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editorial | internet banking – don’t be the next victim! | VAT update | budget 2014 update | financial reporting update | implementation of the energy Act 2011

Spring 2014

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LETTER frOm The ediTOrWelcome to our briefing for professional institutes and membership bodies.

In this edition we look at the Energy Act 2011 and the impact for you if you are a tenant or a landlord. We also look at the latest developments in financial reporting. Whether you already adopt International Financial Reporting Standards or the current UK GAAP and are a registered charity or not, we highlight the key changes you will need to consider going forward.

We examine internet banking and how many organisations, who are the victim of frauds, could have prevented this happening with simple and easy to implement internal controls. So don’t be the next victim! In addition we highlight important tax and VAT matters arising from the latest budget.

If you have any feedback on this edition of the briefing, or wish to discuss any of the matters raised, do contact one of our team.

Kathryn Burton partnerT 020 7969 5515 E kburton@haysmacintyre.com

Jeremy Beard head of Pimbs, partnerT 020 7969 5503 E jbeard@haysmacintyre.com

inTerneT bAnKing DON’T BE THE NEXT VICTIMStrong and effective internal controls around BACS/internet banking payments (hereafter referred to as banking software) are crucial to mitigating the risk of fraud. Many organisations who are the victim of frauds could have prevented this happening, with simple and easy to implement internal controls. Payment through banking software brings with it efficiencies, but also increased vulnerability.

ACCESS To BAnKInG SoFTWAREAccess to banking software is generally controlled by the bank. Authority to amend access is provided by the organisation to the bank. Banks usually require a written request, with two authorised signatories approving this change. Certain banking software will allow persons with administrator access to make a change directly in the banking software. This increases the risk, and particular care must be made to review reports of changes to access. It is therefore important to know how changes can be made, and who has the ability to make those changes.

Log on access will often be controlled by card readers/fobs to approve payments. Keep access to these secure and limited to only those persons with authority and never share card readers, fobs or passwords.

PAyMEnT CREATIon Payments are usually created in the accounting software and uploaded into the banking software. Some organisations do not have this facility, and process the payment as an entry only in the accounting software and key the payment directly into the banking software. The core issue is the driver of the

payment, namely the sort code and the account number, where the standing data resides, and who has the ability to make changes to that standing data.

ChAnGES To PAyMEnT AFTER CREATIonIt’s important to fully understand at which point payment details can be changed and who can make those changes. In some circumstances, banking software has a facility to switch on and off the ability to make changes to those payments outside of the accounting software. Know who can make changes to payment details, specifically at which point in the process.

inTerneT bAnKing DON’T BE THE NEXT VICTIM CONTINuED

Where changes can be made, your organisation should ensure that adequate segregation of duties exist, as a change in the payment will lead to a difference from the accounting software either in value, or who the payment is made to. This is often highlighted by suppliers when they do not receive payment.

APPRoVInG ThE PAyMEnTWe have discussed previously controls over logging onto the banking software. The persons approving the payment must be provided with the correct paperwork. Care should be taken to ensure that the sort code and account number on the invoice match the details on the payment.

In some organisations, the login and password details are provided to the same person who created and processed the payment, with the authorised signatory signing a printed report of proposed banking software payments and trusting that person to make the payment. In these cases, there is a risk the payment total could remain the same, but the bank details or amounts within the total could be changed.

Finally, a number of banking software applications still permit sole approval. In these circumstances ensure you have compensating controls in place.

SEGREGATIon oF dUTIESSegregation of duties is an issue for most organisations. This is amplified for smaller organisations where the desired segregation of duties are not always feasible. Where segregation of duties isn’t possible, additional checks and balances as stated above need to be implemented to mitigate any potential risks.

MonIToRInG ChAnGESWhilst most of what has gone before refers to preventative controls, we must also consider detection controls, including whether reviews of exception reports or change logs occur.

SUMMARyClients are encouraged to talk through their systems and controls with us and then refer back to their banks to ensure that they are utilising the most sophisticated security measures available to them.

Whilst the processing of payments through banking software brings efficiencies and reduces the risk of cheque fraud, this also brings with it different internal control risks.

