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Application of charity accounting
principles and practices for
Student Unions
Presented by: Christine Wilson, Partner,
Moore and Smalley LLP, on behalf of CFG
Session Objective
• To provide an overview of:
- The regulatory and reporting requirements associated
with Charity Commission registration
- Accounting under the Charities Statement of
Recommended Practice (SORP) and how this may be
applied in the Student Union context
- The Accounting treatment of unrestricted and restricted
funds and the treatment of funds held by student societies
on behalf of their clubs and societies
- The VAT treatment of different charitable funds
- The direct tax regime affecting charities
- Q&As
Regulatory requirements
• Relevant legislation
- Companies Act 2005
- Charities Act 2011
• Public benefit requirement
• Risk management reporting requirement
• Charity SORP – Accounting and Reporting by Charities (2005)
Statutory Duties Directors duties as defined by the Companies Act:
• Responsibilities
- Act with due skill and care
- Act in good faith and in the interest of the company
- Exercise powers for proper purpose
- Exercise accountability to stakeholders
- Ensure proper books of account are kept
- Ensure the company does not ‘wrongfully trade’
• Roles include
- Establishing a vision, mission and values
- Setting strategy and structure
- Delegating to management
Regulatory requirements
Trustees’ duties as defined by the Charities Act
• Duty of prudence
- Use of funds and assets to further its objectives
- Avoid undue financial and reputational risk
• Duty of care
- Use all possible care and skill to ensure the charity is well run
- Employ appropriate experts or take external professional advice
- Ensure proper use of public funds
• Duty of compliance
- Ensure all relevant legislation and regulations are complied with
Reporting Requirements
• Companies house
- Annual Return
- Financial Statements/Annual Accounts
- Any other company changes eg changes in directors
- Penalties for late filing of accounts – 9 month deadline
Reporting Requirements (2)
• HMRC
- Company tax return – Form CT600
- Forms P11D
- RTI
- VAT Return if registered
Reporting Requirements (3)
• Charity Commission
- Charity Annual Return
- Charity Accounts
- Changes in Charity details eg changes in trustees
Charity Accounting and
Reporting
Accounting and Reporting: Background
• Companies Act and Charities Act
• SORP: Statement of Recommended Practice – Accounting
and Reporting by Charities
- Issued 2000
- Revised 2005
• One consistent set of rules to be applies by charities
SORP: Does Compliance Matter?
“The accounts are a lengthy document full of numbers that our supporters
don’t understand”
• Endorsed by the Charity Commission
• Compliance is an indicator of good governance
• Auditor’s Reports on non-SORP compliant accounts
Does it matter to funders?
• Summary of findings
- Trustees’ Report and Accounts are important to the decision
making process:
“an essential part of the assessment of a grant application”
- No appetite to simplify the reporting requirement – it was felt that
simplification might then lead to funders needing to request
additional information from applicants
- SORP has led to more consistency in presentation of accounts –
which assists funders in assessing applications
Does it matter to funders?
• Key elements of the accounts from a funder’s perspective
- Analysis of incoming resources – enabling them to see how the
charity is funded
• Information to allow them to asses the financial viability of the charity,
including:
- Trustees’ Report
- SOFA
- Balance Sheet
- Notes to the accounts
The accounting framework: in more detail
• Companies Act 2006
• Charities Act 2006, 1993, 1992 – Consolidated into Charities Act 2011
• SORP 2005
- Statement of Recommended Accounting Practice
- Accounting and Reporting by Charities
• Audit requirement >£500,000 income
Contents of “the accounts”
• TAR – Trustees’ Annual Report
• Auditors Report
• SOFA – Statement of Financial Activities
• Balance Sheet
• Cash flow statement
• Notes to the accounts
Trustee’ Annual Report
• What is the purpose of the charity?
• How is it run?
• What did it do during the year?... and does that fit with its purpose?
• How did the charity provide a benefit to the public?
• What are its future plans?...and how will it fund those plans
• How does it safeguard its resources – monetary and non-monetary?
