2013 and Pensions Review

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Dec 13, 2013 (3 years and 3 months ago)

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Charity Financial Regulation Update
2013 and Pensions Review

The Gathering

February 2013

Adrienne Airlie

Martin Aitken & Co

Glasgow


Agenda 2013 (1)




Accounting Standard Changes


FRS 100/101/102


UK Government
-

BIS
-

Audit Exemptions


OSCR


Annual Review


Guidance issued


Current Issues


Scottish Government


The Charities Reorganisation (Scotland) Amendment Regulations 2012


SCIOs


HMRC


Gift Aid


GASDS


Charities Online


Concessions


Trading





Agenda 2013 (2)


HMRC
-

VAT


Partial exemption


Cost sharing exemption


Cultural exemption


Fundraising exemption


Listed Buildings


Charities in Challenging Times


Efficiencies /Governance/Trustees Duties


External Scrutiny


Added Value


1. Internal controls & Governance


2. Risk Management


3. Succession Planning/ Board skills


4. Reserves policy


Future of Financial Reporting in UK



FRSSE

FRS 102

EU
-
adopted

IFRS

Entities eligible for small
companies regime

Entities eligible for small
companies regime


Entities eligible for small
companies regime


Entities not small and not
required to apply EU
-
adopted IFRS

Entities not small and not
required to apply EU
-
adopted IFRS


Entities required to apply
EU
-
adopted IFRS

Future of Financial Reporting in UK



FRS 100


FRS 102


FRS100 a proposed framework


All UK/Irish entities preparing T & F financial statements


Excludes where an entity is required/chooses :


EU
-
adopted IFRSs or


Financial Reporting Standard for Smaller Entities (‘FRSSE’).


FRS101 proposed reduced disclosure framework for


Qualifying entities.


E.g. your financial reporting is included in T & F consolidated financial publically
available


FRS102 will replace current FRSs.


Contains the text of a comprehensive proposed accounting standard


Based upon the International Financial Reporting Standard for Small and Medium
-
sized Entities.

Future of Financial Reporting in UK



250
pages in total compared to 2,500+ for UK GAAP.


A
more succinct streamlined book with the benefit of
simplification


Sorted by subject area which makes it easier to find the relevant
requirements for a certain topic


Effective

accounting periods beginning 1 Jan 2015


ASB issuing Feb/ March 2013



FRS 100
-
102 applies to public benefit entities (PBE) not just to Coys


PBE Specific requirements within FRS 102


A PBE is an entity whose primary objective is to provide goods or services


for the general public, community or social benefit


where any equity is provided with a view to supporting the entity’s primary objectives


rather than with a view to providing a financial return to equity providers, shareholders
or members.


Future of the SORP



The three existing SORPS


charities, education and housing


to be updated to reflect the new proposals


Target date new charity SORP 1 January 2015


Timescale dependent
upon
FRS100
-
102 agreement


SORP will
be progressed
once the
new accounting
framework is
finalised



Audit Exemptions


UK Government


BIS Dept. for Business Innovation & Skills
-

Consultation


Reduce corporate compliance


Audit Exemptions
-

certain Subsidiaries


Subsidiary nor listed or a bank


Sub must be included in consolidated accounts of the parent and be compliant a/cs


Parent will guarantee all o/s liabilities of the sub at the B/sheet date until paid in full
-

Unlimited


Shareholders all agree with exemption being taken


Parent discloses that Sub is exempt from annual audit.


Guarantee, Consolidated Accounts and Shareholder agreement all lodged at Coys House


Audit Criteria


Changes for companies with accounting periods ending on or after 1
st

October 2012 to align with small company
thresholds.


Companies now need to meet 2 out of the 3 to require a statutory audit


These do not affect charities which still need to comply with current criteria


Issues


Guarantee, common in charity subs, particularly trading subs


Level of audit work in the Group? Cost savings?


