Developments in the not-for-profit sector

The second SORP bulletin was issued by the Charity Commission on the 5 October 2018. This means that the requirements regarding the need for comparatives for a number of charity specific notes, that the consultation gave warning of, are now in place with immediate effect (ie for accounts for reporting periods beginning on or after 5 October 2018). The second ‘immediate’ requirement relating to the recognition of payments made by deed of covenant or under gift aid and the tax treatment of those items, whilst now required by the bulletin, merely brings the SORP in-line with the existing requirements of FRS 102 and it is anticipated most charities, where it is relevant, will have already adopted those changes. The final immediate change is the removal of the undue cost and effort exemption relating to assets which have significant components with different useful lives. Again this was aligning with FRS 102 and already applicable for charities preparing accounts under that standard.

Overall, there has been little change since the consultation and our charity alert issued in March provides further guidance on the main impacts of the bulletin.

Whilst headlines regarding new codes of corporate governance can largely be disregarded by charities, except with regard to considerations of best practice, the Companies (Miscellaneous reporting) Regulations 2018 (the draft Regulations) now require action from large private companies which will include the largest charitable companies. Subject to approval by parliament these regulations will apply for reporting periods starting on or after 1 January 2019.

• All large companies must include a section 172(1) statement in their strategic report which describes how their directors have complied with their duty to promote the success of the company for the benefit of its members whilst having regard to the matters set out in section 172(1) (a)-(f). These matters include a number of non-financial considerations.
• Align crisis management structure, process and documentation with other aspects of organisational resilience, such as business continuity and incident management.
• All companies of a ‘significant size’ must disclosure their corporate governance arrangements in their directors’ report and on their website, including whether they follow any formal code.

Read more by Deloitte on the section 172 requirements in our Need to know publication or the June 2018 Governance in brief.

The Criminal Finance Act 2017 came into force in September 2017 and introduced two new ‘corporate criminal offences’, enabling the easier prosecution of businesses which fail to prevent the facilitation of UK or overseas tax evasion. There are strict financial penalties for getting it wrong and the risk of reputational damage.

This legislation applies to all companies and businesses and therefore also captures charities that are incorporated, for example those limited by guarantee, charitable incorporated organisations and community interest companies.

The six guiding principles which should underpin any defence are:

• Risk Assessment
• Proportionate Procedures
• Top level leadership
• Due diligence
• Training and communication
• Monitoring and review

For those who have not yet initiated a risk assessment, this is a matter of urgency. For other charities it may be time to review that initial assessment and ensure that all areas of operations are captured, assessed and procedures developed and in place.

Read more by Deloitte on the Corporate Criminal Offence.

Read the draft Code of Ethics

The Code of Ethics has been developed by the National Council for Voluntary Organisations (NCVO) for consultation. The code is intended to be complementary to existing sector codes such as the Charity Governance Code, as well as individual charities’ codes or policies. It is not intended to replace their own definitions of values and codes of conduct. It is hoped that the code will make charities more relevant and accessible for beneficiaries.

The principles of the draft code are:

• Beneficiaries first
• Integrity
• Openness
• Right to be safe

The principles are straightforward and the challenge for charities will come in assessing how they uphold those principles and how procedures and policies are embedded into the culture and ethos of the organisation. The Code also challenges charities to make public, not only their annual accounts, but also their approach to safeguarding, bullying and harassment, and the complaints procedure. It will be important that procedures are in place to action and monitor these public policies.

In July 2018, the Charity Commission published an interim update on its safeguarding taskforce. It confirmed that it received 620 safeguarding related reports in April and May 2018 compared to 196 during the same period in 2017.

• 1,152 reports of serious safeguarding incidents received between February 2018 and May 2018, compared to 1,210 during the whole of 2016/17, and 1,580 during 2017/18
• 734 new cases have been opened relating to safeguarding concerns

The taskforce has been undertaking a deep dive of historic records from 2014 to 2018 and has now analysed 95% of those interviews. No cases have so far been identified where the Commission has been required to take immediate action or where it has been necessary for the Commission to engage with authorities about any ongoing risk or unreported criminality. A report setting out the key findings will be published at the end of the review.

Read the Charity Commission update.

The Charity Commission has reminded all charities that the deadline for submitting the 2017 annual return is the 31 October 2018. If your charity has not yet submitted its return it should be done by the end of October. Click for the link to the Charity Commission website to submit your annual return.

The new questions

Salaries and benefits in charities: Charities are required to give a breakdown of salaries across income bands and the amounts of total employee benefits for the highest paid member of staff. The individual salary details will not be made public.

Overseas expenditure: These questions are to establish how charities transfer and monitor funds sent overseas. The Charity Commission recognised that some changes may be required for record keeping and therefore questions about methods of transferring money outside the regulated banking system, and about monitoring controls and risk management, will be optional for the 2018 return and mandatory for 2019.

Income from outside the UK: These questions are about the breakdown of sources of income from each country a charity receives funds from. The options available are:

• overseas governments or quasi government bodies
• overseas charities, non-governmental organisations or non-profit organisations (NGOs/NPOs)
• other overseas institutions (for example private company donations)
• individual donors resident overseas
• unknown

As with the question on money transfers the Charity Commission recognised that some charities would need to make changes to their financial systems to collect and sort the information more easily. The categories highlighted in bold are therefore optional for the 2018 return, although they will be mandatory in 2019.

