Route changes for charities
1 Sep 09
Christine Scott looks at the likely impact of proposed changes to accounting regulations on Scottish charities – and those further a?eld
by Christine Scott
There are more changes on the way for charities and their accountancy advisers as the Scottish Government:
- finalises its plans for updating the Scottish charity accounting regulations 2006
- explains how it intends to address the unintended prohibition on the purchase of trustee indemnity insurance and
- sets out possible future changes to the Charities and Trustee Investment (Scotland) Act 2005.
The exact timing of these changes is unclear, although changes to the Scottish charity accounting regulations are expected to be in place for 1 April 2010.
Changes to the Scottish charity accounting regulations
Some of the changes to the accounting regulations are less certain than others. Top of the list of likely changes is the introduction of a requirement for charities to set out in the trustees’ annual report how they provide public benefit. This would mandate what is already good practice guidance from OSCR. Also expected are:
- An audit requirement for group accounts which had been omitted unintentionally from the original regulations. In practical terms most parent charities preparing group accounts would have been audited anyway on the basis of audit requirements placed on the accounts of the parent charity.
- A change in the definition of “gross income” for the purpose of applying the group accounts and audit threshold; in all likelihood, the definition will be extended to include permanent endowment funds, which are currently excluded from the definition. This change would have the effect of reducing both thresholds, although the actual reason for the change is confusion over the existing definition of “total recorded income”. However, it is possible that any reduction in thresholds would be mitigated by giving charities a year’s grace to allow for one-off peaks in income.
Other changes are being considered, but the thrust of the consultation is that the Scottish Government is very much open to the views of stakeholders before deciding how to proceed. .
An increase in the threshold for the preparation of Charities SORP accounts is a possibility, which would thereby increase the number of charities eligible to prepare their accounts on a receipts and payments basis. Relief from preparing SORP accounts may also be given to those charities which exceed the threshold for one year only.
Changes to trustee indemnity insurance provisions.
An unintended consequence of the 2005 Act was the prohibition on the purchase of trustee indemnity insurance. Although OSCR has made it clear that no regulatory action would be taken against charities which purchase indemnity insurance, the anomaly in the law has remained and the sector has continued to be uncomfortable with the status quo. In the absence of parliamentary time to amend the 2005 Act directly, a provision has been included in the Public Services Reform Bill, introduced in May this year, amending the 2005 Act and removing the prohibition. The wording in the Bill mirrors the requirements already in place for English and Welsh charities, which were introduced by the Charities Act 2006, and is therefore unlikely to be subject to revision. This change in the law is not expected to be effective until April 2010 or later.
Future changes to the Charities and Trustee Investment (Scotland) Act 2005.
The Scottish Government intends to make further changes to the 2005 Act at some point in the future. The changes will give OSCR powers to assist charities in situations not foreseen in the Act, or increase the transparency of the regulatory framework. No timescale has been set for these changes as a suitable legislative vehicle has not yet been identified.
Key among these changes are plans to allow OSCR, with the permission of the charity concerned, to:
- appoint charity trustees to enable a charity to continue to operate
- amend a charity’s constitution beyond the existing arrangements for the purpose of improving the charity’s governance and administration
- approve the reorganisation of restricted funds where the charity’s constitution does not enable an amendment.
OSCR is also likely to be given the power to amend directions issued to charities which it considers to have failed the charity test, requiring such charities to take the steps it considers necessary for the purpose of meeting the test. At the moment, once a direction is issued, it is set in stone and there is no opportunity for OSCR to reflect on its decision or extend the deadline for compliance with the direction. Charities receiving a direction may be given the power to question the issue of a direction or to ask for it to be reviewed. These changes should prevent charities being removed from the Scottish Charities Register prematurely.
Additionally, ICAS has recommended that the Scottish Government considers removing the requirement for English and Welsh charities registered with OSCR, which already fall within the scope of the Charities Act 1993, from having to comply with the Scottish charity accounting regulations.
This would prevent technical non-compliance with the detailed requirements of these regulations, such as references to Scottish legislation, without reducing in any real sense the accountability of these charities. This recommendation is reflected to an extent in the recommendations of the Calman Commission on Devolution.
Issues for charity trustees and their advisors to think about now or in the near future
- Check that gross income for the purposes of establishing external scrutiny or group accounts requirements is being interpreted correctly under the current version of the 2006 accounting regulations. The consultation paper clarifies that gross income excludes permanent endowments but otherwise includes grants or donations for the purchase of fixed assets. Beware, as the definition is likely to be amended from 1 April 2010.
- For Scottish charitable companies receiving an audit, ensure that the audit is undertaken under both company law and charity law. The basis for the audit of charitable companies is currently open to interpretation and OSCR and the APB take the view that an audit under charity law only, can be undertaken for companies below the company law audit threshold. ICAS takes the view that it is good practice for Scottish charitable companies to be audited under both Acts. Engagement letters and auditor’s reports should also reflect the requirements of both Acts.
- Look out for the Public Services Reform Act and its implementation timetable to ensure that terms of trustee indemnity insurance policies comply with the new provisions. In the meantime, check the proposals set out in Section 99 of the Public Services Reform Bill which is available on the Scottish Parliament’s website.
- All charities, including English, Welsh and Northern Irish charities registered with OSCR, should keep an eye on CA Magazine and the technical, tax and research pages of the ICAS website for further news on the implementation date and final changes to the 2006 accounting regulations.
Calman Commission recommendations
The Calman Commission received evidence on the difficulties arising for charities from the existence of three, possibly four, definitions of “charity” and “charitable purposes” within the UK. Different definitions exist within Scottish and English charity law and within UK tax law. A fourth definition has been developed for Northern Ireland, although the new regulatory regime for charities here is not yet fully established.
There are also additional burdens placed on UK charities established outside Scotland but operating in Scotland through having to register with OSCR, comply with its monitoring regime and comply with the Scottish charity accounting regulations. Steps taken by OSCR to minimise the burden of dual regulation on English and Welsh charities are to be welcomed but the 2005 Act means an element of active regulation is still required.
The Commission has made two significant recommendations about charity matters reflecting these issues:
- There should be a single definition of each of the expressions “charity” and “charitable purpose(s)”, applicable for all purposes throughout the United Kingdom. This should be enacted by the UK Parliament with the consent of the Scottish Parliament.
- A charity duly registered in one part of the United Kingdom should be able to conduct its charitable activities in another part of the UK without being required to register separately in the latter part and without being subject to the reporting and accounting requirements of the regulator in that part.
The recommendations are intended to reduce the burden on charities of overlapping UK regulation without reducing its effectiveness, damaging public confidence or placing charitable assets at risk. In seeking to achieve these worthwhile objectives, those tasked with addressing these recommendations will need to consider the practicalities of doing so and the political sensitivities surrounding the devolved arrangements.
Christine Scott us assistant director, charities and public sector, ICAS