ACIE Scottish Conference 2012 Scottish Charity Sector An Update

1. ACIE Scottish Conference 2012Scottish Charity SectorAn Update August 2012 Adrienne Airlie Martin Aitken & Co Glasgow

2. The Scottish Charity Sector 5% >£500k 11% <£500k 14%< £100k 70% <£25,000

3. OSCRCharity Sector Update As at 31/3/2011 23,288 Charities 70% of Charities < £25,000 income* 84% of Charities < £100,000 income* 5.6% of Charities > £500,000 income* 5.6% of Charities = 93.7% of total sector income* 4.7% of Charities > £500k = 90% (excl cross border)* *Source - OSCR “Scottish Charities 2008”

4. The Scottish Charity Sector Key players • OSCR • Scottish Government • SORP Committee • ASB/CC/OSCR • HMRC • Accounting Standards Board (ASB) • Charity Commission • Other Professional bodies • Trustees/Beneficiaries/Fundraisers • General Public

5. Agenda 2012 • Basic Refresher • Thresholds, Income & Expense recognition • Scottish Government • Public services Reform (Scotland) Act 2010 • The Charities Accounts (Scotland) Amendment Regulations 2010 • Charity Reorganisation ( Workshop 2A) • SCIOs • The Scottish Charitable Incorporated Organisations 2011 • General Regulations & Dissolution Regulations 2011 • OSCR processes – “SCIO’s a guide” • HMRC • Gift Aid • Fit & Proper/ Finance Act 2010 • VAT

6. Agenda 2012 (cont) • Charitable Trading & VAT issues • Current/ future issues • Disclosure • SORP Concessions • Support costs • Governance • Internal controls • Risk Management • Board structure/ succession planning/skills • ASB/ Future of the SORP • Scotland Office consultation on law reform for Unincorporated Associations

7. Charity Accounts Unincorporated From 1 April 2011 * Concessions exist in the SORP for charities under Audit threshold of £500,000

8. “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

9. The Charities Accounts (Scotland) Regulations 2006 – Company Thresholds From 1 April 2011

10. The Legislation –From 1 April 2011

11. Flowcharts – Accounts Preparation Decision Tree Is the charity a company? YES NO Prepare true and fair accounts in accordance with the Charities SORP. Does the charity have a gross income of £250,000 or more? YES NO Does the charity’s constitution (or other founding documents) or any enactment say it should produce true and fair accounts or have the trustees decided that it should? YES NO Prepare accounts on a receipts and payments basis in accordance with regulation 9 of the 2006 accounting regulations (as amended).

12. External Scrutiny Decision Tree For Non Company Charities Does the charity’s constitution or any enactment say that an audit should be undertaken, or have the charity trustees decided that an audit should be undertaken? Audit carried out by a registered auditor. YES NO Is the gross income of the charity £500,000 or more? YES NO Does the charity have assets (before deduction of liabilities) of more than £3,260,000? YES Independent examination by a member of a professional accounting body or a full member of the Association of Charity Independent Examiners or another person eligible for appointment under regulation 11(2) of the 2006 accounting regulations (as amended). NO Is the gross income of the charity between £250,000 and £499,999? YES NO Does the charity prepare true and fair accounts? YES NO Independent examination by someone with the requisite skills under regulation 11(1) of the 2006 accounting regulations (as amended).

13. External Scrutiny Decision Tree For Charitable Companies Do the charity’s founding documents or any enactment say an audit should be undertaken, or have the charity trustees decided that an audit should be undertaken? Audit carried out by a registered auditor. YES NO Does the charity qualify as small under the Companies Act 2006? NO YES Is the gross income of the charity £500,000 or more? YES NO Does the charity have gross assets (before deduction of liabilities) of more than £3,260,000? YES NO Independent examination by a member of a professional accounting body or a full member of the Association of Charity Independent Examiners or another person eligible for appointment under regulation 11(2) of the 2006 accounting regulations (as amended).

14. Income Recognition • Standard SOFA Headings • Incoming resources from generated funds • Voluntary income • Activities for generating funds • Investment income • Incoming resources from charitable activities • Other incoming resources

15. Income Recognition • Income – FRS 5 detailed explanations • Entitlement • Certainty • Measurement • Conditions • Certain & controllable • Lack of related expenditure is not a reason for deferral • Grant /Performance Related / Service Contract?

