The key areas covered in this issue are Governance, Compliance, Financial and other Reporting and Taxation.
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The government, Charity Commission and umbrella organisations have initiated urgent work to address the safeguarding challenges within the charity sector, in response to the reports in recent years of abusive organisational cultures as well as revelations about sexual exploitation and abuse of beneficiaries within the international aid sector.
Within this response a report ‘In Plain Sight: Workplace bullying in charities and the implications for leadership’ has been funded by the Department for Digital, Culture, Media and Sport (DCMS) and produced as a collaboration between ACEVO, the Association of Chief Executives of Voluntary Organisations, and Centre for Mental Health.
The investigation and report draws upon the voices of victims of bullying in charities to describe the conditions in which it occurs and might persist, and provides analysis and recommendations for what charity leaders should do to create safer working cultures.
As well as providing a summary of the results of a detailed anonymous online survey returned by over 500 respondents, in-depth interviews with 20 victims of bullying, and personal accounts of victims of bullying, the report also provides information on relevant government and Charity Commission policy and advice as well as other charity sector initiatives.
In its conclusions, the report identifies six sector-specific systemic stressors and three key cultural and relational factors linked to the management of conflict, which appear particular to charitable organisations’ culture and behaviour.
There is zero tolerance in the government response to safeguarding and addressing bullying cultures in both the international sector and domestic charities – it is an absolute requirement for charity leaders to put in place robust and effective systems for internal leadership and management to identify, report, investigate and deal with misconduct, and to remove wrongdoers. The report includes five detailed recommendations covering areas of governance, policy, the regulatory framework and sectoral cultural change.
The report is intended to be read by staff, managers and leaders within the charity sector, as well as policy makers and the victims of bullying who participated in the online survey and interviews. The full report is available from the ACEVO website.
The National Council for Voluntary Organisations (NCVO) has launched a range of free safeguarding resources, supported by other organisations, to help charities create and implement relevant safeguarding plans.
The NCVO resources site recognises that safeguarding is about making sure your organisation is run in a way that actively prevents harm, harassment, bullying, abuse and neglect as well as being ready to respond safely and well if there is a problem. It acknowledges that everyone in an organisation has a role to play in safeguarding and that this should become part of the day to day activities.
This resource is structured as a series of links to web based resources which outline simple steps that charities can take to ensure that they are run in a way that actively prevents staff, volunteers and everyone they come into contact with from suffering harm, harassment, bullying, abuse and neglect.
The safeguarding resources are available on the NCVO know how website.
The Charity Commission has, in
line with the ACEVO and Centre for Mental Health report mentioned, updated its
guidance on safeguarding and protecting people which sets out what charities
should do to protect people who come into contact with the charity through its
work with abuse or mistreatment of any kind.
Although much of the guidance
remains unchanged, the updates include when to consider DBS checks and how to
put into practice policies and procedures, along with signposting to new sector
The full updated guidance can be accessed from the GOV.UK website.
In December 2019, the Charity Commission issued new guidance for charity trustees on when to report incidents involving the charity's partners as a serious incident.
For this guidance, partners include:
The guidance states that “Trustees should make a serious incident report when an incident has occurred involving one of the charity’s partners in the UK or internationally, which materially affects the charity, its staff, operations, finances and/or reputation such that it is serious enough to be reported.”
Although the guidance recognises that it is for the trustees to determine whether an incident is ‘serious enough’, it looks at three scenarios, and incidents within these, which are most likely to trigger the requirement to report a serious incident. The three scenarios are:
The full guidance can be seen on the GOV.UK website.
The Fraud Advisory Panel,
supported by the Charity Commission, has recently published a report ‘Preventing Charity Fraud: Insights and Action’.
Ten years on from a report by the
Fraud Advisory Panel on fraud in the charity sector, the Commission (partnered with
the Fraud Advisory Panel) repeated and extended the scope of that survey,
contacting a representative sample of 15,000 registered charities across England
and Wales. With a 22% response rate, this is the largest ever analysis of fraud
committed against UK charities.
The report on Preventing Charity
Fraud highlights a number of conclusions, including a significant increase over
the 10 years in the detrimental impact of fraud on charities, especially on their
reputation. The report also finds that excessive trust is the main contributory
factor that allows fraud to occur, suggesting more needs to be done to embed a
culture of scrutiny and appropriate challenge.
