An update on issues facing the Charity and Not for Profit Sectors
The Charity and Not for Profit sectors (the sectors) have had more than their 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 so on and it is only right that accountability is at the forefront of everyone’s minds in the sectors. The public needs to feel confident about the accountability and transparency in the sectors. It is for this reason that most legal and accounting developments and new requirements have concentrated in one way or another, in making the sector ‘accountable and transparent’.
It is useful to summarise the latest developments in the sectors but note this is only a summary and as such should you require clarification or details about any items referred to below, you are encouraged to read more about the issues using the substantial amounts of information that is widely available.
However, the amount of information available and the variety of sources make it a somewhat difficult task to consider the important issues in a user friendly manner.
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 ‘piece meal’ basis and the latest instalment is the ‘5th commencement order’ that was laid before parliament on the 17 December 2007. This will come into force on a variety of dates over the next year. However, please note Companies Act will only affect the sectors if organisations are incorporated as companies (usually limited companies by guarantee). As a significant number of organisations in the sectors are incorporated by a deed or royal charter, the new Companies Act will not affect all organisations in the sectors.
Companies Act 2006 received its Royal Assent on 8 November 2006 but the act will come into force in stages. It is the longest act ever passed by Parliament. Its aim is to simplify and consolidate.
Amongst areas of the act that have already come into force are:-
- Communication issues - for example notice of general meetings can now be posed on the website.
- Directors’ duties to exercise independent judgement and reasonable care.
- Proxy voting.
- AGM where Section 336 refers to a charitable company no longer having a need to hold an AGM unless required to do so by Articles.
- Witten resolutions where, amongst the various amendments, is that fact that it is no longer necessary to have signatures of all members for a written resolution.
- Changes to company secretaries whereby private companies no longer have to have a secretary unless required to do so by their Articles.
- Filing accounts where the period for filing 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 makes administration of Charities easier (e.g. AGM, notices, communications etc) whilst, at the same time, not losing site of the changes that have more restrictions applied (e.g. restriction of time allowed for filing of accounts).
Of more relevance are the other developments in connection with Charities Act 2006. This came into effect and will directly impact charities of all sizes in one way or another. Like the Companies Act 2006, the new Charities Act is introduced on a ‘piece meal’ basis. Amongst more important development in the Charities Act 2006 are the following:
- Public Benefit (see below)
- Remunerations of trustees
- Charitable incorporated organisations
- Fundraising changes
- Powers and status of Charity Commission
The Charity Commission has published the long awaited guidance on ‘Public Benefits’. Previously, four general categories of charities existed;
- Relief of poverty
- Advancement of Education
- Advancement of Religion
- Other purpose beneficial to the community
The presumption of public benefit applied to the first three categories. There are now thirteen new definitions for 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 a 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 overall, the criteria and the debate is not surprising and should not, in theory, effect any charity. The key is to be able 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 justification of Public Benefit is, by definition, far easier for existing charities. The ‘yet to be registered charities’ are the ones that will need to prove meeting the criteria before they can be registered.
The Public Benefit criteria applies to all charities who must pass the Public Benefit requirement although much of the attention in the press has been devoted to independent schools. The Charity Commission have set out two key principals that charities must meet in order to fulfil the Public Benefit requirements;
- There must be identifiable benefits
- To be clear what the benefits are
- Benefits must relate to the aim of the charity
- Benefits must outweigh any potential detriment or harm and;
- 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 Charity Commission has outlined the following time to publish 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 the Public Benefit guidance in practice are that the trustees of charities have a duty to apply the guidance. Furthermore, the annual report must now include 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 (ISA’s) and new legislation.
Some of the key changes are detailed 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 250 B 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.
- ISA 315 deals with the risk assessment and is important particularly for charities that have legacy income and heritage assets as application of accounting policies to these areas has been covered in this section.
- 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 that 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 pubic 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 will contain.
Turning into the area of taxation – the developments in this area are, by definition, very 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 came into force. There are as usual transitional reliefs.
- Bond washing legislation for charities was reprieved (this will save same £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 in a transaction with a large donor.
There have been few victories on the VAT front and these could potentially bring significant amount of refunded VAT to the sector. The areas have been
- donations made by text
- abandoned animals
- private school fees
Note that one of the major changes in the accounting profession, convergence of accounting standard and preparation of accounts in accordance with International Accounting Standards (IAS) has no effect charities as they are not permitted to use IAS.