Subsidiary guarantees



OSCR



OSCR


Annual Review 2011


Accounts compliance


76% satisfactory


17% qualified pass


7% inadequate, re
-
submit accounts


Suitable IE/Audit report


3 yrs failures still not rectified in yr 4


Triggers > £25,000 Gross Income


38% Possible failure to apply funds for charitable purpose


28% Poor liquidity / low reserves/ viability issues


17% Transactions with Trustees


Most prevalent issues re complaints ( 381
-

2011)


General Governance

21%


External Disputes

10%


Misrepresentation

10%


S23 Failure re info


5%


Int Embezzlement *


5%


Trustee duties



4%


Lack of public benefit


5%


Personal benefit




4%

*
Charity aware


OSCR


Other Assistance


Case studies


Charity trustees & personal liability


Private benefit


S23 Information request


Meeting the charity test


“ Protecting charitable status” issued Feb 2012


Key learning's for Trustees Section 7 + Checklist


Good case studies


Main area for complaint is Governance


Effective Internal controls & accounting


2011 “ Whose in Charge


Control & Independence in Scottish
Charities”


OSCR

“Audit” & Governing Documents



Constitution, Trust Deed, Memo & Articles


Reference to “audit”


Consider change to “the accounts should be subject to external scrutiny in
line with the relevant requirements of legislation” *


Check permitted, funders, notify OSCR within 3 months.




*OSCR reporter June 2012


OSCR


Equality Act 2010


Impacts on all charities


Included on Risk Register


OSCR Guidance


“Quick Guide to Equality”


Employer > 25, Association > 25 members


Provision of services


Restriction of benefits


protected characteristic


EHRC guidance


Restriction of users


religions, schools etc.


Issues for Charities


Justification


Beneficial aims


Prevent / Compensate for a disadvantage


Proportionate





Scottish Government


Scottish Government


New legislation


The Charities Reorganisation( Scotland) Amendment Regulations 2012


Amended the 2007 Regulations in respect of charity re
-
organisations
for new thresholds, procedures etc as reflected in :


The Charities Restricted Funds Reorganisation( Scotland) Amendment
Regulations 2012


Effective 1/11/12 for Restricted Funds


Subject to
Reorganisation Conditions


A. Some /all purposes of R Fund have


Been fulfilled/ provided for elsewhere


Can no longer be given effect to


Have ceased to be charitable purposes


No longer an effective method of using funds


B. The purposes of the R Fund provide a use for only part of its
property









Reorganisation of Restricted Funds Regulations 2012 (cont.)


Reorganisation Outcomes


the resources of the restricted fund to be applied to better effect for
charitable purposes consistently with the charity’s constitution’


If the purpose of a restricted fund is no longer a suitable and effective
method of using its property, then a reorganisation scheme could propose
new purposes, as long as they are consistent with the charity’s
constitution


Inability to access/ confirm with donor


3 types of restricted fund




Publication


Large, Property > £1 million Gross annual income > £100,000 OSCR + ADVERT


Small, Property < £1 million Gross annual income < £100,000 OSCR Only


Very small, no assets , Gross annual income < £1,000


None?


OSCR Guidance Oct 2012 , Application form & templates


Right of appeal

Scottish Government
-

The Charities Accounts (Scotland)
Amendment Regulations 2010


FY beginning 1/4/2011


Reg1(2) Gross Income & liability definitions


Reg1(2) Expendable and permanent Endowments


New definition Gross income



incoming resources in all R & U/R but excluding the receipt of any donated asset in a

permanent or expendable endowment fund “


Old definition Gross income

“total recorded income of the charity in all U/R & R funds but not including resources
received as capital funds”


New definition Endowments


funds
consisting of property (which may be heritable or moveable) that has been

gifted to the
charity with specific conditions attached and which cannot be spent

except
in
those circumstances
specified


Recent OSCR rejections of accounts


Mergers/ acquisition/ transfer of assets














HMRC

HMRC


Gift Aid


Recap


Reclaim tax from HMRC on gross equivalent of donation


Only claimable on gifts of money from individuals, sole traders or partnerships


Donor must pay at least as much UK tax as amount being reclaimed from HMRC


Must keep a record evidencing donation is given under gift aid showing name, address
and details of donation


Need to nominate an authorised official and register with HMRC to reclaim


use form
R68


Time limit of four years for making claim


Budget changes


Small donations scheme


GA on individual donations of up to £10 to a total of £5,000
without having to collect declarations


Gift Aid benefit limit increased from £500 to £2,500


Online filing system from 2012/13


All future repayments made by BACS


New Gift Aid Declaration form


Charities Online



Effective from 22/4/13


Charities & CASC


Faster & more accurate claims


Online confirmation & unique ref no, tracking to bank


One amount per sponsored event < £500


Gift aid donations aggregated indiv < £20 up to a total of £1000 per entry.


