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Audit Summary Report
Financial years ended
31 March 2007, 31 March 2008 and
31 March 2009
REPORT BY THE EXTERNAL AUDITORS
FARNHAM PARK SPORTS FIELDS
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Page
1 Introduction 1
2 Independence 2
3 Audit status 3
4 Audit findings 4
5 Audit differences 6
6 Charity sector update 8
Your contacts at Mazars in
connection with this report are:
Michael Stewart – Partner
Mobile – 07795 622984
Jason Foxwell – Senior Manager
Mobile – 07795 622985
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1 Introduction
PURPOSE OF THIS REPORT
The purpose of this report is to set out certain matters that came to
our attention during the course of the audit of Farnham Park Sports
Fields for the years ended 31 March 2007, 31 March 2008 and 31
March 2009.
In order to comply with the provisions of International Standards on
Auditing (ISA) 260 – “Communication of Audit Matters to those
Charged with Governance” we are required to report to you our
audit findings and in particular:
• Views about the qualitative aspects of your accounting
practices and financial reporting
• Unadjusted misstatements
• Matters specifically required by the ISA to be communicated to
those charged with governance (such as fraud and error)
• Expected modifications to the auditor’s report
• Material weaknesses in the accounting and internal control
systems and
• Any other relevant and material matters relating to the audit.
RESPONSIBILITIES
The trustee is responsible for making audited financial statements
available.
Mazars LLP as auditors to Farnham Park Sports Fields is responsible for
forming an opinion on the financial statements.
LIMITATIONS
Our audit procedures, which have been designed to enable us to
express an opinion on the financial statements, have included the
examination of the transactions and the controls thereon of the
charity.
The work we have done was not primarily directed towards
identifying weaknesses in the charity’s accounting systems other
than those that would affect our audit opinion, nor to the detection
of fraud.
We have included in this report only those matters that have come
to our attention as a result of our normal audit procedures and,
consequently, our comments should not be regarded as a
comprehensive record of all weaknesses that may exist or
improvements that could be made.
To a certain extent the content of this paper comprises general
information that has been provided by, or is based on discussions
with, management and staff. Except to the extent necessary for the
purposes of the audit, this information has not been independently
verified. The contents of the memorandum should not be taken as
reflecting the views of Mazars LLP except where explicitly stated as
being so.
This report is to be regarded as confidential to the trustee and is
intended for use by it and staff of the charity only. No responsibility is
accepted to any other person in respect of the whole or part of its
contents. Before this report, or any part of it, is disclosed to a third
party our written consent must be obtained.
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2 Independence
ISA 260 “Communication of audit matters with those charged with
governance” requires us to communicate at least once a year
regarding all relationships between Mazars LLP and the Charity that
may reasonably be thought to have a bearing on our
independence.
We have reviewed our independence and confirm that Mazars LLP
is independent within the meaning of regulatory and professional
requirements. In particular the objectivity of our partner, Michael
Stewart and his audit team is not impaired.
Our review included consideration of whether:
• The firm is dependent on the Charity as a client due to the
significance of the audit fee to the firm
• The firm is owed significant overdue fees
• There is any actual or threatened litigation between the firm and
the Charity
• Any benefits have been received by the audit team which are
not modest
• The firm has any mutual business interest with the Charity
• Any members of the audit team have any personal or family
connections with the Charity or officers; or
• Independence is impaired through the provision of services other
than the statutory audit
There were no other services provided to the charity.
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3 Audit status
SCOPE
As auditors of the Charity for the years ended 31 March 2007, 31
March 2008 and 31 March 2009 we are responsible for reporting on
the financial statements of the Charity.
PROGRESS
The audit fieldwork was conducted on site during April 2010.
We would like to take this opportunity to thank the finance team,
particularly Rodney Fincham, for all their support and assistance
during the audit.
The audit work on the financial statements is now substantially
complete and we anticipate issuing a qualified audit opinion for the
years ended 31 March 2007, 31 March 2008 and 31 March 2009 for
the Charity, following:
• Receipt of approved financial statements signed by the Board;
and
• Receipt of a signed letter of representation
Matters arising from our audit that merit your attention are set out in
Section 5.
AUDIT DIFFERENCES
As part of the requirements of ISA 260 “Communication of audit
matters with those charged with governance”, we are required to
report any adjusted audit differences arising from our work. These
are set out in Section 6.
We are also required to report any unadjusted audit differences
and why they are unadjusted, other than those that are “clearly
trivial” to the Audit Committee.
All audit differences which were not “clearly trivial” have been
adjusted in the financial statements.
QUALIFICATION
As we were not appointed as auditors to the charity until 2010, it
was not possible for Mazars to attend the counting of the physical
stock at the golf course shop. There were no suitable alternative
audit procedures that we could practically adopt to provide us with
reasonable assurance over the quantities of stock held at either the
start or end of each financial year. Therefore, we have qualified our
audit opinion arising from this technical limitation in scope. This
qualification is solely in respect of the quantities of stock held.