Read the Charity Commission information on how to prepare your annual return.

The Charity Commission asked Populus to update their research into Trust in Charities. The last report was issued in 2016. The headline is that public trust and confidence in charities has continued to decline (though only slightly) from the prior year and stands at 5.5/10. The most significant fall was between the 2014 survey where trust was at a high of 6.7/10 and the 2016 survey where the impact of the various fundraising scandals meant public trust and confidence had dipped to 5.7/10. However, it is clear that charities still need to rebuild and manage their reputation and impact. The Charity Commission's conclusions are clear it is not just transparency (although that is still important) but authenticity.

"It’s about organisational values and ethos. The public want to know that charities are what they say they are."

Some of the key findings from the survey include:

• Trust matters to donation behaviour and those who feel their trust in charities has decreased (4 in 10 of the population) are giving less.
• In both 2016 and 2018 scandals in the media involving major humanitarian charities occurred just before survey polling took place.
• Only Doctors, the Police and the Man/woman in the street are trusted more than charities.
• Transparency still rates highest when people are deciding whether to trust a charity.
• 62% of respondents said that their trust had decreased due to media stories and 60% due to too much money spent on advertising, wages and admin.
• The regulator has an important role in increasing trust.

Read Trust in Charities 2018.

HMRC have set out their intentions to become one of the most advanced tax authorities in the world by enhancing the customer experience whilst also closing the tax gap. They aim to do this through the Making Tax Digital initiative, which will transform how HMRC deal with their customers.

Who does this affect?

Making Tax Digital (MTD) covers both individuals and businesses across a number of taxes. For businesses over the VAT registration threshold, VAT is the first tax selected for digitalisation in the UK. This will take effect from 1 April 2019. For Income Tax and Corporate Tax, MTD will not be mandated until April 2020 at the earliest. There are three key digital components to making Tax Digital for VAT.

1. Digital records

Although this does not mean businesses will have to store each invoice and receipt digitally, the transaction data will need to be stored digitally. This includes an AP and AR transactional listing and a digital VAT account from which the VAT return is prepared.

2. Digital links

VAT returns must have digital links to digital records – spreadsheets can remain, but they will need ‘digital links’ to source systems. HMRC has announced a soft landing period of 12 months, however digital links will be mandatory from April 2020.

3. Digital submission

At present, most businesses submit their VAT returns through manually re-keying into HMRC’s online portal. In line with the move towards digital, the online portal will close from April 2019 and taxpayers will no longer be able to submit VAT returns this way. Instead, all submissions must be done digitally via HMRC’s Making Tax Digital API.

Deloitte can help

We are included on HMRC’s list of software suppliers supporting MTD for VAT and have an online filing solution that provides a simple way to manage and submit VAT obligations.

From the 1 August 2018 changes to the automatic disqualification rules meant that there are more restrictions on who can run a charity. It is a criminal offence for an individual to act whilst disqualified. The Charity Commission updated its guidance in May to assist charities in preparing for the new rules.

A charity must not appoint a trustee who is disqualified unless their disqualification has been waived. Further a charity should have systems in place to identifying trustees who become disqualified after they have been appointed.

The previous rules applied only to trustees, one of the key changes is that now, following the change in August, people who are disqualified from acting as a trustee are also disqualified from holding either the position of chief executive or chief finance officer (or equivalent positions) at a charity. The rules focus on the function of the position and not the title when applying the disqualification criteria.

The second key change is the extension of the automatic disqualification from bankruptcy related reasons, and unspent convictions for crimes involving dishonesty or deception, to include being on the sex offenders register and other unspent convictions such as for terrorism and money-laundering.

It remains possible for disqualified people to apply for a waiver using an online form. The Commission will ask trustees to supply information and support for the individual and will include that as part of their assessment as to whether to grant a waiver. The checklist for individuals is provided by the Charity Commission.

The Charity Commission has provided example re-appointment forms for both trustees and senior management positions and strongly recommends charities to request a declaration from those currently in post that they are not disqualified under the new rules. The disqualifying reasons and the exceptions are set out in full in the disqualifying reasons table.

The consultation has just closed for the new Digital Code of Practice which seeks to support digital skills within charities and increase the take-up of digital activity in charities to help them deliver on their charitable purpose in an increasingly digital age.

It is hoped that the code will make charities more relevant and accessible for beneficiaries, create new opportunities for funders to engage with digital activity and increase collaboration across the sector. It will be free to access and open to all charities and there will be a version of the code for small charities as well as larger organisations. The code will include best practice guidelines as well as practical tips and advice. It will be developed by a steering group of charity leaders (in consultation with the wider sector) including representatives from the Association of Chief Executives of Voluntary Organisations (ACEVO), The Small Charities Coalition, the National Council for Voluntary Organisations (NCVO), Office for Civil Society and the Charity Commission.

The Code of Practice is funded by Lloyds Banking Group and the Co-op Foundation and is due to launch at the end of 2018.