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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
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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
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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)
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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
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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
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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
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Reporting Requirements (2)
• HMRC
- Company tax return – Form CT600
- Forms P11D
- RTI
- VAT Return if registered
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Reporting Requirements (3)
• Charity Commission
- Charity Annual Return
- Charity Accounts
- Changes in Charity details eg changes in trustees
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Charity Accounting and
Reporting
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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
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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
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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
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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
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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
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Contents of “the accounts”
• TAR – Trustees’ Annual Report
• Auditors Report
• SOFA – Statement of Financial Activities
• Balance Sheet
• Cash flow statement
• Notes to the accounts
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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?
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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
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Public benefit
• Required disclosure
• Benefit must be related to the aims of the charity
• Must have regard to Charity Commission guidance
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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
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Fund accounting
A big difference between company accounts
and charity accounts
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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)
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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
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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
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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
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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
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Incoming resources: in more detail
Investment income
• Dividends
• Interest
• Rental income on investment properties
Exceptional items
• Significant
• Non-recurring
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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
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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
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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
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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
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Surplus and deficits
• Unrestricted in year deficit
• Restricted fund surpluses
• Reserves carried forward – the difference between restricted and
unrestricted funds
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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
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Balance sheet: fixed assets
• Categories
- Tangible
- Intangible
- Investments
• Policies to consider
- Cost of valuation
- Depreciation and amortisation
- Capitalisation policy
- Impairments
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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
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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
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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
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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
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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
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VAT
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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
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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
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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
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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!
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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
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The Direct Tax Regime
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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
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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
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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
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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!
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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?
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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.
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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
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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….”
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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
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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
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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
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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
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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*
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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
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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
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And finally…
• Regulatory requirements
• Charity accounting
• Restricted and unrestricted finds
• VAT
• Direct taxation
Any questions?
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Thank you
Contact details:
Christine Wilson, Partner
Moore and Smalley LLP
Email: [email protected]
Tel: 01772 821021
www.cfg.org.uk [email protected]