RISK OF FRAUD AND ERROR IN THE FINANCIAL STATEMENTS
We are required under ISA 240 (revised) “The Auditor’s Responsibility
to Consider Fraud in an Audit of Financial Statements” to consider
fraud risk throughout the audit. In particular we must consider
management arrangements for preventing and detecting fraud
and error.
Fraud risks may include asset sales at under value, suppliers over
billing for goods or services, misappropriation of assets and cheque
frauds, as well as manipulation of financial results.
This work is now complete and has not identified any matters which
we wish to draw to your attention.
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4 Audit findings
4.1 QUALITATIVE ASPECTS OF ACCOUNTING PRACTICES AND
FINANCIAL REPORTING
Accounting policies
Financial Reporting Standard 18 requires that entities should review
their accounting policies regularly to ensure that they are
appropriate to their particular circumstances for the purpose of
giving a true and fair view.
We have reviewed the Charity’s accounting policies, as stated in
the financial statements, and confirm that they are appropriate to
provide relevant, reliable, comparable and understandable
information.
Accounting estimates
The most significant accounting estimates concern depreciation of
fixed assets, valuation of properties, classification of funds, cost
allocation and valuation of stock.
We have reviewed these accounting estimates for the Charity and
conclude that they have been calculated on a basis that is
consistent with our knowledge of the Charity and the sector as a
whole. Although, as noted earlier, we have qualified the audit
reports as a result of not being able to attend the stock take and
gain sufficient assurance over the stock quantities held.
Timing of transactions
Our audit work has been undertaken to test whether transactions
have been recorded in the correct accounting periods.
We have reviewed the basis and calculation of all significant
accruals and prepayments to ensure that the risk of misstatement of
reported results is minimised.
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4 Audit findings
4.2 AUDIT ISSUES
• Cash balances
Due to the nature of the relationship between the charity and South
Bucks District Council, the cash balances of the charity have been
incorporated within the Council’s own bank accounts. This makes it
more difficult for the finance staff to separate those transactions
that relate to the charity and to perform regular bank
reconciliations.
We recommend, to enhance the independence of the charity and
enable greater control over the charity’s funds, that a separate
bank account is set up and all of the charity’s transactions,
wherever practicable, be processed through that account.
• Fixed assets
The charity does not maintain an independent fixed asset register.
To ensure greater clarity over ownership of the charity’s assets, we
recommend that a separate fixed asset register for the charity is
maintained. A register would also provide the charity with a tool to
ensure the charity’s assets are identified and can be physically
traced. Periodic reviews to confirm assets held on the register are
still held and maintained would mitigate the risk of misappropriation.
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5 Audit differences
We are required by ISA (UK and Ireland) 260 “Communication of Audit Matters to Those Charged with Governance” to communicate all
unadjusted misstatements, other than those that we believe are clearly trivial, to the trustee. We are also required to report all material
adjustments that management has corrected but that we believe should be communicated to the trustee to assist it in fulfilling its
governance responsibilities.
The tables below sets out the adjusted audit differences that we identified following the completion of our audit of the Charity for the
years ended 31 March 2007, 31 March 2008 and 31 March 2009.
SOFA Balance sheet
Adjusted audit differences Debit
£’s
Credit
£’s
Debit
£’s
Credit
£’s
31 March 2007
Dr Debtors
Cr Expenditure
NNDR refund – charity relief due for the year
23,069
23,069
31 March 2008
Dr Debtors
Cr Expenditure
NNDR refund – charity relief due for the year
23,696
23,696
31 March 2009
Dr Debtors
Cr Expenditure
NNDR refund – charity relief due for the year
2,846
2,846
Dr Cash
Cr Trade creditors
Creditor balance for asset under construction
recorded against cash
56,250
56,250
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5 Audit differences
Difference which affects 31 March 2007, 2008 and 2009
Dr Long term debtors
Cr Unrestricted funds brought forward
Prior year adjustment in respect of VAT debtor from
previous years
273,384
273,384
Dr Long term debtors
Cr Unrestricted funds brought forward
Prior year adjustment in respect of NNDR debtor from
previous years
186,687
186,687
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6 Charity Sector Update
SUMMARY OF TOPICS COVERED:
• 6.1 The Comprehensive spending review – Mazars response
• 6.2 The future of financial reporting for the not-for profit sector
• 6.3 i-XBRL - Implications for charities
• 6.4 Merger activity
• 6.5 The use of endowment funds
• 6.6 The definition of charitable purposes and the fit and proper
persons test
• 6.7 Conflicts of interest and loyalty
• 6.8 Payments to overseas bodies
• 6.9 VAT update
• 6.10 Direct tax update
• 6.11 Pensions planning – National Employment Savings Trust
• 6.12 Charity Commission – Recently updated documents
6.1 THE COMPREHENSIVE SPENDING REVIEW – MAZARS RESPONSE
The reductions in the budgets of government departments will lead
in turn to reductions in the funding of many of our charities,
especially the medium-sized and larger ones.
This will reduce the amount of work which these charities can do for
the benefit of the public. This comes at a time when the need for
the services of charities is greater than ever, for instance to support
those with unemployment, money and housing worries and to meet
the needs of an ageing population. The impact on charities will be
greatest on those services which the Government does not have a
statutory responsibility to deliver.
