Charities - Current Key Issues (Norwich seminar)

Charities – the key issues

Wednesday 11 June 2014

Targetfollow Room

Theatre Royal, Norwich

Mark Proctor

Charities Partner

and 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 care

Reasonable care and skill

- higher ‘care’ threshold for qualified accountants and

other professionals

Seek professional advice when appropriate

- and act upon

Duty of care

Limited 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 Hansell

Consultant

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

Retu

rn

Target Return Portfolio

Market Portfolio

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.


policy cover?

• Any ethical preferences for investments.

• Who can make the investment decisions? I.e. a trustee

body or a nominated separate investment committee or

advisor


policy cover?

• 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 Organisations (CIOs)

- 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 CIOs – trustees and

members

Association CIOs

- wider membership

- includes members who are not trustees

CIOs 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 pros

Limited 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 Companies

2011 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

Advertising

Sale 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

• Rental of commercial property from landlord – can be VAT free

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


- 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


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 with

HM 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


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?

Charities - Current Key Issues (Norwich seminar)

Government & Nonprofit

Transcript of Charities - Current Key Issues (Norwich seminar)