In response the report highlights
a number of actions for charities including the need to boost resilience, focussing
on preventing fraud rather than waiting until after they’ve fallen victim, and reviewing
their financial controls on a regular basis. It also highlights eight
principles of good counter-fraud practice (see the updated Charity Commission
advice) and provides a Fraud Prevention Checklist which lists nine actions to
be assessed by charity Trustees, staff and volunteers.
report can be accessed from the GOV.UK website.
Linked to the survey and report on
charity fraud, the Fraud Advisory Panel has also published a report ‘Preventing Charity Cybercrime: Insights and
A positive conclusion from the
report is that charities are increasingly aware of the risk of cybercrime.
Perhaps not unexpected, larger charities are more likely to appreciate the
threat, probably because they generally have a greater capability to detect
cybercrime. Many small and medium sized charities are less aware of the
cybercrime threat, and therefore likely to have fewer processes in place to
help mitigate risk.
The report recognises that large
charities are more likely to be the victim of a cybercrime than smaller
charities, with phishing/malicious emails the most common method of attack. It
highlights the need for charities to raise awareness of cybercrime and
encourage Trustees, staff and volunteers to raise concerns, especially where
phishing attacks and malicious emails are suspected. It also emphasises that charities
should clarify responsibility for managing the risk of cybercrime and ensure it
is a governance priority for the Board.
As well as providing various
conclusions and actions, the report also emphasises that public trust and
confidence in the sector relies upon good governance in charities and that
within this, ensuring effective cyber security is a vital component.
The full report can be accessed from the GOV.UK website.
Following the Fraud Advisory Panel reports, the Charity Commission has updated its guidance on protecting your charity from fraud and cybercrime by adding the eight guiding principles for tackling charity fraud:
These eight guiding principles have been presented as a one-page summary which is available from the GOV.UK website.
As a key feature of the 2019 Charity Fraud Awareness Week, the Commission also included a free online awareness hub which brings together all the free information, guidance, videos and case studies as well as enabling charity professionals from across the globe to discuss and share ideas on how to protect the sector. The information is available from the Fraud Advisory Panel resources page.
In its five-year strategy published in October 2018, the Charity Commission set out a new purpose, “to ensure charity can thrive and inspire trust so that people can improve lives and strengthen society”. The Commission’s strategy reflects the fact that the public’s perception of the value of charity is determined by how well charities meet public expectations, with both what they achieve and how they do it.
As charities become more prominent in the delivery of a wider range of services - including many that were previously the purview of government - the Commission believes that it is important, and urgent, to understand the value charities deliver, what determines that value, and what makes charities unique in the eyes of the public.
In September 2019, the Commission, together with Frontier Economics, published a paper to explain the steps that are needed to measure the value of the charitable sector. The paper aims to promote discussion on proper measurement as an important step that would allow the sector to understand its value and to deliver more benefit.
The report identifies five potential components to the value of a charity:
Whilst noting that the charity sector can no longer count on being given an automatic benefit of the doubt, and that the public wants reassurance that charities are behaving charitably and delivering their charitable purposes, the paper does not provide any conclusions on the measurement of value but is presented to promote discussion on this topic.
The paper is available from the GOV.UK website.
In November 2019, the Steering Group responsible for updating and
maintaining the Charity Governance Code published a consultation to inform the
future development of the Code.
Following the publication of the new edition of the Code in
summer 2017, the Steering Group intended to review the contents and impact of
the Code at three-year intervals to make sure that it remained current. However,
the Group have concluded that there is a balance to be struck between
continually updating the Code and potential disruption to those using the Code,
especially as it can take some time to work through all the recommendations.
They are therefore proposing only a light ‘refresh’ of the Code in 2020, with
more far-ranging changes taking place in 2023. In line with this they are
looking to develop a ‘route map’ of suggested changes for implementation in
The current consultation process began on 4 November 2019 and is
set to run until 28 February 2020. Anyone interested in providing their input
to the consultation can do this through the online survey, or
by email or post using the pdf copy of the consultation questions available on the Charity
Governance Code website.
Whilst receiving and holding cryptoassets
is not yet a mainstream activity for most charities, it is certain that some
charities will become the owners of such assets, if not as a matter of policy then
potentially through a gift from a kindly supporter and benefactor.