We advise a charity to:
• Look creatively at its strategy in the light of future funding levels
• Look critically at the activities which it carries on and decide
which of these can continue to be delivered and which can’t
• Think about the resilience of the trustee and staff teams to the
challenges which the Spending Review is bringing. How
adaptable is the charity to the new funding environment and to
the likely increase in the needs of its beneficiaries? How well will
it cope with these changes for the benefit of those it works with?
6.2 THE FUTURE OF FINANCIAL REPORTING FOR THE NOT FOR PROFIT
SECTOR
Currently, IFRS apply to all UK companies which are listed on a
recognised stock exchange. The ASB has proposed that IFRS should
apply to all organisations in the UK whose financial statements are
intended to give a true and fair view, which would include many
charities. Specifically, this would include all charities who prepare
their accounts on the accruals basis.
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Those organisations in the UK which are not listed on a recognised
stock exchange and which are not ‘Publicly Accountable entities’
(as defined) would be able to adopt a simpler IFRS standard
designed for small and medium-sized entities (the IFRS SME
standard).
IFRS generally have been designed for businesses trading for profit,
whereas the motivation for charities is social and altruistic rather
than financial. The ASB recognise this and proposes the
development of a standard for public benefit entities (PBE’s), which
would include charities.
We concur with this approach and believe that the definition of
Publicly Accountability should exclude charities. Instead, charities
should be accountable to stakeholders through a sector-specific
standard and supporting guidance. This standard and guidance
should recognise the particular transactions which are common in
charities (for instance fund accounting) and the particular reporting
needs of stakeholders (such as narrative reporting of charitable
purposes, objectives and activities for the public benefit).
We do see a future role for the charity SORP alongside a standard
for public benefit entities to deal with issues such as the form and
content of charity accounts and charity-specific disclosures such as
the authority for trustee benefits.
The present position
The ASB consulted on its Policy on the Future of UK GAAP in February
2010 and received over 150 responses, including a submission from
Mazars.
There was a general acceptance that UK GAAP had run its course
and that the IFRS for SME’s is the foundation for a suitable
replacement. There is a need to develop a standard for PBE’s and
the ASB has asked its Committee on Accounting for Public Benefit
Entities (CAPE) to start work on this. Certain SORP’s should be
retained, probably to include the charity SORP. The ASB should
retain its role to carry out limited reviews of draft SORP’s and give a
negative statement on compliance with accounting practice and
standards. We welcome this as the limited review and negative
statement by the ASB give credibility to the charity SORP and others.
We believe that the Charity Commission will welcome the ASB’s
response to the consultation, perhaps with one reservation, the use
of the words ‘public benefit’ in the term Standard for Public Benefit
Entities. A charity is established for exclusively charitable purposes
for the public benefit. Public benefit is therefore a key test of
charitable status. It could be confusing if public benefit is also used
to describe the wider not-for-profit sector. Perhaps a new term
should be used for not-for-profit entities to avoid this confusion?
The ASB accepts that the original timetable for IFRS for SME’s was
too ambitious and now proposes that the standard is effective for
accounting periods beginning on or after 1 January 2013.
The timeline for the development of IFRS for PBE’s together with an
IFRS-based charity SORP is still to be developed. IFRS for PBE’s should
not be delayed for too long after the introduction of IFRS for SME’s.
The public should not get the impression that the charity sector is
slow in adopting best practice in accounting and reporting or that
public benefit accounting has a lower priority than that for
commercial organisations.
We will continue to update you on progress in this area as this
project progresses.
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6 Charity Sector Update
6.3 i-XBRL - IMPLICATIONS FOR CHARITIES
For charities who are required to file a UK tax return or with trading
subsidiaries which prepare and file UK tax returns, this will become a
familiar acronym.
It is a new initiative driven by HM Revenue & Customs. HMRC are
introducing compulsory electronic tax filing which requires the tax
computations and financial statements to be filed on-line in a
specified format. The format specified is “in-line extensible business
reporting language”, or iXBRL.
The iXBRL format provides a unique computer readable code or tag
for every piece of information in a set of statutory accounts.
What does it mean for you?
• From 1st April 2011 financial statements that accompany tax
filings must be in iXBRL format
• It is applicable to all companies’ accounting periods ending
after 31 March 2010
• It will impact the accounts preparation process
How will your accounts be tagged with iXBRL?
We expect that all programs designed for the production of UK
accounts will be updated to include embedded iXBRL coding
acceptable to HMRC. If you use this type of software, most entries in
accounts will be tagged automatically.
Where you produce your own accounts using Word or Excel there
will in effect be an additional step in producing accounts to make
them iXBRL compliant. You may choose to add the iXBRL tagging
yourself, using a program that can do this for Word or Excel format
accounts, or you can send your accounts to a third party offering a
tagging service.
What are Mazars doing?
Financial statements produced by Caseware, the program Mazars
used for accounts production, will have in-built XBRL tagging in time
for December 2010 year end accounts.