16. Income – example of timing of recognition • Big Lottery award – £150,000 Received 1/3/11 - 50% part funding of outreach worker & office costs p.a. Case 1 - Outreach worker & office exist √Entitlement √Certainty √Measurement • Action - Recognise as a restricted fund in total y/e 31/3/11 Accounts Case 2 - No Worker & no office in place yet ×Entitlement √Certainty √Measurement • Action - Defer Income into y/e 31/3/11, until conditions met

17. Income identification • Important to identify type of income: • Grant : for a project/purpose, no performance criteria but return of surplus • Performance : donor measured performance criteria and return of surplus • Contract : donor specified services, no return of surplus

18. Income – long term funding examples • Incoming resources • Year end 31 March, 2011 • Receipt / approval 1 March, 2011 • 2 Year project • Costs Year 1 £10,000 Year 2 £50,000 Year 3 £60,000

19. Example: Long term funding *2013 requires an additional provision for repayment of surplus, eliminating the £30,000 net income (or renegotiate terms).

20. Example: Long term funding

21. Example: Long term funding Memo: Income recognised pro-rata. 2011 = 1/24 months, 2012 = 12/24 months, 2013 =11/24 months

22. Expenditure • Remember: • Analyse based on objectives and mirror the related income • Support costs are included under Costs of Voluntary and Costs of charitable activity • Governance costs are purely constitutional and non-activity based

23. Expenditure recognition • FRS 12 “Present obligation (legal or constructive) from a past event” • If avoidable by future actions then no expense • Circumstances giving rise to cost must exist at balance sheet date

24. Use of Designated Funds • As expenditure has these restrictions… • Important for charities to consider pre year end, designating funds for future projects • Have it minuted in the last Trustees’/Board meeting of the year • Ring fence an element of unrestricted funds: • To remove apparent surplus funds • To demonstrate pro-active funds management

25. Designated Funds/Income Recognition • Legacy: Charity informed 1/5/11 of death on 1/3/11 and assets in estate cover legacies and bequests. Case 1 – fixed legacy from estate £50,000 √Entitlement √Certainty √Measurement • Action - Recognise as income in total y/e 31/3/11, designate for a project/purpose? Case 2 - share in residue (value unknown at signing accounts) √Entitlement √Certainty ×Measurement • Action - Defer Income into y/e 31/3/12, once amount established

26. Public Services Reform (Scotland) Act 2010 Part 9 Amendments to CTI 2005 – operational from 1/8/10 • S30 Variation, revocation & review of directions • S34 (5) OSCR application to Court of Session deemed removal of trustees • S30 (removal) & S70 (disqualification) non delegated functions • S39/40/42 Reorganisation, wider constitution changes • S70A Appointment of charity trustees • S68A TII excluded as remuneration, only if approved in constitution & insurance does not cover fines/ penalties • Website references • S43 Reorganisation restricted funds – OSCR & Charity – Workshop 2A • The Charities Reorganisation( Scotland) Amendment Regulations 2012 • The Charities Restricted Funds Reorganisation( Scotland) Amendment Regulations 2012 • Effective 1/11/12

27. The Charities Accounts (Scotland) Amendment Regulations 2010 • FY beginning 1/4/2011 • Reg1(2) Gross Income & liability definitions • Reg1(2) Expendable and permanent Endowments • Reg 8 & 9 amended as Accruals threshold increases from £100k to £250k • Reg 10 Asset threshold £3.26 million at y/e • Reg 10 Consolidated accounts need audited

28. SCIOs – An update • Bespoke form of incorporation, charities only, based solely under Scottish charity law • The Scottish Charitable Incorporated Organisations 2011 • General Regulations 2011/Dissolution Regulations 2011 • S 55(7) CTI if SCIO ceases to be a charity it ceases to be a SCIO • Benefits of incorporation without complexities of Coy Law • OSCR processes – “SCIO’s a guide” • New applications & conversions • Matrix • Duties & Requirements of a SCIO -v- Non SCIO – excellent • Practical issues arising – Alan Eccles MMS • General Regs • Constitution • Register of members & trustees • Members Meetings & Responsibilities • Voting & duty of care • Property Transfer

29. Duty to report to OSCR • This relates to the Whistle blowing section of the CTI Act 2005 at Section 46 and states that an individual must inform OSCR if, whilst acting in the capacity of the examiner of a charity he/she becomes aware of any matter relating to the activities or affairs of: The charity or any institution or company connected to the charity and which the Independent Examiner has reasonable cause to believe is likely to be of material significant for the purpose of the exercise by OSCR of its functions under Section 28, 30 or 31

30. Continuing Reporting Duties to OSCR • 2 Duties • Mandatory – Sections 28/30/31 as above • Discretionary – other areas of OSCR’s work • Discretionary – wide ranging e.g. • Cumulative impact of not following professional advice • Large redundancy packages/ non contracted payments e.g. maternity pay • Smaller admin or financial issues • Exp outwith charity’s purpose (cum effect if not material) • Considerable intelligence value for OSCR, part of its wider Monitoring & Compliance function

31. Gift Aid • The Small Charitable Donations Bill was introduced to Parliament on 21 June. The Bill will legislate the Gift Aid Small Donations Scheme (GASDS) which was announced at Budget 2011 and will be implemented from 6 April 2013.