A UK government backed task force
has recently published a legal statement on cryptoassets and smart contracts
which provides some clarity on the status of such assets under the existing law
– including, for example, how they might be transferred as a gift.
The legal statement provides conclusions on the principal
questions - under what circumstances, if any, would a cryptoasset and/or a
private key be characterised as personal property?
The conclusion states that whether
English law would treat a particular cryptoasset as property ultimately depends
on the nature of the asset, the rules of the system in which it exists, and
purpose for which the question is asked. However it also states:
The legal statement then continues
with a number of ancillary questions, including how title to that property is capable
of being transferred.
HMRC have also published two
policy papers, ‘Cryptoassets: tax for
businesses’ and ‘Cryptoassets: tax
for individuals’. These papers explain how HMRC will tax transactions
involving cryptoasset exchange tokens that are undertaken by companies, other
businesses and individuals. Although much of this is not directly relevant for
charities, both papers confirm that businesses and individuals will not have to
pay tax on non-tainted donations of cryptoassets to a charity. The ‘tax for
individuals’ paper also confirms that cryptoassets will be property for the
purposes of Inheritance Tax.
The legal statement can be accessed from the UK
In September 2019, the government published a new access page for the Charity Commission guidance. As well as providing a list of all Charity Commission ‘CC’ guidance (CC3 to CC49) it also lists the available guidance under six topics:
Within each topic the guidance is further segregated to help readers identify guidance that will be relevant to them, for example the ‘Trustee role and board’ guidance is presented under ‘introductory guides’, ‘essential reading’, ‘detailed guidance’ and ‘other’. The other topics have different but relevant groupings for their guidance documents.
The page also has a link to a search facility which may be helpful to users looking for guidance on specific topics.
The access page is on the GOV.UK website.
For accounting periods commencing on or after 1 April 2019, new legislation has come into force requiring all large companies, including large charitable companies, to include additional disclosures in their annual Director / Trustee reports on their annual energy use and greenhouse gas emissions together with related information.
Charities affected will be those that meet two or more of the following requirements, in either the current or previous financial year, and do not qualify as low energy users:
Charitable companies which qualify as low energy users (defined as a company which consumed 40,000 kWh of energy or less in the United Kingdom) during the period for which the directors’ report is prepared are exempt from the detailed disclosure requirements, although they must state in their report that this is why the information is not disclosed.
For all large companies that do not fall within the above exemption, the additional reporting requirements are set out in the legislation, and require disclosures based on all of the energy use and emissions by the company inside the United Kingdom. For charitable groups, although the basic reporting requirement is for the combined group, there is an exemption to exclude from the report any information which relates to a subsidiary which does not itself meet the reporting criteria as above.
The required disclosures for large charitable companies with no exemption are:
a) the annual quantity of energy consumed from activities for which the company is responsible involving:
i) the combustion of gas; or
ii) the consumption of fuel for the purposes of transport; and
b) the annual quantity of energy consumed resulting from the purchase of electricity by the company for its own use, including for the purposes of transport.
The report must also state the methodologies used to calculate the information disclosed as above, include at least one ratio which expresses the charitable company’s annual emissions in relation to a quantifiable factor associated with the company’s activities, and (with the exception of the first year of reporting) include the comparative information as disclosed in the report for the preceding financial year.
To assist companies affected by this new reporting requirement the government have published some Environmental Reporting Guidelines which are aimed at helping companies both to comply with the new reporting requirements, and to understand the extent of other environmental impacts of the organisation such as water usage and waste. These guidelines can be accessed on the GOV.UK website.
Full details of the new disclosure requirements are set out in The Companies (Directors’ Report) and Limited Liability Partnerships (Energy and Carbon Report) Regulations 2018 which can be seen on the GOV.UK website.
In a monitoring review report published in August 2019, the Charity Commission has expressed concern that a significant proportion of charities are not fully reporting their related party transactions.
The Commission found that, although the vast majority of charities disclosed Trustees’ remuneration and, to a lesser extent, Trustees’ expenses in the notes to their accounts, the disclosure of transactions with persons and entities closely connected to the charity or its Trustees was significantly less complete.
The conclusions are based on three random samples taken from 2017 accounts filed by 262 charities. Compliance was best in the larger (over £1 million income) charities, although even in this group the overall compliance was only 86%.