We recognise that not all accounts can be prepared using
accounts production software. So, as conversion or iXBRL “tagging”
packages are released, we will be evaluating and comparing the
various solutions as they become available to the market. We will be
offering clients a service of tagging their accounts.
6.4 MERGER ACTIVITY
During recent months there have been increasing numbers of
mergers and other forms of co-operation and collaboration. What
are the forces driving this?
Most charities work in collaboration with other charities. For
instance, a charity which supports rough sleepers in terms of food,
clothes and accommodation may also help their service users to
access healthcare and gain employment or go into further
education. The rough sleeping charity may lack expertise in
healthcare, employment and education. It may not wish to invest
heavily in building up expertise outside its core activity of care for
vulnerable people. Instead, it may prefer to work with one or more
charities which specialise in healthcare, employment and
education.
Co-operation may be more formal and on occasion charities have
joint purchases , for example of office premises. This spreads the cost
and financial risk across both charities as well as allowing the two
organisations to share services such as facilities management.
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Merger is then the final stage of this process, with two organisations
becoming one. Some mergers are operational, others are strategic
and both have a place, depending on circumstances. A charity
with operating problems, whether of governance, service delivery,
fundraising or continuity of statutory funding, may need a more
stable partner to help solve its problems. The partner may bring
trustee experience, service delivery skills or financial resources. If the
merged organisation would be more stable than the two
separately, there could be merit in merger. For instance, there may
be a stronger board of trustees after merger or central and service
delivery costs which could be cut through streamlining these
activities. Time is often of the essence to deal with the underlying
operational problems before these escalate to a size which cannot
be resolved. In reality, these operational mergers are often
takeovers of the weaker charity by the stronger one.
In contrast, a strategic merger is usually one of equals. Cost savings
are not the primary driver and the timetable is not urgent. The
charitable objects and activities for the public benefit will be
complementary and the culture of the two organisations will be
compatible. The two organisations may have worked together or
know each other well. There may be close contact between the
two sets of trustee or management teams. Some trustees may sit on
both boards and representatives of each may attend the other’s
board and management team meetings by invitation, as observers.
Generally, the motivation is to pool resources for the benefit of the
two sets of beneficiaries or service users. This may be through better
or wider services, through winning more funding or through
advocacy with a single voice. Cost saving is a benefit, but not the
key motivation for merger.
Which factors can de-rail a potential merger? Cultural differences
can be insurmountable, although this factor may prove to be less
important as the public spending cuts bite. Trustees and the
management teams of both charities must work together for a
merger to happen, even though a number of individuals may be
losing their role or post. It helps, for instance, if one chair and one
chief executive are looking to stand down, leave or retire.
One merger partner may have a pension deficit in a defined
benefit scheme, either on its balance sheet or off the balance sheet
in a multi-employer arrangement. The size of the deficit may
counteract the strategic benefits which have been identified. We
expect to see considerably more mergers over the next few years.
Some will be driven by financial pressures or succession issues.
Others will aim to consolidate a part of the sector which is currently
fragmented and there is benefit in consolidation to a smaller
number of charities in operation.
6.5 THE USE OF ENDOWMENT FUNDS
Currently, we are seeing a great deal of interest by charities in
spending their permanent endowment. Obviously each case is
different but, typically, the trustees will be seeking more flexibility in
how they can use the funds they are responsible for, especially at
this time of severe financial constraint.
Under charity law (section 96(3) of the Charities Act 1993), a charity
has permanent endowment unless it can spend all its property
(money) on its charitable purposes without having to distinguish
between capital and income. Turning this round, a permanent
endowment is capital which can’t be spent by a charity.
There are two sorts of permanent endowment:
• Investment permanent endowment is capital which is to be held
to provide income for the charity and which cannot itself be
spent as income. Usually, the document which set up the
permanent endowment will specify that the capital should be
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6 Charity Sector Update
invested and the income spent on specified charitable purposes.
Note that, usually, the underlying investments can be sold and
the proceeds used to buy alternative investments, providing that
the capital is held and continues to provide an income for the
charity.
• Functional permanent endowment is capital which is to be used
for a specific purpose or purposes of the charity. Examples are
village halls, recreation grounds and historic buildings. The
distinction between capital and income does not usually apply
as there may be no income arising on the capital.
The distinction is important in terms of how the permanent
endowment can be used. An investment permanent endowment is
an administrative restriction. If the Charity Commission is satisfied
that removal of this restriction is in the best interests of the charity,
the Charity Commission can remove the restriction by making an
Order. In the case of a functional permanent endowment, the
trustees may wish to sell the asset and use the proceeds for a
purpose other than replacement of the endowment in question.
This would involve a change of purpose. The Charity Commission
would need to make a Scheme to change the purpose, for
instance to the general purpose of the charity.
A permanent endowment can be difficult to recognise. If there is
nothing to indicate that there is a restriction on spending capital,
the Charity Commission will usually agree that all the assets may be
spent. Permanent endowment is normally created in the governing
document of the charity or in some other document, such as the
deed of gift of shares or the conveyance of a property.