Detailed listings still accepted.


Options for claims


1. Use an online form


< 1000 donor claims


2. Claim through the database


> 1000 donor claims


Software compatibility


3. Claim via a Paper Form


ChR1


Scan


R68i Forms will be accepted until 30/9/13

The Small Charitable Donations Bill 2013




The Small Charitable Donations Bill was introduced to Parliament on
21 June. Gift Aid Small Donations Scheme (GASDS) and will be
implemented from 6 April 2013.


Gift Aid Style Top Up payments


Charities have to be in GA scheme already


3 yrs. min


Continued use of GA, fraud restriction


Draft Regulations


Penalties/ anti avoidance


Complex


Third Sector article 17/10/12


Further concession


April 13


Gift Aid in Charity Shops, donors & donated
goods. Single claim proceeds/ donations up to £100 if charity direct and £1000
if via a trading sub. Guidance to be issued.



HMRC
-

Gift Aid, Concessions


Benefit limits


25% of donation up to £100


£25 for donations between £100 & £1000


5% of donation above £1000 up to a maximum
benefit of £2,500


Split payments


Donor aware of value of benefit at time of
donation


Quantifiable market value


HMRC
-

Gift Aid, Concessions


Example calculation


Dinner ticket costs £100, value of meal provided is £25.


Donor is advised at time of purchasing that value of meal is £25 and
signs a form agreeing to donate proceeds under gift aid


Benefit is 25% of donation therefore whole amount is subject to gift
aid (note that if meal cost £26 it would not be)


the charity claims back the basic rate tax of 20 per cent from HMRC on
the donation.


So the charity is able to make a repayment claim of £25 (£100 divided
by 4)


HMRC
-

Gift Aid, Concessions


Auction items


Item is commercially available


e.g. football top signed by player is not commercially available


Donor is aware of price when making a successful bid


Example in notes


VAT


Donation outside scope of VAT if no significant benefit


Split payments


may be a business supply for VAT purposes


Fundraising exemption applies to events/auctions

Gift Aid
-

Golf Day example

Golf Day

Total

Non
-
members

Members package

Numbers attending

220.00

195.00

25.00

Cost per ticket

100.00

75.00

Total Income

21,375.00

19,500.00

1,875.00

Expenses per ticket

Green fees (non members only)

4,875.00

25.00

0.00

Prize bags

550.00

2.50

2.50

Catering
-

breakfast

230.00

1.05

1.05

Catering
-

lunches

990.00

4.50

4.50

Bar

450.00

2.05

2.05



Total Expenditure
-

paying members

7,095.00





Effective cost per ticket

35.09

10.09

Effective donation per ticket

64.91

64.91

Total donations which could be recognised

14,280.00

12,657.27

1,622.73

Must also consider eligibility for gift aid.

Must be non
-
corporate entity to be eligible.

Est.
190 are non corporate therefore and 30 are company payments:

Amounts 'donated'

190 ticket donations @

64.91

12,332.73

Potential gift aid

3,083.18

Trading


HMRC
-

Charity Trading & Tax


Incidental trading exemptions


£5,000


< £25% of total income ( up to £50k max)


Set up a company to avoid tainted activities & tax arising


Transfer of profit by gift aid


accepted by HMRC


Payment within 9 months of year end


Segregates income streams although increases admin costs


Common misperception that Charities are ‘exempt’ from tax


Wrong!


Direct Taxes


Income Tax/Corporation Tax: Exemptions available


Indirect Taxes


VAT ‘Business Test’


no ‘blanket’ exemption


Charities & Direct Tax


A number of exemptions are available :


Primary purpose


Profits from activities are used
only

for charitable purpose


Trade carried out by beneficiaries


i.e. Charity for disabled runs a café staffed by disabled individuals



This is a specific exemption in
HMRC guidance see
-

http://
www.hmrc.gov.uk/charities/tax/trading/basics.htm


Beneficiaries must do most of the work


Incidental trading profits


Maximum £50k turnover from trading activities


Profits used for charitable purpose



VAT


Charities & Indirect Tax
-
VAT


A charity can be carrying out a business activity even though it is for a
charitable purpose



HMRC uses the business test



Is the activity carried a serious undertaking earnestly pursued? or function which is
actively pursued with reasonable and recognisable continuity?