Mark Leckie internal audit managerT 020 7969 5629 E mleckie@haysmacintyre.com

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Further to the Budget’s VAT measures, a recent European Court decision regarding defined contribution pension schemes may be of interest. The decision in the case in question, ATP Pension Services A/S was released on 13 March. Essentially the decision confirmed that management charges for such schemes should be regarded as exempt from VAT.

It may well be that insurance backed schemes have already been treated as exempt, but where the scheme is not an insurance backed product and VAT has been charged, either directly to the employer or the pension fund itself, then you should contact your fund manager and ask that they issue credit notes and repay the over charged VAT. Credit notes can be issued going back a maximum of four years.

In an earlier case; PPG holdings BV which dealt with defined Benefit schemes, the Court had confirmed that the management of such a fund was taxable, but that it was a cost to the employer and that the VAT was therefore recoverable in accordance with the normal VAT recovery position of the employer.

The case extends hMRC’s previous view which only allowed VAT to be recovered on costs relating to setting up a scheme, and its day-to-day administration. VAT on the management of the investment activities of the scheme had been regarded as irrecoverable.

Following the case, hMRC now accept that where the supply by the scheme manager is to the employer, i.e. the employer commissioned and paid for the service, and it covers both day-to-day administration and investment management, VAT on both elements is recoverable in accordance with your normal VAT recovery position. details are set out in Revenue & Customs Brief 06/14.

VAT uPDATE

finAnCiAL rePOrTing uPDATE

There are many changes afoot for all organisations with regard to financial reporting. For those of you who already adopt International Financial Reporting Standards (IFRS) these are likely to be minimal compared to those of you who need to transition to FRS 102 (or IFRS). In addition, if you are a registered charity there is also the new SoRP to consider.

FoRThCoMInG IFRS dEVELoPMEnTS – ACCoUnTInG FoR LEASESThe IFRS Foundation has an ongoing project in respect of changes to the accounting treatment of leases and, in particular, the significant narrowing of the definition of an operating lease. The underlying basis of these changes is the concept that a lessee has acquired the right to use an asset through entering into a lease agreement and that the commitment to future lease payments represents a present obligation.

Accordingly, the current proposals would require lessees to account for a “right of use” asset, which would be amortised over its useful life and make a provision for the future lease payments, discounted at an appropriate rate. Rather than recognising lease rentals directly as expenditure, lease payments would reduce the outstanding liability and the operating charge would comprise the amortisation of the RoU asset and the unwinding of the discount on the lease provision.

The completion date for the IFRS project is yet to be confirmed but we expect it to be completed during 2014.

ChAnGES To UK FInAnCIAL REPoRTInG STAndARdSThe countdown has begun for the implementation of the new UK financial reporting standards. FRS 102, The Financial Reporting Standard applicable in the UK and Republic of Ireland, was published in 2013 and modernises and simplifies financial reporting for unlisted companies as well as public benefit entities such as charities and membership organisations. The standards which are mandatory for accounting periods beginning on or after 1 January 2015, require entities to restate their comparatives and as a result entities will be required to prepare a Balance Sheet at the beginning

of their comparative period.

We highlight some of the significant changes regarding the move to the new Standards:

Fixed assetsThere is the opportunity for organisations when adopting the new standards to revalue classes of assets, such as freehold land and buildings, at deemed cost. deemed cost can be fair value or a previous revaluation at, or before, the date of transition. This valuation can then be ‘frozen’ and there is no requirement to continue a policy of revaluation. This would provide many organisations with the opportunity to significantly increase the value of their balance sheet or provide a mechanism to avoid further additional valuations in future years. however, this could also increase the annual depreciation charge.

Post-employment benefitsMany membership organisations are part of multi-employer defined benefit schemes but currently do not adopt FRS17, as their share of the assets and liabilities of the Scheme cannot be separately identified. Going forward, where an employer is unable to identify its share of the assets and liabilities of a multi-employer defined benefit pension scheme, the scheme will continue to be accounted for as a defined contribution scheme as is allowable under current UK GAAP. Where deficit funding is required as part of a recovery plan on such pension schemes, FRS 102 requires the recognition of a discounted liability in relation to the payments due under that funding agreement.

DiscountingAlthough discounting is not a new concept, it is one that is currently rarely used. discounting, the recognition of the time value of money, is a general consideration for all monetary assets and liabilities under FRS 102 where receipt or payment is due, or expected, after more than one year from the balance sheet date.

