Charities - Current Key Issues

Murray Graham

Chairman

Introduction

• Specialist charities and academies team

• Extensive charity client portfolio

• Charity Finance Award 2013

• Charity Auditor Award 2013

Matthew Waters

Charities Team

Trustees’ responsibilities

What is a Trustee?

“the person(s) having the general control and management of the administration of a charity.” s.177 Charities Act 2011

Trustees’ responsibilities

What are a Trustee’s duties?

- Duty of compliance - Duty of prudence - Duty of care

From the Charity Commission guidance ‘The Essential Trustee’.

Duty of compliance

Act according to the charity’s governing document

- Keep governing document under review

- Funds administered in accordance with investment policy

- Election and term length of trustees

- Area of operation

Duty of compliance

Comply with Charity law

- Annual report and financial statements in appropriate format

- Also comply with other relevant legislation (ie. Employment law)

Duty of compliance

Act with integrity

- Personal conflicts of interest

- Mis-use of charity funds or assets

Duty of prudence

Protecting the charity’s assets

- Use only to further the purposes and interests of the charity

Duty of prudence

Adequacy of financial procedures and controls

- Governance reviews

- Investment policy

- Reserves policy

- Risk reviews

- Trustee roles

- Decision making

Duty of careReasonable care and skill

- Higher ‘care’ threshold for qualified accountants and other professionals

Seek professional advice when appropriate

- And act upon

Duty of careLimited liability

- Trustee liability can be limited if demonstrated that due care was exercised, were acting within the charity’s objects and professional advice was acted upon

Collective responsibility

- All trustees collectively liable unless they make clear they disagreed with a particular decision and were overruled

Scott HansellConsultant

Lovewell Blake Financial Planning Limited

Charity Investment Mandates – The Challenges

The challenges for charities

“Many organisations are having to dip into their reserves, cut vital front line services and some are concerned about whether they can survive the toughest of times”.

John Low, CEO of Charities Aid Foundation

The needs of charities

Charities often have specific goals and objectives for their investments such as providing an income or keeping pace with inflation.

When donations fall, charities will rely on their investments increasingly to meet liabilities, and to carry out activities and core functions.

The needs of charities

So there’s a need for investment solutions which:

• aim to mirror these goals and objectives

• are designed to try to avoid short-term losses and provide portfolio liquidity if required

• can be tailored to meet your organisation’s requirements

Increasing certainty – the benefit of adynamic asset allocation approach

Re

turn

Target Return Portfolio

Market Portfolio

Client Goals

Time

Charities may access their assets at specific points on the black line.

Increasing certainty – the benefit of adynamic asset allocation approach

Our approach is to stay as close to the goals as possible – this minimises the risk of having to dip into reserves at depressed values.

The lost years – traditional ‘stock broker’ investing

Ti

Feb 2000

Feb 2012


What is needed?

• A more modern active approach – potential returns in all prevailing market conditions


How?

• A broad investment universe

• Unique access to specialist institutional investment techniques

• Better management of volatility

Charities’ investment policies

• A policy can be given in the first instance to any professional advisory company in order for them to tailor your needs and objectives effectively.

• A formal written policy will provide you with a framework for identifying your key objectives, managing the charity’s resources effectively and will demonstrate good governance.

Charities’ investment policies

• A formal investment policy may attract future benefactors who could see value in your principles. Any investment policy will link to your reserves policy and help demonstrate sustainability.

• Your investment policy should be consistent with your charity’s fundamental principles. It should reflect your charity’s values, accountability, risk controls and ethics.

What should an investment policy cover?

• The scope of your investment powers.

• The charity’s key objectives, now and in the future.

• The charity’s attitude to investment risk.

• The current amount available for investment, timing of objectives and liquidity needs.


• Any ethical preferences for investments.

• Who can make the investment decisions? I.e. a trustee body or a nominated separate investment committee or advisor


• How your investments will be monitored or judged? Against benchmarks such as Bank of England base rate + 5% or Inflation + 2% per annum.

• Reporting requirements or review meetings.

Workplace Pension Reform – Auto Enrolment

• What are our new pension duties?

• What do charities have to do?

• Can we still use our existing pension scheme?

Workplace Pension Reform – Auto Enrolment

• What is the staging date?

• Which employees should we include?

• What is Auto enrolment?

How can Lovewell Blake Financial Planning help?

• Help you develop an investment policy

• Cash management service – identify charity accounts/FSCS protection

• Long term investment advice to suit your charity’s individual goals and investment policy

• Ongoing reviews – on course to meet goals?