Does the activity have a certain measure of substance in terms of the quarterly or annual
value of taxable supplies made? conducted in a regular manner and on sound and
recognised business principles?


Is the activity predominately concerned with the making of taxable supplies for a
consideration? Are the taxable supplies that are being made of a kind which, subject to
differences of detail, are commonly made by those who seek to profit from them?


Precedents on “ business activity”. The case of
CCE v Morrison's Academy
Boarding House Association

[1978] STC


VAT not linked to charity structure


VAT advantages very limited & complex


Charity Income
-

VAT

Possible VAT scenarios

for Charities

Example

of Income

VAT treatment

Donation

Non
-
business

and outside the scope

Admission

to an exhibition

Standard rated

Sale of brochures

Zero
-
rated

Catering

at a qualifying fund raising event

Exempt

VAT liability


Partial Exemption

Income/Activity of an entity

Business

Taxable includes,
zero, standard,
reduced rate

Exempt i.e. Health &
Welfare, Education, one off
fundraising events, Lotteries

Non


Business i.e. Grant funding

VAT recovery model


Income/Activity of an entity

Business

Taxable

Exempt

Non


Business i.e. Grant funding

Full

Full or none

Restricted

Unrestricted

None

Partial

HMRC
-

Partial Exemption VAT issues


Taxable supplies, register
-

£77k


Non Business


prov of services at no charge


Outside the scope
-

grant income


Exempt


Fundraising


Direct Input VAT re a non business supply can never be reclaimed


no de
minimus limit


Partial exemption


De minimus limit, Irrecoverable VAT


non Bus


Blocked


Other input VAT split
-

Exempt & Taxable, Annual Adjustment


Voluntary VAT registration


do the advantages re input VAT recovery
outweigh the following ?

1. Admin Costs

2. VAT burden to customers / service users





Charity Income
-

VAT


Donations


Outside the scope if a genuine donation with nothing received (or benefit) in return


Grant funding


Outside the scope if charity provides nothing in return


Sale of donated goods


Normally SR ( but may be ZR, Exempt ) depends on goods



Admission fees


If free, outside the scope of VAT


Otherwise SR unless Cultural exemption applies

VAT


Cost Sharing Exemption


What is it?


Introduced by FA 2012 following extensive consultation process


A valuable means of reducing VAT costs in shared services


Mandatory provision of the VAT Directive since 1977


Not previously introduced in UK owing to uncertainty as to how to give effect.


Back to Basics


Charge to tax occurs where



any supply of goods or services made in the UK
,



where it is a
taxable supply

made by a
taxable person



in the course or furtherance of
any business

carried on by him


S 4 VAT Act 1994


A
supply

is anything done for
consideration
.


CSG
-
Addressing the problem

A

B

C

Recharges

What if
A

and
B

are:



Charities?


Housing Assocs?


Educational establishments?


VAT recovery?

Cost sharing exemption exempts C’s supplies

Likely beneficiaries:



Banks


Charities


Social Housing orgs


Health and welfare orgs


Financial Services


LAs


Educational Institutions

Cost Sharing Exemption


Must be an independent group of persons (CSG) supplying services to
members



Members’ activities are exempt or non
-
business


Services supplied by the CSG must be ‘directly necessary’ for a member’s
exempt or non
-
business activity


CSG only recovers from its members, a member’s individual shares of
expenses incurred by the CSG in making exempt supplies


Should not give rise to distortion of competition.

The CSG


Can take any legal form


VAT registration


Supplies to non
-
members


VAT compliance responsibility of the CSG


knowledge of members’
activities!


Only services received from the CSG that can be ‘directly necessary ‘or
‘directly attributable’ to a member’s exempt/non
-
business supplies can be
exempted


Where a member has some taxable activity shared overhead costs could
not be exempted , subject to :
-


CSGs option of the
‘85% test’.


The CSG
-

85% test


The CSG’s supplies to a member can be exempted where that member’s
non
-
taxable activities are 85% or more of total activities


12 month ‘Look back’ and ‘Look forward’ test


Members should review PE calculations


Effective control/communications between the CSG and members is a
must


Members failing test gives CSG a headache!