Where the members determine that discounting is applicable to an asset or liability, an appropriate discount rate will need to be calculated: this could be the organisation’s borrowing rate or the return

on their investments. There is no hard and fast rule for determining the relevant discount rate. discounting need only be applied where its effect is material, but in practice this means that it will need to be considered for any material classes of monetary assets and liabilities.

Holiday payMembership organisations will be required to recognise a liability for the costs of all benefits to which employees are entitled at the year end which have yet to be paid. This means that the cost of any unused holiday should be accrued if material. This is likely to be a bigger issue for an organisation where their financial and holiday year are not in line.

ThE nEW SoRPFor those professional institutes and membership organisations that have charitable status, they will be used to preparing their statutory accounts in accordance with the framework of the Statement of Recommended Practice “Accounting and Reporting by Charities” (SoRP). The SoRP Committee has now completed the draft of the next SoRP to reflect the new UK accounting framework and the final version is due to be issued in the summer.

The SoRP has a modular format with core modules, to which all charities will need to refer when preparing their financial statements, and additional modules, which apply in certain circumstances or for specific transactions. The new SoRP seeks to provide a more detailed explanation than the previous SoRP and enables readers to be directed to the areas they seek guidance on quickly.

Many of the changes are largely cosmetic with headings on the SoFA renamed in an attempt to improve understanding by readers. We detail below some of the key areas.

Income recognitionThe new Charities SoRP has modified the criteria for income recognition in line with International Accounting Standards. Previously one of the criteria for recognising income was that the charity was ‘virtually certain’ to receive an inflow of economic benefits, whereas this has now been amended to a ‘probable’ inflow. This is unlikely to result in a change of accounting policy for charities, requiring restatement of their income as the other criteria ‘entitlement’ and ‘measurement’

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BuDGET 2014 UPdATediscounts. At present VAT is accounted for on the discounted price even when the discount is not taken up. In future, VAT will be due on the consideration received. For supplies of telecommunications and broadcasting services where there is no obligation to provide an invoice, the measure took effect on 1 May 2014.

• Forallothersuppliesitwillapplytosupplies made on or after 1 April 2015, unless a need is identified to bring it forward for certain specified categories of supply.

PERsONAL TAXIncome tax• Thetax-freepersonalallowancewill

increase to £10,000 for 2014/15 and £10,500 in 2015/16.

• Thehigherratetaxthresholdwillalsoincrease to £41,865 in 2014/15 and £42,285 in 2015/16.

• Atransferablepersonaltaxallowancefor married couples and civil partners will be introduced from April 2015, allowing couples to transfer up to £1,050 to their spouse. only basic rate taxpayers will be allowed to do this.

• Thecurrent10%startingrateforsavingswillbereducedtoa0%bandin 2015/16 and expanded to cover £5,000 of savings income.

• Therewillbeaconsultationonlimitingthe UK personal allowance to UK residents and those living overseas who have strong UK connections – this could mean removing automatic entitlement to the personal allowance for all UK/EU citizens who are resident overseas.

• Incometaxreliefforinterestpaidonloans to invest in close companies will be expanded to include all companies resident throughout the European Economic Area (EEA).

BusINEss TAX AND EMPLOyMENT TAXEsSocial investment tax relief• Thereliefwillprovidearangeof

income and capital gains tax reliefs to provide incentives for investment by individuals in qualifying social enterprises. The scheme is modelled upon the Enterprise Investment Scheme.

• Ithasbeenannouncedthatincometaxreliefwillbeavailableat30%ofthe amount invested available from 6 April 2014.

national Insurance Contributions (nICs)• Legislationistobeintroducedto

collect Class II nICs alongside income tax and Class IV nICs under self-assessment.

• ThesechangeswillhaveeffectfromApril 2016.

Employment allowance• FromApril2014,everybusiness

and charity with employees will be able to reduce their Class 1 national Insurance (nIC) bill by £2,000, as a result of the annual Employment Allowance.

• Theallowancewillbeclaimedthrough Real Time Information (RTI) and payroll software.

Tax-free childcare scheme• Anewtaxfreechildcareschemewill

be introduced from Autumn 2015. Eligible working parents will be provided with a top-up of 20p for every 80p they spend on childcare, up to an annual limit of £2,000 per child. Parents will be eligible if both are working (earning less than £150,000 a year) and the child is under 12. The scheme will operate via an online account.