The Commission notes that the review highlighted that the Trustees of a significant number of charities are not being transparent about related party transactions; any lack of transparency is damaging to public confidence and casts doubt on the integrity of the governance arrangements at a charity. The Commission therefore emphasises that Trustees need to ensure that the related party transaction disclosures provided in their accounts are comprehensive and complete.
The report can be seen in full on the GOV.UK website.
The SORP-making body charged with
developing the Charities Statement of Recommended Practice (the SORP) is
looking for engagement partners that will form key stakeholder groups to help
gather feedback and ideas for change.
Chosen engagement partners will
have an interest in charity financial reporting and the work of the sector, and
will have the opportunity to work with the SORP Committee to make sure that
their views are expressed correctly. The engagement partners will be put into
stakeholder groups based on their main areas of work and will be asked to
Although the SORP-making body's
recruitment to the new SORP Committee has now closed, they are still looking
for engagement partners with applications being invited from donors, funders,
commentators, accountants, Trustees, auditors, independent examiners or
advisors in the UK and Ireland who are interested or knowledgeable about
charity financial reporting.
The closing date for applications
is 31 January 2020 and more information on how to apply can be found on the GOV.UK
In July 2019, new draft off-payroll working rules were published introducing changes to the current regime, known as 'IR35'.
The new rules take effect from April 2020 and require organisations engaging workers via a personal service company (PSC) or other similar intermediary to check whether the individual providing the services should be treated as an employee or self-employed for tax purposes. If these checks show that the relationship is effectively one of employment, and therefore IR35 will apply, the business paying the PSC will have to deduct PAYE and NIC from payments made for the worker’s services. Previously it was the responsibility of the PSC to make these deductions, but HMRC’s view was that fewer than 10% of these organisations actually complied.
Small businesses will initially be exempt. For incorporated entities a small business is defined as one that meets two of the following three criteria:
However an unincorporated entity need only exceed the £10.2 million turnover figure to be considered 'not small'.
In view of the pending deadline, it is essential that affected charities take action now to ensure that they are ready to comply with the new regime from April 2020 by identifying all off-payroll workers and reviewing the terms of engagement and the necessary policies and procedures put in place. This will include documenting the engagers’ conclusions regarding the employment status of the worker and issuing a “Status Determination Statement” to the worker, the PSC and any other intermediary (such as an agency) in the chain of engagement.
If a charity establishes that the new rules will apply and that it should be deducting PAYE and NIC from payments made to a worker, it will need to evaluate the cost of the employer’s NIC which will also apply, as well as any Apprenticeship Levy payments. This will need to be built into budgets going forward, and many engagers may re-evaluate the rates they are prepared to pay freelance workers as a result.
If the charity continues to engage with PSCs, remember that it is the charity’s responsibility to perform and evidence an employment status check on the individual. Employment status is a subjective area based on case law rather than legislative tests and, as a result, there is an embedded risk.
The risk of getting the status wrong is expensive; not only would the charity, as the engager, be subject to interest costs and potentially penalties for failure to operate PAYE correctly, but it opens up the possibility of back taxes on the individual worker for four or six years, depending on the specific rules applied. NIC can also be charged going back six years.
Find out more from our insight The steps so far and the processes to be put in place before April 2020.
New VAT legislation has now been introduced which allows entities that are not ‘corporate bodies’, but which control other entities, to be included within a VAT group.
Prior to 1 November 2019, all members of a VAT group were required to be corporate entities (i.e. established by Royal Charter, Act of Parliament or as a company Limited by Guarantee) and consequently
trusts, partnerships and individuals were not allowed be included.
While many charities do have corporate status there are also many charities established as trusts that, while having ultimate control of other companies within a group, have not been able to join or form VAT groups because they are not incorporated.
A VAT group is a facilitation that allows entities that fall under common control to form a single VAT entity. Members of a VAT group are, therefore, not required to apply VAT to intra-group charges.
In some cases this can save VAT where the group contains entities that are unable to recover VAT on costs in full (because they make exempt and/or ‘non-business’ supplies) and can also save on administration since one VAT return is submitted that aggregates all group members’ activities.
If you have a ‘non-corporate’ entity, such as a charitable trust that has not been able to be part of, or form, a VAT group previously, there may be a benefit in applying to HMRC for group treatment.
However, before doing this it is important to consider whether forming or changing a VAT group would require detrimental changes to existing partial exemption and/or business/non-business methods.
