With
the Charities Act finally in force, much has been made in
the mainstream press of the new public benefit test. While
charity lawyers may argue that little will in fact change,
speculation over the future fee-charging charities has certainly
provided plenty of copy.
Rather less attention has been given to changes the Act makes
to the accounting regime. Perhaps unsurprisingly, these have
failed to capture the public imagination in quite the same
way.
This is unfortunate, because on the face of it the accounting
changes are relevant to far more charities than the status
of private schools, and for those covered will have a genuine
impact. For some, they could mean real savings.
The most obvious benefit is the alteration in the thresholds
for a mandatory audit, which have been both increased and
simplified. Most notably, the audit threshold has risen from
£250,000 to £500,000 – enabling, according
to the Charity Commission, more than 5,100 charities to opt
for the cheaper and simpler option of an independent examination
of their accounts, rather than a full audit.
Furthermore, the new threshold is based solely on income (rather
than income and expenditure, as in the past) and charities
need only look at the current year’s accounts to see
if they meet the threshold (previously they had to be below
the threshold in the previous two accounting years as well).
The threshold change alone will prove of real benefit, according
to the Charity Commission. “Taken with the promise [also
in the Act] of a further review of the thresholds this year,
this represents a considerable opportunity to both lighten
the regulatory burden and save charities both effort and money”,
says Nigel Davies, deputy head of accountancy policy at the
Commission.
On top of this, the Charities Act, along with the Companies
Act 2006, has introduced some sensible alignment between charitable
companies and the rest of the sector. As well as raising the
audit threshold to £500,000 for charitable companies
– in line with trusts – those below it will also
now be required to commit to an independent examination, rather
than an accountants report. In truth, this probably means
a little more work, but this should be offset by the resulting
simplification.
The lower threshold for independent examination for charitable
companies (currently £90,000) will also be harmonised
with that of unincorporated groups later this year.
“In effect, the reporting, accounting and audit regime
for all charities has now been brought under the Charities
Act,” explains Sally Kirby, head of charities at accountants
Chantrey Vellacott DFK. “In that sense it makes life
easier for charitable companies, because they can just refer
to the Charities Act” – unless of course they
have a trading subsidiary (see below). This simplification
will be even greater once charities are able to convert to
the new Charitable Incorporated Organisation form when this
has been introduced.
Mixed messages
The Act won’t make life easier for everyone, however.
For a start, as Kirby points out, some exempt charities
and all excepted ones now face registration with the Charity
Commission, and face the consequent accounting requirements.
“They give with one hand and take away with another,”
she jokes.
Initially, this will only apply to those with an income
over £100,000 – and even that won’t happen
before 2008. It’s also worth bearing in mind that,
technically, these charities should have been meeting the
appropriate accounting standards, including having an independent
examination or audit, where necessary.
Nevertheless, Kevin Russell at Stewardship, which advises
churches and other Christian charities, thinks registration
will see a number having to tighten up on their accounting.
“The quality of some of their accounts in the past
may have been quite variable,” he says. “Some
have come to us in the past and asked us to draw up three
years’ worth of accounts. Once they’re registered,
it won’t be allowed to get to that stage.”
Russell also reckons registration will see an end to suspicions
that some excepted charities are taking a more informal
approach to independent examination than they should, rather
than following the process set out by the Charity Commission.
Meanwhile, the effect of the threshold rise elsewhere might
be more limited than is first apparent. For example, despite
the new £500,000 mark, charities also still have to
have an audit if their income is over £100,000 and
they have more than £2.8 million in assets –
and, as Lord Phillips of Sudbury pointed out in the debates
before the Bill was passed, this figure is taken before
liabilities. “[It] seems very odd, even bizarre, if
you have a land charity with £3 million in assets
and a mortgage of £2.5 million,” he noted. Other
charities that would be excused an audit by the new threshold
may also find their governing documents or key funders require
that they still have one.
Even among those find they can now opt for independent examination,
some suggest that the choice isn’t that clear cut.
Kirby points out that there is also, in effect, a third
income threshold in addition to the £500,000 one for
a compulsory audit and £10,000 or £90,000 level
(depending on whether the charity is incorporated) for independent
examination: £250,000. Charities with an annual income
above this must ensure the independent examiner is professionally
qualified. This, says Kirby, is likely to reduce the savings
the examination will offer over an audit.
“Charities can’t assume it is necessarily going
to be a very cheap option,” she says. Given the added
assurance an audit provides to trustees and funders, charities
might question whether the reduction in costs is justified.