• Currentemployer-supportedschemes,such as childcare vouchers or directly contracted childcare, can continue for existing members; we recommend that employees consider which option is best for them.

VAT

• TheVATregistrationlimitincreasesfrom £79,000 to £81,000, and the de-registration limit rises from £77,000 to £79,000. The changes took effect on 1 April 2014.

• TherewillbeachangetotheVAT treatment of prompt payment

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have not changed. Therefore under the old SoRP, if you were entitled to the income, it should have been brought into the financial statements in most instances and should not, therefore, mean any change going forward.

Staff costsThe disclosure of staff costs will be expanded to include redundancy and termination payments as a separate line item in the notes to the accounts. Furthermore, the aggregate remuneration of key management personnel will need to be disclosed, in addition to the usual banding disclosure for higher paid employees. FRS 102 permits, but does not require, the remuneration of key management personnel to be disclosed on an individual basis.

Governance costsGovernance costs will no longer appear on the face of the SoFA and instead will be considered to be part of support costs. The total amount of governance costs will continue to be separately identifiable in the notes to the accounts.

WhAT ABoUT ThE FRSSE?The Financial Reporting Standard for Smaller Entities (“FRSSE”) framework may be an alternative to adopt for those entities that are small and do not want to adopt FRS 102. however, despite initial consultation indicating that the FRSSE would remain unchanged following the introduction of FRS 102, the tentative view is now that the current FRSSE will be withdrawn and replaced by FRS 102 “light”. An Exposure draft is expected in June 2014, which will not leave much time for preparing for any changes if the FRC intend having a 1 January 2015 which may, effectively, be forced on them by EU Accounting directives.

Please feel free to contact any of the haysmacintyre team if you would like to discuss the above changes, and their impact on your organisation.

Tracey Moore audit managerT 020 7969 5650E tmoore@haysmacintyre.com

imPLemenTATiOn Of The ENERGy ACT 2011BACKGRoUndAs part of the drive to reduce emissions of carbon dioxide and other greenhouse gases, the Energy Act 2011 (“the Act”) placed an obligation on the Secretary of State for Energy and Climate Change to introduce regulations that would prevent a landlord letting a property which had an Energy Performance Certificate (“EPC”) below a rating set out in regulations, to be published at a future date. Similar legislation applies to “domestic” and “non-domestic property”, being the terms used in the Act, with both having a backstop date of no later than 1 April 2018 for the enabling regulations to come into force. Although the regulations have yet to be published, it is widely expected that the minimum energy rating will be set at “E”, which is the rating referred to on the department of Energy and Climate Change (“dECC”) website.

In practical terms, the Act will apply to all rented property, subject to some exemptions, whatever the use of the property. All organisations which are landlords, tenants or both will need to start assessing the potential impact of the Act on their properties.

Regulations will also be brought in, no later than 1 April 2016, to give tenants of domestic properties the ability to make certain energy efficient improvements. Landlords will be unable to unreasonably refuse consent to such improvements, although it is expected that refusing on the grounds that the proposed improvements would have a negative impact on the value of the property will be acceptable.

The definition used in the Act of “let the property” is explicitly defined as to “maybe include “continue to let the property””. We could therefore be faced with tenants having to be in properties with an EPC of no worse than an “E” rating by 2018. In the meantime there are many issues to consider, such as, who should pay for the improvements, the timing of any work, the potential for disruption during such works, the effect on property valuations, whether dilapidation provisions need revisiting and the effect on rent reviews.

however, there is some good news in that it is likely that the requirements will be subject to there being no upfront cost to landlords. Landlords are expected to have fulfilled their responsibility if:• theyhavereachedtheminimumenergyratingrequired;or• havecarriedoutthemaximumpackagethatwillbefunded

under the Green deal and/or the Energy Companies obligation schemes, both of which are designed to support the energy efficiency improvements.

It is also expected that certain buildings will be exempt from the regulations, such as listed buildings where improvements would unacceptably alter their character and buildings that are due to be demolished. Indeed such properties are currently exempt from the requirement to produce an EPC and it is hoped that there will be consistency between the two regimes, although consistency in government policy cannot be a foregone conclusion.