Charities or their subsidiaries who have been accounting for VAT on digital publications at the standard rate may have an opportunity to submit a claim for overpaid output tax. HMRC's previous position, that digital publications are not able to benefit from zero rating unlike physical/printed versions, has been overruled in a recent Upper Tier Tribunal decision. It may also potentially allow charities to move to more digital publications in the future.
We expect that HMRC will appeal against this decision and so the matter is unlikely to be concluded in the near future. However, due to the four year statutory limit on adjusting VAT claims and the length of time that may be taken if HMRC are to appeal, our recommendation is that protective claims are submitted to HMRC going back four years in order to protect any over-paid VAT going ‘out of time’.
Until the dispute is finally resolved and/or HMRC issues updated guidance, we would recommend that taxpayers continue to account for VAT on digital publications and submit further protective claims if necessary.
For more information on this please see the full article on our website.
We have previously highlighted
that HMRC was looking at the VAT position on advertising services that charities
receive from suppliers, such as Facebook and Google. HMRC has now interpreted
these supplies to be VAT standard rated supplies of targeted marketing.
HMRC’s main argument is that the
provision of ‘advertising’ services, where suppliers such as Facebook/Google
are able to target recipients by using their browsing history, is not
‘advertising to the public’ (a key condition for treating a supply to a charity
as advertising). As a result, these services are not zero rated but are
considered to be marketing services which are standard rated.
HMRC admit in its own published
guidance that an element of ‘targeting’ can still be seen as advertising, for
example an advertisement in a trade magazine only available to members of that
particular trade body. However, the Facebook and Google targeting goes beyond
what they deem ’an element’.
There is a perception that HMRC
perhaps do not fully understand the technical provision by Facebook, Google and
similar providers, and therefore cannot make a judgement as to the extent of
targeting. However, based on this HMRC interpretation, and as most of the
suppliers are based overseas, it is the responsibility of charities to account
for standard rated Reverse Charge VAT if this is seen as a marketing supply; the
Reverse Charge due on any advertising services received from overseas continues
to be zero rated.
HMRC has not published proper
clarification on its position on this and is still discussing matters with
Charity Tax Group. However, visiting
officers from HMRC are insisting that this matter is a ‘done deal’ and
assessments are being issued; charities who receive these services should be
prepared and make the necessary provisions, as HMRC can go back four years.
As well as the Google and Facebook
Reverse Charge issue, it will be easier for HMRC to see whether or not Reverse
Charge VAT is being declared on other supplies from overseas as Making Tax
Digital becomes further reaching in the next few years.
HMRC define overseas suppliers as
any supplier who is based outside the UK, so the Reverse Charge applies to
supplies from both EU and Non-EU suppliers. HMRC are looking at services
received from these overseas suppliers, which if received from a UK supplier
would have UK VAT charged at the standard rate, and then checking to see if entities
have applied a Reverse Charge to these services on their VAT returns.
As well as the marketing services
highlighted, services can include web hosting, software licences, consultancy, photocopier/asset
hire and other marketing services. Charges for such services must be converted into
sterling, and the receiving entity must then charge itself VAT at the standard
rate on these charges and account for the VAT on their return.
This can be important for
charities, both because a lot of the services purchased abroad do not give the
charity the right to a full recovery of input tax, and because not applying the
Reverse Charge has led to assessments which could, in turn, lead to penalties
for not completing VAT returns with ’reasonable care’.
We commented in our previous Charities Alert that, under the fifth EU money laundering directive (5AMLD), all UK resident express trusts could be required to register with HMRC from April 2020, regardless of whether or not they have any liabilities for tax.
In April 2019, HM Treasury issued a consultation document proposing how they would implement this directive, including the requirement for all express trusts (and all charitable trusts) to register with HMRC’s Trust Registration Service.
Following the responses to this first consultation, a further consultation has now been issued on 24 January 2020 and will run for four weeks to 21 February.
The good news for charities is that the draft legislation included in this second consultation has excluded from the definition of UK express trusts, and therefore from the requirement to register with the HMRC Trust Registration Service, trusts for charitable purposes which are registered as a charity in Scotland or Northern Ireland or which are registered, exempt or excepted from the requirement to register as a charity in England and Wales.
Further information is available on our website. We will update this if there are any further developments on the registration requirements for charities.
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