Matthew Waters

Charities Team

Charitable incorporated organisations

Unincorporated charity - Registered with the Charity Commission - Trustees enter into contracts personally on behalf of the Charity

Charitable company - Registered with Companies House and the Charity Commission - Separate legal entity which enters into contracts

Charitable incorporated organisations

Charitable Incorporated Organisaton (CIO)

- Registered with the Charity Commission only

- Separate legal entity which enters into contracts

Statutory framework of CIOs

Legal framework (general regulations, insolvency and dissolution regulations, etc) set out in the 2011 Charities Act.

Statutory framework of CIOs

A CIO shall:

- Be a body corporate

- Have a constitution

- Have a principal office in England or Wales

- Have one or more members

Types of CIO – trustees and members

Determining the CIO structure which best suits your charity:

Foundation CIOs

- Closed membership

- Same voting members as trustees

Types of CIO – trustees and members

Association CIOs

- Wider membership

- Includes members who are not trustees

CIO Constitutions

The Charity Commission has produced model constitutions for both Foundation and Association CIOs.

- Must be in a form specified by Charity Commission regulations

- Must explain any deviations from model constitutions (advised to provide marked-up version showing

variances if significant number)

CIO Constitutions

- Must be in English if principal office is in England

- May be in English or Welsh if principal office is in Wales

The model constitutions are subject to Crown Copyright and use of them is licensed under the terms of the Open Government Licence.

Therefore, must acknowledge the source.

Suitability – The Pros

No dual registration and regulation

- Registered with the Charity Commission only

No minimum registration threshold

- Can register if income less then £5,000

Suitability – The ProsLimited liability

- Separate legal entity to employ staff, enter into contracts, etc.

Specifically designed for charities

- Income under £250k can produce receipts and payments accounts

- Not possible for Charitable Companies

Suitability – The Cons

Delay in getting started

- Advised 40 working days to respond to registrations - Could make unsuitable for reactionary appeals requiring quick funding

Completely new structure

- Untried and untested, unfamiliar to funders and lenders - Deficiencies in some areas ie. where are charges over assets lodged?

Suitability – The Cons

No minimum registration threshold

- Required to register and file returns regardless of size

Only exists at the Charity Commission

- If registration is lost the Charity will fold

Conversion to CIO

Unincorporated charities

No conversion process written into 2011 Charities Act. Charity Commission guidance sets out process as:

- Register new CIO with Charity Commission

- Transfer all assets and undertakings into CIO and settle all liabilities

Conversion to CIO - Dissolve unincorporated charity in accordance with governing document

- Apply for unincorporated charity to be removed from register

Charitable Companies2011 Charities Act contained provisions for conversion but legal framework still in process of being finalised. Regulations expected later in 2014.

CIOs – Points to consider

Start conversion process early

- Have registration in place ready for year end and asset transfers


Administration

- Charity stationery will need to be updated for new registration number and statement that organisation is a CIO etc.

- New bank account(s) will need to be set up in CIO’s name


- Notify relevant authorities eg HMRC

- Will require professional advice re: leases, employee contracts, pension schemes, land registry, legacies left to unincorporated charity (notify local solicitors?)

Housekeeping

- Take opportunity to review charity’s objects, composition of board, membership procedures, etc.

Keeping up to date

- www.charitycommission.gov.uk

- www.cabinetoffice.gov.uk

- www.lovewell-blake.co.uk/media-centre/

Liz Hill

VAT Consultant

VAT Threats and Opportunities

Agenda

• Liability of grants, donations and contracts• Fund raising and sponsorship• Advertising• Donated goods for sale• Supply of staff• Certified zero rating of purchases• Relevant charitable purpose

Grants, donations and contracts

• Grants and donations – VAT free (outside the scope), provided no benefit given to grantor/donor

• If goods, services or benefits provided, may have to charge VAT at 20%


• Contracts for services may be charged at 20%, if charity provides service or goods

– Review contract schedule

– Assess both parties’ understanding


• For example

– Contract between charity and council for project reviewing number of elderly persons using local bus services

– Contract between charity and council to provide advisory services to young homeless people


– Grant funding paid by council to charity to support annual event

– Contract between two charities where one supplying technical administration and management services to other

Fund raising and sponsorship

• Fund raising income receipts – VAT free (exempt)

– Downside - no recovery of VAT on expenditure


• Example - Dinner dance with auction

• Ticket income – VAT free (exempt)– Cannot reclaim any VAT incurred on, say, hire of

tables and chairs

• Auctioned goods sold VAT free (zero rated)– Can reclaim VAT incurred on eg display stands


• Some costs to the charity should be VAT free (zero rated) eg advertising and printing– Check with the printer

• Sponsorship charges may be VAT free (outside the scope) as donations if nothing significant provided in return – For example, name in programme

AdvertisingSale of advertising is subject to VAT at 20% except:

• When publication has < 50% of adverts placed by private persons. VAT free (outside the scope)

• Supply to another charity of space for public advertisement. VAT free (zero rated) or