32. 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

33. HMRC – Gift Aid • 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 • End of transitional relief – 3p per £ supplement ended 5 April 2011 • Online filing system from 2012/13 • All future repayments made by BACS *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.

34. HMRC – Gift Aid • 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

35. HMRC – Gift Aid • 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 will add an additional transitional relief of £3 for claims up to April 2011, making a total payment of £28.

36. HMRC – Gift Aid • 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 may apply to events/auctions

37. HMRC – Fit & ProperFinance Act 2010 • A new definition for tax purposes of charities, CASC’s etc entitled to UK charity tax reliefs • Satisfy “management condition” • Applies to Gift Aid from 1/4/2010 • Will apply to other reliefs later • “Management condition” - managers must be “Fit & Proper” • No definition, HMRC guidance • Charities procedures on appointment • Sham charities & fraudsters • HMRC basic guide & model declaration - attached

38. HMRC – Fit & ProperFinance Act 2010 (cont) Revised Guidance Feb 2011 HMRC assumes that all people appointed by charities are fit & proper unless they hold information otherwise. Recruitment steps. If HMRC find a manager is not a fit & proper person charity will not necessarily lose entitlement to the charity tax reliefs. Reliefs not withdrawn during an enquiry. Repayments however may be withheld. HMRC recommends that all staff complete the fit & proper helpsheet & sign the declaration. Evidence of charity support.

39. Charity Trading • Incidental trading exemptions • £5,000 • < £25% of total income ( up to £50k max) • Set up a company to avoided tainted activities & tax arising • Transfer of profit by gift aid – accepted by HMRC • Segregates income streams although increases admin costs

40. VAT issues • VAT not linked to charity structure • VAT advantages very limited & complex • 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

41. Current Issues 1. SORP – Small Charity concessions Appendix 5 – Accounting for smaller charities Below Audit threshold ( <£500k ) SOFA – Resource classifications (incoming & expended) to suit their circumstances SOFA – Notes restricted as above e.g. Support cost/ apportionment/ Income analysis Notes – Staff emoluments not needed in £10k bands from £60K upwards Trustees Annual Report (TAR ) as follows…

42. Current Issues1. SORP – Small CharitiesTAR Reference & Administrative Details [Registered] Name Other Names used Registration Number [Charity] [Company] Principal office address Registered address [charitable company] Charity Trustees [up to date of report] ……………………Audit Threshold………..………………………………………… Senior Staff Name & Address of Professional Advisers [Bank] [Solicitor] [IE] [IFA]

43. SORP – Small Charities TAR Structure Governance Management Nature of Governing Document and how constituted Recruitment method for trustees …………………………………..Audit Threshold……………………………………. Trustee induction and training policy/procedure Organisation structure and how decisions are made Relationship with wider networks Major risks

44. SORP – Small CharitiesTAR Objectives and Activities Summary of objects in governing document …………………………………..Audit Threshold……………………………………. Aims and differences seek to make Main objectives in the year Strategies to achieve these Details of significant activities Tie in with ‘charitable activities’ note Grant making policies Programme Related Investment policies Use of volunteers

45. SORP – Small CharitiesTAR Achievements and Performance Main achievements in the year ……………………………………………….. Audit Threshold……………………………………. Performance against objectives Qualitative Quantitative Indicators Measures Charitable activities Fundraising performance Material expenditure for future years Investment performance Matters outside charity’s control

46. SORP – Small CharitiesTAR Financial Review Reserves policy Funds in deficit ………………………….Audit Threshold……………………………………. Principal funding sources How expenditure supported key objectives Investment Policy

47. SORP – Small CharitiesTAR Plans for future periods …………………….Audit Threshold……………………………………. Aims and key objectives Planned activities

48. SORP – Small CharitiesTAR Funds held as Custodians Assets held Name & objects of charity on whose behalf held and how this fits in with their objects Arrangements for safe custody and segregation

49. Current Issues2. 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

50. Current Issues3. 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