Trustees’ Annual Report – Financial
sections in more detail
• Financial review
• Investments
- Policy
- Review
• Reserves
- Policy
- Position vs Policy
• Risk Management
- Financial risk
- Non financial risks
Public benefit
• Required disclosure
• Benefit must be related to the aims of the charity
• Must have regard to Charity Commission guidance
The auditor’s report
• Addressed to the members = “Those charged with governance”
• Opinion on the accounts = SOFA, balance sheet and notes to the accounts
• Opinion on TAR – consistency with accounts
• Modified reports – Qualified vs unqualified vs emphasis of matter
• Going concern = 21 months from date of signature
• Whistleblowing duties of auditors
Fund accounting
A big difference between company accounts
and charity accounts
Funds and Fund Accounting
• Permanent Endowment – by the donor
• Restricted – by the donor
• Designated – by the trustees
• Unrestricted – general day to day operating surplus/(deficit)
Funds: In more detail
Permanent Endowment
• Generally – property given to the charity which must always be
used for the stated purpose
Restricted Funds
• Grants or donations for a specified purpose
- Purchase of particular assets
- Delivery of specific services – dealing with surplus/deficits
- Clubs and societies – ringfencing funds
Funds: In more detail
Designated Funds
• Designated by the trustees
• For a specific purpose
• Importance of utilising designated funds
Unrestricted funds
• General operating reserves/free reserves
• Importance of overall surplus
Statement of Financial Activities - SOFA
Incoming Resources
• Voluntary
• Activities for generating funds
• Charitable activities
• Investment Income
• Other = exceptional items
Resources expended
• Costs of generating funds
• Charitable activities = using funds for the benefit of beneficiaries
• Governance Costs
Fund Transfers
Investment profits/losses
Incoming resources: in more detail
Voluntary income
• Donations, including covenanted income
• Legacies
• Grants
Activities for generating funds
• Fundraising events
• Trading income
Charitable activities
• Amounts earned from providing services to beneficiaries
• Service level agreements
• Fees charged
Incoming resources: in more detail
Investment income
• Dividends
• Interest
• Rental income on investment properties
Exceptional items
• Significant
• Non-recurring
Resources expended: in more detail
• Cost of generating funds
- Investment management costs
- Trading costs
- Costs of fundraising events
- Management and administration costs
• Charitable activities
- Direct cost of providing services to beneficiaries
- Indirect costs including management and administration costs
Resources expended: in more detail
• Governance Costs
- Trustee costs
- Certain legal and professional fees
- Audit/independent examination fees
- Any relevant management and administration costs
• Exceptional costs
- Significant
- Non recurring
Resources expended: Management and
administration costs
• Allocated across all activities
• Bases of allocation – disclosed in the notes to the accounts
- Staff costs
- Activity levels
- Utilisation of space
Fund Transfers
• Transfer of assets (sometimes cash) from one 'pot' of funds to
another, some examples:
- Contracts ending in surplus
- Purchase of fixed assets
- Fulfilling a donor's restriction
• Investment profits/losses
- Restating investment assets at market value
• Investment portfolio
• Property
Surplus and deficits
• Unrestricted in year deficit
• Restricted fund surpluses
• Reserves carried forward – the difference between restricted and
unrestricted funds
Balance Sheet
• Snapshot of assets and liabilities
• Net current assets/liabilities = indicator of adequacy of working
capital
• Long term assets and liabilities
• Importance of ringfencing restricted fund assets and liabilities
• Restricted cash balances
Balance sheet: fixed assets
• Categories
- Tangible
- Intangible
- Investments
• Policies to consider
- Cost of valuation
- Depreciation and amortisation
- Capitalisation policy
- Impairments
Balance sheet: Current assets
• Categories:
- Stocks and WIP
- Debtors
- Bank and Cash
• Issues to consider
- Valuation of stock: cost vs net realisable value
- Debtors
• Recoverability/need for provisions
• Prepayments and accrued income
Balance sheet: Creditors
• Analysed between those due within one year and those due after
more than one year
• Trade creditors
• PAYE and VAT
• Accruals and deferred income
• Provisions for liabilities and charges – pension deficits
• Issues to consider:
- Deferred income vs restricted income – another difference
between company accounting and charity accounting
- Defined benefit pension scheme deficits, in particular local
government pension schemes
Notes to the accounts
• Confirmation of accounting policies
• Acknowledgement of funders
• Fundraising income vs fundraising costs
• Expenditure analysis
• Explanatory notes
• Confirmation of fund usage and balances carried forward
Notes to the accounts: in more detail
• Income and expenditure
- Analysis of funding streams and funders
- Analysis of allocation of costs between activities
- Disclosure of employee numbers and costs
- Disclosure of transactions with trustees – remuneration of
trustees for management services
Notes to the accounts: in more detail
• Balance sheet and disclosure notes
- Analysis of headings shown in the balance sheet
- Analysis of movements in restricted funds on a project by
project basis
- Analysis of assets by fund
- Disclosure of commitments and contingencies
- "Going concern" disclosure
VAT
VAT
Registration threshold =£79,000
Indicator Business Non-business
Nature of supply Supply for a
consideration ie
payment by cash,
credit card etc
Services provided
for free - Provision
of welfare, advice,
employment
services,
representation etc
VAT
Indicator Business Non-business
Who pays for the
goods or services
The recipient
ie bar take, shop
receipts etc
Third party eg
grant funding or
donation -
University funding,
donations etc
VAT
Indicator Business Non-business
VAT Chargeable? Taxable – 0%, 5%,
20%, eg:
0% Books
20% Bar sales
Exempt – No VAT
eg Sports facilities
Outside the scope
of VAT
No VAT chargeable
on grants and
donations
VAT
Indicator Business Non-business
VAT recoverable
on expenditure in
making supplies
Taxable – Yes
Exempt - *Maybe!
