further guidelines are being published by the Charity Commission but the criteria and the debate are not surprising, and should not in theory affect any charity.
The key is to demonstrate that public benefit is being provided and charities must devise proper systems to ensure that the message is delivered consistently and regularly to the public at large.
However, I believe that demonstration of public benefit is far easier, by definition, for existing charities. "Yet to be registered charities" will need to prove that they meet the new public benefit criteria before they can be registered.
The public benefit criteria applies to all charities, however much of the attention in the press has been devoted to independent schools. The Charity Commission has set out two key principles that charities must meet in order to fulfil the public benefit requirements:
- There must be identifiable benefits. It must be clear what the benefits are. They must relate to the aim of the charity. They must outweigh any potential detriment or harm.
- The benefits must be to the public or a section of the public. Beneficiaries need to be appropriate to the aims of the charity. No restriction should apply because of geography or ability to pay. People in poverty must not be excluded because of inability to pay. Any private benefits must be incidental.
"The implication of these changes in practice is a new duty of the trustees of a charity to apply the public benefit guidance."
The Charity Commission is following a timetable in relation to publishing the guidance on public benefit: January 2008 - main guidance published; February/March - consultation period; April 2008 - new public benefit requirement came into force; December 2008 - final versions of initial sub sector guidance to be published.
The implication of these changes in practice is a new duty of the trustees of a charity to apply the public benefit guidance. Furthermore, the annual report must now include a statement of public benefit.
As far as auditing is concerned, all UK charities are audited by reference to Practice Note 11, issued by the Auditing Practices Board.
A revised version in draft has just been issued reflecting the latest changes and developments including International.
Standards on Auditing (ISAs) and new legislation.
Some of the key changes are listed below:
ISA 200 encourages trustees to discuss rotation and independence issues with their auditors, as auditors are now required to apply this as standard to charities.
ISA 220 deals with issues surrounding quality control and all auditors should ensure that this is in place. It should be communicated to trustees and if not communicated, trustees should be asking the auditors to have this reflected in the audit plan.
"ISA 315 deals with risk assessment and is most important for those charities which have new legacy income and heritage assets."
ISA 2508 is probably the one that has been updated most significantly from the earlier Practice Note. This has been done in light of the Charity Commission's new approach to serious incidents.
The Practice Note details the eight matters which the regulators have agreed to be of material significance.
"There have been few victories on the VAT front, but these could potentially bring a significant amount of refunded VAT to the sector."
ISA 315 deals with risk assessment and is most important for those charities which have legacy income and heritage assets.
ISA 570 regarding going concern is particularly important in Light of the public benefit debate.
If a charity were to fail to meet the public benefit requirements persistently, then it could be argued that this may affect the charity's going concern.
This, in turn, would entail other issues which need to be discussed with the auditor.
However, it is important to note that whilst failing the public benefit test is of importance to the auditor for going concern purposes, the auditor is not required to form an opinion on the public benefit test itself.
The Practice Note is currently in its consultation period and it is interesting to see how this will develop over the next few weeks and indeed what the resultant Practice Note wilt contain.
Turning to the area of taxation, the developments in this area are highly technical and you do really need to read the small print. Amongst the most recent developments are:
- Changes to Gift Aid that were introduced in the 2007 budget have come into force. There are as usual transitional reliefs.
- Bond washing legislation for charities was reprieved (this will save some £400,000 annually on administration costs for charities).
- Substantial donor legislation introduced in 2006 seeks to bring charities into a tax charge when they enter into a transaction with a large donor.
There have been few victories on the VAT front, but these could potentially bring a significant amount of refunded VAT to the sector. The areas have been: donations made by text; abandoned animals; private school fees.
It should be noted that one of the major changes in the accounting profession - the convergence of accounting standards and the preparation of accounts in accordance with International Accounting Standards (IAS) - has had no effect on charities as they are not permitted to use IAS.