CSG Members


Must be at least 2 members


No upper limit


Must have made or have intention to make 5% exempt/non
-
business
supplies


In this case CSG services are directly attributable to
all

exempt/ non
bus supplies


It is the activities in which engaged and not registration status which
determines eligibility


Member could be non VAT registered in the scheme


Just gaining the cost saving advantage rather than the VAT advantage.


Member is exempt or outside the scope.



CSG
-

How it might look

Member A

Member B

Member C

CSG

Third party
supplier

Supplies between Members and CSG are exempt

Subject to normal VAT rules

Non CSG

member

Subject to normal VAT rules

Cultural & Fundraising Exemptions


Charity Specific VAT Exemptions


Cultural exemption


Non
-
profit making organisation


Admission profits applied to continuance/improvement of facilities


Managed by volunteers with no direct/indirect financial interest



Fund raising exemption


Exemption covers ticket sales, admission, advertising space,
merchandise, non
-
donated auction goods, bar/catering, sponsorship


There may still be zero
-
rated supplies


sales of programmes,
children's clothes, auctions of donated goods


Relief available to Charity and trading subsidiary


Relief restricted to 15 events per year


A Charity can appoint an agent/promoter to organise the event and
exemption will still apply.

3
rd

party large fundraising events

Charity Specific VAT Treatment


Large fund raising events


London Marathon


Charity will normally pay for places in the event and offer to
individuals


Monies raised will be classed as donations so long as individuals do
not receive any benefits.


Not classed as benefits:


Free T

shirt


Running advice


Pre/Post
-
event meetings/refreshments


Classed as benefits


Free travel/accommodation


Bikes/watches



Charity Specific VAT Treatment


Large fund raising events (cont’d)


Charities may stipulate a minimum sponsorship figure


This is an entry fee and is SR


Excess over this is a donation and outside the scope



Gift Aid applies subject to

usual gift aid declaration


Some input VAT can be recovered where the Charity makes taxable
supplies


Charity incurs VAT on a bike awarded to an individual


A taxable supply.


Recover VAT incurred on the bike.


Minimum sponsorship amount , attributable input VAT could be recovered
.

Listed Buildings


Listed Buildings & Approved Alterations


Changes take place from 1 October 2012


Affects owners and developers of listed buildings


Building materials and construction services supplied in the course of
“approved alteration” to a listed building will be standard rated


Where the building is sold or subject to a long lease, only buildings
reconstructed from shell continue to benefit from the zero
-
rate


Developers VAT recovery reduces


Building owners costs go up by 20%.


Some good news


increased grant funding for listed places of worship


Another solution:


Alteration may qualify for reduced rate


Many contractors are of the opinion that owners will resort of un
-
registered cowboy builders


Substandard alterations and a loss to the Revenue


Challenging times


Charities in Challenging Times



Be strategic


Improve efficiencies


Creative, partnerships/ JV’s


Public benefit responsibility


displacement


People
-

engagement Senior Team & Trustees


Sector knowledge


Support yet question


Plan, medium to Long term


Man A/cs, Budgets, Cash Flow


Reserves


Careful use


Manage risks responsibly ( not become risk averse)


All roles for Trustees

Charities in Challenging Times


Trustees duties


S66 Duties of a Trustee, CTI2005


A charity trustee must “ act in the interests of the charity”


(a) act in a manner which is consistent with its purposes,


(b) act with the care and diligence reasonable of a person who is managing
the affairs of another person,


(c) in any possible conflict of interest situation


(i) put the interests of the charity before those of the other person, or


(ii) disclose the conflicting interest to the charity and refrain from
participating in any deliberation/ decision.


Any breach of the duties is treated as being misconduct in the administration of
the charity as a whole. Trustees must ensure


any breach of duty is corrected and not repeated,


any trustee who has been in serious or persistent breach is removed as a
trustee.


“Ultra vires” action


Joint liability


Charities in Challenging Times CTI 2005
-

Trustees Remuneration


Charity may not remunerate Trustees (incl connected persons) for all
services
unless


S67(3) written agreement re max amount


Does constitution allow this?