There is a statutory power for a charity to spend some or all of its
permanent endowment. The trustees need to be satisfied that by
spending capital, the charity will be able to carry out its charitable
purposes more effectively. Nearly always, the Charity Commission
will have to give its approval to the use of the statutory power. As
well as ensuring that the necessary resolutions have been passed by
the trustees, the Charity Commission will need to be satisfied that
the reasons which the trustees give support their decision to spend
the capital. The Charity Commission will also need to be satisfied
that what is proposed is in keeping with the original spirit of the gift.
It follows that the Charity Commission are more like to agree to a
use of the statutory power to spend capital for an older
endowment, say one which is over 100 years old, than for one
created comparatively recently. In the case of a recent
endowment, it would be harder for the trustees to argue that
circumstances have changed in a way to justify departing from the
wishes of the donor.
We have been working with our clients who wish to spend their
capital, advising on the case to be made and working with the
Charity Commission to gain their approval. Our approach is
cautious. Where there is doubt or uncertainty, we work alongside
the Charity Commission for their clarification, for the benefit of
current trustees and those who may be appointed in the future.
6.6 THE DEFINITION OF CHARITABLE PURPOSES AND THE FIT AND PROPER
PERSONS TEST
In the Finance Act 2010, the tax exemptions for charities and the
reliefs for gifts to charities have been extended to similar
organisations in the EU, Norway and Iceland. In order to achieve
this, the definition of a charity for UK tax purposes has changed.
A charity (including a UK charity) must now meet 4 conditions.
1 It must be established for charitable purposes only, which
now has the same meaning as for charities in England and
Wales in section 2 of the Charities Act 2006.
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2 It must be within the authority of a UK court or one of a
corresponding jurisdiction in the countries concerned.
3 It must comply with any requirement to be registered under
the law of the country concerned. For a UK charity, this is the
registration requirement under the Charities Act 1993.
4 Anyone having the general control and management of the
administration of the charity must be a fit and proper person
to hold that position.
The fourth condition is called the management condition and those
charged with this responsibility are called the managers for the
purpose of the Fit and Proper Persons test. The link to the Fit and
Proper Persons test is in the basic Guide:
http://www.hmrc.gov.uk/charities/guidance-
notes/chapter2/model-dec-ff-persons.pdf
The detailed guidance on the Fit and Proper Persons test follows at:
http://www.hmrc.gov.uk/charities/guidance-notes/chapter2/fp-
persons-test.htm
The new condition applies to Gift Aid with effect from 1 April 2010
and is due to be extended to other tax reliefs later in 2010.
Currently, it applies only to charities who claim repayment of tax
under gift aid. The guidance on Fit and Proper persons is relevant to
trustees, employees and volunteers of a charity who claim tax relief
or exert control over how charitable funds are spent. The term
general control and management should be interpreted widely. It
includes those who are able to exert direction or influence the way
a charity is run and how it spends its money. For a small charity, the
managers for the purpose of the Fit and Proper Persons test are likely
to be the Chair, Treasurer, Secretary and other members of the
management Committee. For a larger charity, the managers may
well be the trustees and the senior management team.
The aim of the Fit and Proper Persons test is to ensure that those who
claim tax relief and control how charitable funds are spent do not
misuse their position for fraudulent or other illegal purposes.
Fit and Proper person
There is no definition of a Fit and Proper person. HMRC has
discretion as to whether a failure of the fourth condition of the
definition of a charity affects the status of the charity. HMRC has
published guidance on how it will interpret and apply this condition.
New charities applying for registration with HMRC may have a new
form to complete called HMRC Charity Application form (ChA1).
Charities which claim gift aid for the first time will be asked to
complete this form. This replaces the former procedure where a
charity’s eligibility for charity tax relief was checked through
correspondence. At the time of writing, form ChA1 is being revised,
see the HMRC website for details. The requirement is to provide
details to NMRC of the Authorised Official and between two and
four Responsible Persons, see below,
A charity with an existing HMRC charity reference number will not
need to complete form ChA1. Such a charity need not do anything
until it needs to notify HMRC of changes to its details, such as its
Authorised Official and two to four of its Responsible Persons, see
below. The form to use is form ChV1, the Charities Variations form.
What should an individual charity do?
HMRC’s general presumption is that the trustees of a charity would
not knowingly appoint an individual who is not a fit and proper
person. HMRC will not routinely ask charities to demonstrate that
their managers are fit and proper persons. However, HMRC does
expect charity trustees to be able to demonstrate that they have
given proper consideration to the suitability of managers and that
the managers are fit and proper persons. There are two aspects,
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therefore, what procedure to follow when appointing a new
manager and how to let HMRC know about its managers?
There is no statutory procedure for a charity to follow when
appointing a new manager, recognising that in this context, the
definition of ‘manager’ covers potentially a wide range of
individuals. Current best practice for current managers and on
appointment of potential managers could be:
• To ask current managers to read the Basic Guide above
• To ask current managers to sign the model declaration (below)
• To ask potential managers to read the Basic Guide above
• To ask potential managers to sign the model declaration
(below)
• If the potential manager refuses to sign the model declaration
and the charity cannot verify their suitability as a fit and proper
person, the charity should re-consider their appointment
• If the potential manager signs the model declaration but
discloses further information, the charity should form a view on
their suitability for appointment and take advice from HMRC
where necessary.