Not surprisingly, Fiona Gordon, director of the Association
of Charity Independent Examiners (ACIE), is not entirely
convinced by this. She doesn’t dispute that an audit
is more detailed, but says the extra work inevitably “comes
at a price”. For an audit, she points out, charities
are looking at the top end of the accountancy profession,
“and the top end of hourly fees”. The same is
not necessarily true for an independent examiner.
Top
The best is yet to come
Whatever charities decide about independent examination,
however, it is true that the changes introduced by the Act
are not that sweeping. As Andy Malpass, head of the charities
group at chartered accountants Whittingham Riddell, puts
it, the changes are “significant but not extensive”.
There are, after all, already close to 60,000 charities,
with incomes above £10,000 and below £250,000,
that can theoretically use independent examination; the
Act adds only another 5,000.
Indeed, reforms that together could have a much bigger impact
are already in the offing. The Charity Commission, for instance,
currently has its revised Annual Return form out to consultation
– shortening it yet again for smaller charities –
and it is also making it simpler to file online.
Later this year, the Commission will also launch a review
of the thresholds. This is will concentrate on the lower
end, with Andrew Hind promising to recommend “a significant
uplift” to the £10,000 lower threshold above
with charities need to have an independent examination.
A figure of £25,000 has been mentioned. This will
need to go out to consultation, but there is not expected
to be much opposition to some rise; ACIE has yet to take
a position, but Gordon, for instance, points out that simply
adjusting the original £10,000 threshold set in 1993
for inflation would see it at about £15,000 today.
More fundamentally, some charities could be in line to see
their whole approach to drawing up their accounts, rather
than just the way they are reviewed, change. Already with
the Act, those that now don’t require an audit benefit
from a few concessions in the SORP for smaller charities
(under Appendix 5), but the threshold review may see many
others benefit from a rise in the receipt and payments threshold
(currently £100,000 for unincorporated charities)
so that fewer have to prepare accrual accounts.
Finally, for those still faced with preparing accounts under
the SORP who find the experience a burden (and a recent
Directory of Social Change survey suggested there were quite
a few), the newly-formed SORP committee is also said to
be sympathetic. According to the Charity Commission, it
is “very conscious” of the needs of smaller
charities. “The Committee intends to remodel the next
SORP to address the needs of the small first,” explains
Davies.
All this is unlikely to be enough to get the public’s
attention off public schools and onto charity accounts,
of course. But for those faced with the daily grind of keeping
the books in shape, it could be the best news they’ve
had for some time.
The changes at a glance
-
The threshold for audit is raised from
£250,000 to £500,000 for all charities.
Charitable companies below the threshold will require
an independent examination rather than an accountants
report
-
Charities with income above £100,000
and gross assets over £2.8 million must have an
audit
-
The independent examiner must be professionally
registered for those charities with income over £250,000
-
Some exempt charities and all excepted
charities to register with the Charity Commission, starting
with those with annual income above £100,000
-
Group accounts to be mandatory for
those with subsidiaries and with an income above a threshold
yet to be decided. Currently charities subject to a
statutory audit are recommended to draw up group accounts
under the SORP; the Act has reduced the number to which
this applies. The Commission will consult on the threshold
above which group accounts must be prepared
-
The new Charitable Incorporated Organisation
will be introduced, probably in 2008. This will relieve
charities of the need to report to both the Charity
Commission and Companies House
-
Under the Companies Act 2006 the deadline
for filing company accounts has been reduced from 10
months of the financial year end to nine.
The trade off
If the Charities Act is not an overhaul of the accounting
regime, says Keith Hickey, chief executive of the Charity
Finance Directors’ Group, that’s because there
was no need for one. “It’s more tying up loose
ends than anything else,” he explains.
However, for many, including Hickey, one major loose end
that remains is the requirement for charities to set up
separate subsidiaries to trade. Even those accepting the
principle that to scrap the rule would be unfair to businesses
argue that the way it is applied lacks coherence.
Helen Elliott, partner at auditors Sayer Vincent, for instance,
highlights the rules around challenge events, which currently
see them considered as a trading activity if those taking
part are away for more than two nights. “It’s
just a bit arbitrary,” she complains.
While the government seems unlikely to fundamentally change
its position on this (it rejected the idea of allowing charities
to trade quite early on in the process leading to the Charities
Act), CFDG hopes it might consider relaxing the rules around
sponsorship or increasing the small charity exemption under
which charities don’t have to set up a separate company.
Top
|