• Sale of advertising space in programme for fund raising event. VAT free (exempt)

Donated goods for sale• Sales of goods donated to a charity (or taxable person

who has agreed to give profits to a charity) are VAT free (zero rated)

• For example

– Clothing store donates fleeces to charity which sells them at a jumble sale

• Goods available to public before donation

Donated goods for sale

• Extra Statutory Concession 3.21 permits zero rating where:

– Goods which are unfit to be made available to the public eg clothing for rags or electrical equipment

• Rule about goods being made available to public is side-stepped

Supply of staff

Supply of staff = business activity plus VAT (20%) except:

• Joint contract of employment. VAT free (outside the scope)

By concession, seconded staff. VAT free (outside the scope) provided that:

• Employee must be engaged in non business activities and

• Payment cannot exceed ‘normal remuneration’

Certified zero rated purchases

• Relevant goods supplied to a charity or paid for with donated funds can be VAT free (zero rated)

• Relevant goods

• Charity must issue certificate to supplier

• Can also cover imported goods

• Incorrect issue can lead to a fine

• Medical equipment

Certified zero rated purchases

– Telecommunication equipment

– Ambulances

– Medical or surgical appliances for disabled persons

– Motor vehicles adapted for wheelchairs, handicapped persons or terminally sick

– Resuscitation models

RCP

• Relevant charitable purpose – otherwise than in the course or furtherance of business

• Can result in VAT free (zero rating) building services

• For example - building of new village hall, charity office or facility, sports hall

• Longridge Case (going to appeal)

• Change of use

Matthew Waters

Charities Team

Upcoming changes – SORP 2015

- 10 years since the previous Statement of Recommended Practice issued

- New SORP drafted to accommodate upcoming changes in financial reporting

- Consultation period over

Upcoming changes – SORP 2015

- Expected to be cleared by Financial Reporting Council by the end of May 2014 and published by end of June 2014

- Keep updated: http://www.lovewell-blake.co.uk/media-centre

http://www.lovewell-blake.co.uk/media-centre

Upcoming changes – regulatory

The National Audit Office (NAO) reported on the Charity Commission. The Commission accepted and endorsed their recommendations:

- Accepted that it was too cautious in tackling problems

- To put more emphasis on compliance, regardless of income

-


- Therefore more statutory enquiries, not just ‘high risk’ charities

- Enquiries into charities failing to submit accounts on time

- Conducted a review of 70 random sets of accounts - 74% prepared to acceptable standard - 26% signposted for guidance


- Individual scrutiny of 770 sets of accounts prompted referrals to professional accountancy bodies to highlight serious concerns about standard of work

- Established new dedicated monitoring team

Social Investment Tax Relief (SITR)

New tax relief scheme to encourage support of social enterprises.

Investors - Can deduct 30% of qualifying investment from income tax liability - Applies from 6 April 2014 (awaiting Royal Assent – July 2014) - Minimum period of investment of three years - Maximum annual investment of £1m

Social Investment Tax Relief (SITR)- Can also defer capital gains tax if gain is invested in

social enterprise

- Tax then payable when investment redeemed or sold - No CGT on any gain on disposal of social investment - Income tax payable on any income from social investment

- Not available if reliefs such as Enterprise Investment Relief were obtained

Social Investment Tax Relief (SITR)Eligibility

- Entity must have a defined, regulated social purpose - eg Charity, Community Interest Company - Fewer than 500 employees - Gross assets no more than £15m

The entity seeking investment must register withHM Revenue & Customs to be issued an SITR Compliance Certificate. Cannot apply until Royal Assent gained.


Entity will need to meet a number of conditions regarding control by parents and control of subsidiaries. If entity seeking eligibility is part of a group, will need to refer to detailed guidance and seek professional advice re potential restructuring.


Qualifying investment

- In the form of newly issued shares in a CIC or a qualifying loan to either entity

- Must be paid up in full, in cash, at time of investment

Social Investment Tax Relief (SITR)There is a restriction on the amount a social enterprise can raise under SITR, determined by a calculation (€200k adjusted depending on CGT and SITR rates). At present, in the most basic scenario, the enterprise can raise €344,827.

Within 28 months, all but an ‘insignificant amount’ of monies raised using SITR must have been employed for the purposes of the chosen ‘trade’ (charitable activity). Failure to meet this condition will result in tax relief being lost.


Where we are:

- Guidance issued to enterprises and investors

- www.gov.uk

- Investor can begin planning for 2014/15 tax year

- Enterprise can determine if meets criteria but cannot register at present


- Seek professional advice (loan agreements, eligibility, investor tax position, enterprise group restructuring, etc)

- Awaiting 2014 Finance Bill receiving Royal Assent (expected July 2014)

Questions?

Government & Nonprofit

Charities - Current Key Issues