*Why? If exempt
income and related
expenditure is de
minimis then VAT
incurred in making
supplies is
recoverable
No!
How to calculate recoverable VAT?
VAT on
expenditure
relating to:
Business
Overheads
Non-business
Amount recoverable 100% Apportioned 0%
Methods
Non Statutory method
- Income ratio
- Staff costs
- Floor area
- Departmental costs
HMRC approval
recommended
The Direct Tax Regime
Trading income: a reminder of the rules
• What trading activities are allowed?
- Trade in furtherance of a charity's objects – primary purpose
- Trading activities to raise funds – fundraising events
• Tax exemption for small scale trading
- Available where annual turnover from all non-exempt trading
activities does not exceed the greater of:
• £5,000
• 25% of all incoming resources, subject to an upper limit of
£50,000
Tax Exemption for Charity Trading (ie
trading by the Students Union itself)
• If the profits are applied solely to the purpose of the charity and
either
- The trade is carrying out the primary purpose of the charity
- The work in connection with the trade is mainly carried out by
the beneficiaries
• Primary Purpose = trading activities which fall within the primary
objective of the charity
Exemption for Fund Raising Events
• Small scale fundraising events
• Not regularly carried out
• Not in competition with other commercial traders
• Supported due to charitable nature
• The more specific VAT exemption criteria have been adopted for
income tax purposes
Trading companies
• Wholly owned subsidiary
• Gift Aids taxable profits to charity
- Turns taxable income into exempt income
• Protects the charity in the event of a failure of the trade
• However, this route is not as straightforward as it used to be!
Key Areas to consider (1)
• Is the company necessary?
- Are you sure you have a taxable trade?
- Other reasons – eg to mitigate risk
- Will the compliance cost exceed any possible tax bill?
Key Areas to consider (2)
• Is the business viable
- The time and expertise of trustees should not be wasted on
peripheral activities
- If the trade is a major venture, consider the need for
professional advice
• A Trustee's primary duty is to act only in the interests of the
charitable objects
• A Trustee’s duty is to conduct the business of the charity as an
ordinary prudent person with business experience would conduct
their own.
Key Areas to consider (3)
• Transfer of profits
- Gift Aid
- When
- How much?
- Funding the company
• Start up funding
- Share capital – generally need to minimise equity investment
- Loans from the charity
- External funding
Key Areas to consider (4)
• Loans by the Charity
- Unsecured – too risky
“Charities should not normally make unsecured or interest free
loans…. Such loans are not compatible with the proper
discharge of the duties and responsibilities of charity
trustees….”
Key Areas to consider (5)
• Loans (continued)
- Need to demonstrate that the company is not receiving a benefit
- Secured on trading company assets
- Carry a commercial rate of interest
- Interest should be paid
- There must be a mechanism for repayment
Key Areas to consider (6)
• Funding the company as it trades
- Need to build reserves in the company
- Need to demonstrate that funds are going from the company to
the charity
- Failure can result in loss of tax exemption on a £ for £ basis
Corporation tax
• Tax liability (if any) – falls due for payment 9 months and one day
after the year end
• Tax returns – must be filed 12 months after the year end
• Form CT41G – New company details
• Penalty regime for non compliance
Gift Aid
• Donations made to unions or societies and clubs may be eligible
• Gift Aid only applies to gifts of money
• Must register with HMRC
• Gift Aid declarations for each donation
• No link between the donation and those who benefit from it
Gift Aid
Benefits to donors – limits:
*Capped at an overall limit of £2,500 from 6 April 2011
Donation Maximum value of benefits
£0 - £100 25% of the donation
£101 - £1,000 £25
£1,001 + 5% of the donation*
Gift Aid
• Small Donations Scheme
- Effective from 6 April 2013
- Charities can claim a top-up equivalent to Gift Aid on up to
£5,000 of small donations without a Gift Aid declaration
- Applies to small donations (< £20 each) only
- Must continue to make Gift Aid claims if you wish to also claim
under the Small Donations Scheme
- Detailed rules apply
Employer Taxes – in brief
• Non payroll income/expenses and benefits in kind
• Tax/NIC “Dispensation” and “PAYE settlement agreements”
• “Self-Employed” status disputes
• Termination/redundancy/”pilon” payments
• Tax efficient flexipay & salary sacrifice schemes
And finally…
• Regulatory requirements
• Charity accounting
• Restricted and unrestricted finds
• VAT
• Direct taxation
Any questions?
Thank you
Contact details:
Christine Wilson, Partner
Moore and Smalley LLP
Email: [email protected]
Tel: 01772 821021
www.cfg.org.uk [email protected]