WhAT ARE ThE REGULATIonS?We know what the Act will require but not, as yet, the detail of how it will be implemented as the draft regulations have yet to be published. Although the Government had intended to withhold details of the regulations until closer to implementation, thanks to lobbying and representations from interested parties, dECC set up two working parties early last year to consider the practical implications of the regulations. however, we are still waiting to see the working parties’ recommendations to dECC, although they are expected shortly, followed by a public consultation late this year. nevertheless, the end game to improve properties to at least an “E” grade by2018,isclear.Currently, it isestimatedthatabout20%ofcommercial property falls below such a rating.

FInAnCInG ThE IMPRoVEMEnTSThe preamble to the Act sets out one of its objectives as being “to make provision for the arrangement and financing of energy efficiency improvements to be made to properties by owners and occupiers”. Accordingly there are provisions within the Act to enable landlords and tenants to apply for funding support through the Green deal.

Under the Green deal the cost of upgrading the property is paid back through increased energy bills in the future but, unlike a loan, the “liability” is attached to the property rather than the person arranging the improvements. Therefore, when a new occupier comes into a property which has benefitted from the Green deal the new occupier will face increased energy bills which are likely to make the property less attractive with a consequent impact on the property’s value.

The implicit interest rate in such deals has already been heavily criticised as being too high and unattractive and it has not had the take up the Government expected. The Labour Party has also announced that it will cancel the Green deal if it wins the next general election – but maintain the requirements of the Act.

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IMPACT on LAndLoRdShaving a property that can be let is fundamental to protecting its value. If you are a landlord you will need to assess the extent to which you have to enhance your properties in order to be able to continue letting them once the regulations are enacted. If substantial improvements are required, you will need to consider the timing of the works and indeed whether a fuller refurbishment or rebuild might prove more beneficial in the longer run.

you should also consider the terms of any letting agreements – not just who is liable for the cost of the improvements but whether you are liable for the costs of disruption to your tenant(s) during the works. If the lease provides quiet enjoyment to the tenant, and the works breach this covenant, who picks up the cost? This will depend on the terms of the lease which may be overridden by reliefs in the, as yet unseen, regulations.

The need to undertake enhancement works on properties falling beneath an “E” rating will depress the property’s value until completed, which could have implications on bank arrangements with covenants over loan to property values, as well as the ability to argue for a market rent at rent review time. Landlords will also need to consider the impact of expenditure on their financing and any development plans.

IMPACT on TEnAnTSTenants will also not escape the impact of the Act. They will need to consider whether they will face unexpected costs as a result of works undertaken by their landlord and the implication that the regulations will have on their dilapidation liabilities. Some commentators have suggested that tenants might find themselves liable for improvements as a result of the creeping up in the conditions to each EPC rating in recent years. For instance, a tenant might have taken on a property with a “d”

rating which at the end of the lease is rated “E”, not through any deterioration in the state of the property but just through a rebasing of the EPC ratings. depending on the lease terms that tenant might find themselves responsible for handing back the property in the new definition of a “d” EPC.

TAx IMPACTdepending on circumstances, landlords and tenants could be faced with extensive capital expenditure. To the extent that such expenditure is incurred in a tax paying environment, it is always sensible to review proposed capital expenditure to ensure that any tax reliefs are maximised as part of the planning process. Looking at the tax status afterwards usually means missed opportunities, especially if claims for enhanced capital allowances are to be maximised.

ConCLUSIonAlthough the detailed regulations have still to appear, it is clear that property will not escape the Government’s focus on carbon reduction and energy efficiency in the next few years. Where you are involved in the letting out of property, make sure that you know the energy efficiency of your buildings and, where they fall below an “E”, develop a plan to ensure they become compliant. This way you can ensure you maintain your income streams and minimise the disruption of any improvement works.

If you are a tenant, engage with the landlord on the subject so that you can find out what work may be required and, hopefully, minimise any disruption to your activities.

Tom Brain senior audit managerT 020 7969 5670 E tbrain@haysmacintyre.com

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future eventsPARn Finance Forum 24 June 2014

For further information on these events please contact

Jenni Whale on 020 7969 5698,

jwhale@haysmacintyre.com or visit www.haysmacintyre.com

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