Must only relate to minority of Trustees


Reasonable in the circumstances


In the interests of the charity


S67 (5) 3 general exemptions


Authority existed at 15/11/04


An order of the Court of Session


Other enactment


Incorrect payment is Misconduct

Charities in Challenging Times CTI 2005
-

Trustees Remuneration


Remuneration Sec 68(1)


Contract of employment, service and BIK


Not reimbursed exps, services include goods supplied


Payment to a person connected which “might benefit” a Trustee
prohibited, any direct or indirect benefit


Connected


Sec 67


Married, partner, same sex couples


Close family relative, child, sibling, step children etc.


Coy connected to Trustee


control 20% Sec 105


Partnership


Trustee or connected person


Charities in Challenging Times


Trustees Duties OSCR
Guidance


Case studies


Charity trustees & personal liability


Private benefit


S23 Information request


Meeting the charity test


“ Protecting charitable status” issued Feb 2012


Key learnings for Trustees Section 7 + Checklist


Good case studies


Main area for complaint is Governance


Effective Internal controls & accounting


2011 “ Whose in Charge


Control & Independence in Scottish
Charities”



Charities in Challenging Times


Trustees Duties, Internal
Controls


NOT
total protection


Sufficiently rigorous controls provides :


protection for the charity's assets


best defence for the trustees against


failing to protect the charity's assets and funds.


3 Key Areas


1.The 'tone at the top'


A culture of control embedded in the operations of the organisation


Created by the trustees /senior management


Lead by example
-

adhere to the charity's internal financial controls and good practice.


2.Review of controls


Trustees review annually the effectiveness of the charity's internal financial controls.


Are they still relevant ? Appropriate ?


3. Segregation of duties


No single individual has sole responsibility for any single transaction from authorisation to

completion and review.


Internal controls help manage risk,
protect all Trustees.


Added Value

Added Value

1. Internal Controls & Governance


OSCR guidance


Who’s in Charge 2011


CC 8


Internal Financial Controls, June 2010


All sizes of charity covered


Checklist to follow


All Income areas


Purchases/expenses


Assets & investments


Electronic banking/ tiered authority


Restricted Funding


Great advice source for all advisers/ trustees & directors


CC 10


Hallmarks of an Effective Charity


1. Clear about purposes & direction


2. A Strong board


3. Fit for purpose


4. Learning & improving


5. Financially sound & prudent


6. Accountable & transparent



Added Value

2. Risk Management


No OSCR guidance


CC26


Charities & Risk Management


SORP requirements for Risk Management


Model of risk management


Risks


detailed analysis


Governance. Operational. Financial. External Compliance


Annex 1 & 2


Worked examples


Disaster Recovery Planning


Heat Map


Added Value

3. Succession Planning


Board Skills


Skills Audit & matrix for the Board


Leadership


Strategic Leadership


Communication


Interpersonal skills


Technical/ Educational skills


Understanding Finances/ Legal /HR


Meetings


Creativity/ Lateral thinking



NCVO Website


Good Practice in Trustee Recruitment





Added Value

4. Reserves policy


CC 19 Charities & Reserves


Why?


Confidence, Financial Management & Planning


Sustainability, risk management, strategic planning, budgeting


How?


Nature of funds, risk policy, strategic & operational plans


When?


At least annually in detail, monitor monthly as part of accounts/ budget
process.


What?


Reliability, prospects, commitments


Annex 1


Smaller/ uncomplex charities






Added Value

4. Reserves policy (Cont)


Can Trustees explain / understand the policy


Excesses/ deficits/ variances


Zero level reserves


Endowments/ Investment returns


CC19


Annex 2


Understand funds


Functional assets


Financial impact of risk


Sources of income


Future plans/ commitments


-

Designations


-

DB Pension Scheme







Added Value

4. Reserves policy (Cont)


CC12 Managing Financial Difficulties & Insolvency in Charities


Role of Trustees in effective Management & Financial control


Value of the Balance Sheet


Insolvency definition


Cash Flow test


Balance Sheet test


Operation whilst apparently insolvent


Going concern


Claims on Funds


Professional advice


Liquidation/ Administration


Liability of charity trustees


OSCR involvement






Charity Financial Regulation Update
2013 and Pensions Review



Any questions?

ada@maco.co.uk

Notes


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