If the new manager is to be the Authorised Official or a Responsible
Person, the charity should advise HMRC on form ChV1, as above.
The Authorised Official is the person that the charity has advised
HMRC is authorised to deal with the charity’s tax affairs. The
Responsible Persons are usually the trustees.
A model declaration is given in the detailed guidance. In signing
the declaration, a manager discloses information about their past
(for instance, whether he or she is disqualified from acting as a
charity trustee or has been involved in tax fraud). A manager also
confirms that he or she will ensure that charity funds (including tax
reliefs) will be spent on charitable purposes only.
These changes are important for charities and the term manager
has wide application for the Fit and Proper test. Trustees should
review their policies and procedures, including documentation and
ensure that these are fully compliant with the Fit and Proper test.
6.7 CONFLICTS OF INTEREST AND LOYALTY
The Charity Commission has just published a Regulatory Case Report
on The Arts Council of England.
In this case, The Arts Council of England made a grant of £10,165 to
one of the charity trustees. This is prohibited by its governing
document, a Royal Charter. The grant was small in terms of the
charity’s total expenditure of over £500 million, but that is not the
point. A prohibition of a benefit to a trustee is absolute and a charity
must put in place the relevant policies and procedures. Trustees
must not get into a position where their personal interests and those
of the charity conflict, unless the conflict and any personal benefit
are properly authorised and the conflict is managed effectively.
So what should a charity do? All trustees should advise their fellow
trustees of any actual or potential conflicts as soon as these arise
and follow the charity’s policy on conflicts. Any trustee benefit must
be duly authorised. Trustees should remember that a conflict may
be of loyalty as well as interest or may concern the benefit of gifts or
hospitality. To help our clients, we have written a model policy of
conflicts of interest, loyalty, gifts and hospitality, which includes an
annual declaration by trustees for the Register of Interests. Please
contact us if you would like a copy.
Conflicts can be common in membership bodies. For instance, a
trustee of the membership body may also be a trustee of one of the
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member organisations. In which charity’s independent interests
should that individual act? A practical solution may be for that
individual to declare the conflict of loyalty through the Register of
Interests and for this declaration to be noted on the agenda for
each trustees’ meeting. The individual concerned (and indeed
fellow trustees) can then judge whether he or she is conflicted and
act accordingly.
If say, the conflicted trustee is trustee of a member in the North West
and the membership charity trustees are considering their members
in the North West, there is a conflict of interest and loyalty and
loyalty to declare but not one which requires managing. There is no
benefit to the charity of the conflicted trustee other than the benefit
of membership which it enjoys, alongside all the other members in
the region. Conversely, the membership charity trustees may be
considering placing a contract for services with one of their North
West members. An arrangement such as this is common in
membership organisations to strengthen individual members by
placing work.
Here, there is a conflict which requires management. The trustees of
the membership charity may agree that the conflicted trustee can
attend the meeting at which the contract is to be awarded. The
conflicted trustee can explain to trustees whether his or her local
charity can deliver the contract. He or she may then be asked to
leave the room whilst the unconflicted trustees discuss and decide
the awarding of the contract.
Best practice dictates that the Chair and Treasurer, at least, of the
membership charity should not allow themselves to be in the
position of having a conflict of interest as described above. It would
be difficult to manage that conflict and also carry out the roles of
Chair or Treasurer. Similarly, less than half (and perhaps considerably
less than half) of the trustees of the membership organisation should
have such a conflict of interest.
Conflicts which are handled properly can be a positive force; for
instance, a trustee with a conflict of loyalty may bring a broader
perspective to a meeting of trustees, thereby helping those trustees
to make a more informed decision on the matter in hand. Trustees
should remember to disclose conflicts of interests and the way in
which these have been managed in the financial statements, as
related party transactions.
Trustees should be aware that conflicts which are not handled
properly can damage a charity’s reputation and also damage
public trust and confidence in charities generally. Rightly, the
Charity Commission takes this matter seriously and so should
trustees.
6.8 PAYMENTS TO OVERSEAS BODIES
Charities have always had to take reasonable steps to ensure that
payments to bodies outside the UK would be applied for charitable
purposes. For such expenditure incurred on or after 24 March 2010,
the charity must take such steps as HMRC consider reasonable to
ensure that the money will be properly applied by the body outside
the UK. HMRC will expect charities to have evidences of the steps
they have taken.
The link to the HMRC guidance is:
http://www.hmrc.gov.uk/charities/guidance-
notes/annex2/annex_ii.htm# 9
Although the HMRC guidance is in a section covering non-
charitable expenditure by a charity, which can result in a tax
liability, the guidance is equally important in making sure that
payments to overseas bodies do qualify as charitable expenditure.
HMRC’s guidance states, with the key words underlined:
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9.1 When a payment is made or is to be made to a body outside
the UK, this will only be considered charitable expenditure if the
charity takes steps that the Commissioners for HMRC consider are
reasonable in the circumstances to ensure that the payment is
applied for charitable purposes….
What should a charity which makes overseas payments do to meet
the new requirement?
The existing guidance from the Charity Commission is still relevant
and can be found at:
http://www.charitycommission.gov.uk/Charity_requirements_guidan
ce/Your_charitys_activities/Working_internationally/Charities_workin
g_internationally_index.aspx
The Charity Commission guidance notes in paragraph 72 that a
charity can work with other organisations, (whether charitable or
non-charitable). The charitable purposes of the other organisations
should be similar or the same as the charity and the project or
activity to be carried out must be the best way of delivering the
charity’s purposes.
In selecting a partner, (paragraph 73 and 74), the charity should:
• Identify potential partners with the same interests, take up
references where practical and assess the viability of the
potential partner
• Make sure that the agreement is in writing, with costed budgets
and forward plans
• Document in the agreement how the local organisation is to
report actual expenditure on agreed programmes of work, to an
agreed timescale
• Identify the anticipated outcomes, how these are to be
reported and, where possible, audited locally.
HMRC then advise that charity trustees need to be able to describe
the steps they have taken to meet the new requirement,
demonstrate that these steps were reasonable and produce
evidence that the steps were in fact taken. It is not sufficient for the
trustees to rely solely on the fact that the overseas organisation is a
charity under the domestic law of the host country.
HMRC will have regard to:
• The charity’s knowledge of the overseas body
• Previous relations with the overseas body
• Past history of the overseas body
The trustees should be able to provide evidence that the payments
to the overseas body have been or will be applied for charitable
purposes. The evidence will depend on the scale of operations and
the size of the sums involved. For a small, one-off payment, an
exchange of letters may be enough, confirming details of the
payment and how it is to be spent, followed by confirmation that
the money has been or will be spent on the purpose for which it was
given.
Where the sums involved are larger or the funding is part of an
ongoing commitment, the trustees will need fuller documentation.
This might include an independent verification of the status of the
overseas body. The trustees of the paying charity may seek a
legally-binding commitment that the funds will be spent charitably.
The trustees should then specify the precise charitable purpose on
which the payment is to be spent, how they will monitor the
spending and how they will satisfy themselves that the money has
indeed been spent on the charitable purposes specified.
The new HMRC provision is an opportunity to for trustees to update
their charity’s due diligence documentation and ensure that it
meets the requirements of the Charity Commission and HMRC.
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6.9 VAT UPDATE
The Charity Tax group has calculated that the VAT rate increase to
be introduced with effect from 4 January 2011 will cost the charity
sector £143 million in irrecoverable VAT.
According to a publication by Liam Byrne and Ian Lucas, The VAT
rate hike will hit smaller charities hardest as those with an income of
less that £30 million per annum will be disproportionately affected as
VAT currently accounts for 3.6% of their income as compared with
2.3% for larger organisations. To add insult to injury, VAT will be
added to certain postal services provided by the Royal Mail from
January next year too.
Do you know how much the increase will cost your organisation?
Whilst January may seem some way away yet, it is worth
considering ways of mitigating the VAT now. Here are some
suggestions which may help soften the blow:
• It may seem obvious, but can you bring forward capital
expenditure before 4 January 2011 to ensure that VAT is incurred
at 17.5%? Equally, can you raise invoices for supplies early where
customers cannot recover VAT?
• Whilst HMRC has implemented Anti-forestalling legislation, there is
still scope to make prepayments for services or goods supplied
after 4 January 2011 provided that the invoice is paid within 6
months and the supply does not exceed £100,000.
• Do you take advantage of all the charitable reliefs available to
charities? Are you charged VAT on printed matter or advertising?
Do you buy your print and design and delivery services
separately? Buying a package of goods from a single supplier
can be VAT efficient and cost effective.
• HMRC has now accept that pay per click sponsored links
appearing on search engine websites are advertisements, and
qualify for zero-rating. It follows that the supply of copyright and
design services associated with such sponsored links fall within
the zero-rating.
• Are you recovering VAT on fundraising costs or fund
management costs? VAT recovery can be achieved when the
fundraising or fund management benefits the organisation as a
whole.
• When was the last time you reviewed your partial exemption
method and business/non business apportionment? Does the
method still reflect the organisation’s activities? Significant
savings can be achieved by agreeing special partial exemption
methods or non business/business apportionments and methods
are worth reviewing periodically.
• Have you considered whether you are applying the correct VAT
treatment to your income streams? Are you receiving a grant or
have you entered into a contract for services? Many
organisations assume that they are receiving grant income which
is outside the scope of VAT whereas in reality they are providing
a service under the terms of the agreement. Whilst this can
create a risk if VAT is not accounted for correctly, it can also
create opportunities where parties to the contract are able to
recover VAT.
• It may also be beneficial to create a VAT group or even to
create separate VAT registrations. Re structuring the organisation
from a VAT point of view may result in significant benefits.
• On a more prosaic level, do you know whether your systems can
deal with a VAT rate increase mid period?
• Finally, the treasury is currently considering whether VAT should
be charged on shared services where charities share back office
staff. Following an earlier ECJ decision it appears that such
services should be exempt from VAT.
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6.10 DIRECT TAX UPDATE
Substantial donors
Draft legislation for consultation on the anti-avoidance rules for
substantial donors will be published later this year and we will
update you when this is finalised.
Gift Aid consultation
Consultation and debate on Gift Aid continues. Some charities want
a composite rate between 20% and 40% instead of higher rate relief
for donors personally. Others, mainly those receiving large
donations, believe that this will reduce the amount they receive, as
donors take account of personal tax relief when making donations.
All generally agree that the administration should be simplified.
6.11 PENSIONS PLANNING - NATIONAL EMPLOYMENT SAVINGS TRUST
2012 will see the introduction of the Government’s national
workplace based pension scheme to be known as the National
Employment Savings Trust (NEST).
The purpose of this initiative is to ensure that employees can retire
with a reasonable basic pension without reliance on State benefit
by providing access to a pension scheme to which employers are
obliged to contribute. In so doing, NEST will create the yard stick
against which existing employer’s pension plans (of all types) will be
judged NEST, and all that is associated with it, will therefore have a
major impact on all employers, including charities.
The Coalition Government has indicated that they may make some
changes to NEST. We do not, however, anticipate a dramatic move
away from the current projected 8% compulsory contribution that
would dilute the value of this initiative, the importance of which is
accepted by all Parties.
The main issue for most employers who provide pension plans for
their staff is that auto enrolment will take effect immediately upon
NESTs implementation, the timing of which will be based on their
number of employees. It will therefore be necessary to test existing
plans against the NEST yard stick to decide how best to meet
prevailing requirements, and what action will need to be taken.
Employers who do not already have a pension scheme in place or
who have a substantial number of employees who have not joined
the company arrangement, must consider the budgetary
implications of auto enrolment. It would be unwise to rely on an
expectation that some employees will “opt out” of the plan as the
reality is that inertia will mean that employees stay in rather than
make an effort to come out.
Whilst future planning will take account of any increased pension
costs, it is equally important to ensure that there is effective
communication with employees so they are aware of the future
cost implications for them and how it will impact on take home pay.
More importantly, it is essential that there is an appreciation that
they will be able to maintain a better life style in retirement
particularly for those who assumed that the State would provide.
NESTco – the Delivery Authority for the new state initiative – will
commence nationwide marketing early in 2011 to ensure that all
employers are aware of its requirements and how they can remain
exempt from them. Similarly, some employers may wish to adopt
NEST as an in-tandem plan where their main scheme has a higher
funding rate and where employees do not wish to pay contributions
to join this enhanced arrangement.
In addition to NEST and auto enrolment, the new Government is
currently finalising the consultation on the tax treatment of pension
contributions for high earners from April. This will take over from the
current anti forestalling measures for those with total earned income
of over £150,000. This will not affect the majority of employees but
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may need to be reviewed where a charity has a final salary
scheme. It may be the case that employers will have to consider
alternative types of benefit, for this small group, which may be less
expensive. This combined with the proposed abolition of a
compulsory retirement age and the necessity to have taken
retirement benefits before age 75 means that employers and
employees alike should take the opportunity to review their current
arrangements.
The Financial Services Authority (FSA) are encouraging increased
employer governance of pension plans and although this has
historically been considered as the domain of occupational pension
schemes, it is commonly felt that those with Group Personal Pension
arrangements should take a similar yet limited approach to the
scheme’s administration, general fund performance and in
particular the overseeing of default funds which are a common
feature of these arrangements.
The charity sector, as for profit organisations, needs to keep an eye
on their employee benefit costs, particularly in the current
economic climate. The changes over the next few years means that
there will be potentially higher costs in the provision of these benefits
and it will be important to ensure that plans provide best value for
money, are appreciated by employees and do not create an
administrative burden on the charity.
Mazars Financial Planning Limited can provide an initial, without
obligation, review service providing some immediate comments on
a client’s current position and any future actions to be considered.
By working with the audit team they are able to provide a rounded
service to ensure that there is no NEST surprise waiting for either
employer or staff. Pensions are a valuable benefit and therefore
should be appreciated accordingly.
6.12 CHARITY COMMISSION - RECENTLY UPDATED DOCUMENTS
There are two clear themes in these updates from the Charity
Commission, to support charities facing financial difficulties and to
set out the Charity Commission’s approach to risk based,
proportionate regulation in the current economic and charity
funding climate:
CC8 Internal financial control for charities June 10
CC8 A self checklist for charities June 10
CC12 Managing financial difficulties and insolvency
in charities
June 10
CC19 Charities and reserves June 10
CC20 Charities and fundraising June 10
CC26 Charities and risk management – a guide for
trustees
June 10
CC36 Changing your governing document January
10
CC39 Accruals accounts pack March 10
CC45 Regulatory Compliance Casework - a guide
for charities and their advisers
March 10
CC46 Statutory Enquiries into charities - a guide for
charities and their advisers
March 10