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Charities Alert

Autumn/Winter 2021

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Our newsletter provides an update on the latest charity news and key announcements that you may need to act on.

The key areas covered in this issue are Governance, Compliance, Financial Reporting and Taxation.

Download Charities Alert [PDF]

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View our briefings and reports, helping you tackle the many challenging issues faced by charities.


The Charities Bill: 5 key changes to charity law

The Charities Bill, announced in the Queen’s Speech on 11 May 2021, proposes several technical, but important, changes to charity law.

Five of the key proposed changes for charities and their trustees:

  • charities and trustees will be able to amend their governing documents or Royal Charters more easily, subject to the Commission and the Privy Council’s approval in certain circumstances.
  • charities will have access to a wider pool of professional advisors on land disposal, and to more straightforward rules on what advice they must receive, which could save them time and money when selling land.
  • charities will have more flexibility to make use of a ‘permanent endowment’ – this is money or property originally meant to be held by a charity forever. This includes a change which will allow trustees to borrow a sum of up to 25% of the value of their permanent endowment funds, without the Commission’s approval.
  • trustees will be able to be paid for goods provided to a charity in certain circumstances, even if not expressly stated in the charity’s governing document (currently trustees can only be paid for supply of services). From pencils to paint, this will allow charities the flexibility to access goods from trustees when it is in the best interests of the charity (e.g. if cheaper), without needing the  Commission’s permission.
  • charities will be able to take advantage of simpler and more proportionate rules on failed appeals. For example, if a charity appeal raises too little money, the charity will be able to spend donations below £120 on similar charitable purposes without needing to contact individual donors for permission.

View the Charities Bill factsheet, published by the Department for Digital, Culture, Media & Sport.

Responsible investments guidance

The Charity Commission ran a public consultation in April 2021 in respect of updated guidance for responsible investments.

During the consultation two charities were granted permission to bring a case relating to responsible investment to the High Court. They are seeking clarification of the law, and there will be a court hearing in 2022. As a result, the updated guidance is not expected to be published until the court has given its judgement as this may affect the final guidance.

View the results of the consultation which were published on 18 August 2021.

Guidance on hybrid working launch by ACAS

ACAS recently published guidance for employers on hybrid working, following the extended period of remote working as a result of the coronavirus pandemic.

The guidance is broken down into the following five sections:

  • Considering hybrid working for your organisation
  • Consulting and preparing to introduce hybrid working
  • Creating a hybrid working policy
  • Treating staff fairly in hybrid working
  • Supporting and managing staff in hybrid working

The guidance also considers other legal matters that employers should consider, including data and privacy issues, health and safety issues and working time requirements.

View the full guidance. 


Safeguarding in international aid

The Charity Commission issued an alert in June 2021 to assist trustees of international aid charities to improve their safeguarding practices.

The alert includes a number of key steps that trustee may consider, including: 

  • making sure policies, communications and ongoing performance management help maintain appropriate behaviours by charity staff and workers to each other and the beneficiaries they serve
  • joining the Misconduct Disclosure Scheme to help protect your charity and other organisations in the sector from individuals who pose a safeguarding risk
  • giving victims and survivors, and their families and friends, a safe means to report their concerns and complaints
  • launching robust and timely investigations into allegations or concerns where they arise.

View the alerts:

Government procurement: Carbon reduction plans

The government has introduced new measures which will require businesses to commit to net zero by 2050 and publish clear and credible reductions plans before they can bid for major government contracts.

Under the new measures, for procurements advertised on or after 30 September 2021, suppliers bidding for contracts above £5million a year will need to have committed to the government’s target of net zero by 2050 and have published a carbon reduction plan.

Carbon Reduction Plans (CRP) must meet the required standard, and includes (but is not limited to):

  • confirming the bidding supplier’s commitment to achieving Net Zero by 2050 for their UK operations.
  • providing the supplier’s current emissions for the sources included in Scope 1 and 2 of the GHG Protocol, and a defined subset of Scope 3 emissions.
  • providing emissions reporting in CO2e (Carbon Dioxide Equivalent) for the six greenhouse gases covered by the Kyoto Protocol4.
  • setting out the environmental management measures in effect, including certification schemes or specific carbon reduction measures you have adopted, and that you will be able to apply when performing the contract and that support achieving Net Zero by 2050.
  • publication of the CRP on the supplier’s website.

View the full details and the Procurement Policy Note issued by the Cabinet Office.

Government procurement: Changes to public procurement rules

New procurement thresholds will apply to public service contracts advertised from 1 January 2022 under changes made in the Public Procurement (Agreement on Government Procurement) (Thresholds) (Amendment) Regulations 2021, which sets out the rules to be followed by contracting authorities when conducting tenders.

Some charities may fall within the definition of a contracting authorities, for example those that receive substantial funding from government, local authorities or NHS Trusts.  Such charities must comply with the public procurement rules.

In most cases the thresholds will increase, however these will now be considered to be inclusive of VAT as opposed to exclusive of vat as is the case currently.

The threshold changes are as follows:

  • Public Contracts Regulations 2015 – for the supply of goods or services, from £122,976 to £138,760 for central government authorities and from £189,330 to £213,477 for sub-central authorities. For works contracts, from £4,733,252 to £5,336,937.
  • Concession Contracts Regulations 2016 - from £4,733,252 to £5,336,937.
  • Utilities Contracts Regulations 2016 – for the supply of goods or services from £378,660 to £426,955, and works contracts from £4,733,252 to £5,336,937.

View the full details.

Fighting cybercrime: Free cyber security tools for charities

Fraud, and in particular cyber fraud, continues to be a significant issue for all organisations, including charities.

The National Cyber Security Centre is the UK’s authoritative voice on cyber security, and to help reduce the risk of cyber-attacks, they are offering registered charities unlimited licences to their Early Warning tool, and 1000 licences to Web Check and Mail Check tools, for free.

  • Early Warning sends you an alert if it spots any vulnerabilities, or signs that your network or computer has been hacked.
  • Mail Check makes it harder for criminals to spoof your emails.
  • Web Check identifies website vulnerabilities and advises what you can do to resolve it.

View the tools and Crowe’s Fraud Risk Assessment guidance.

Financial reporting

Understand the FX issues impacting INGOs

Our recent report, in association with, draws on research from 114 UK charities with international operations. It provides insight into the big FX challenges and identifies possible areas for improvement.

While the research shows there is work to do, it is in many ways encouraging that most organisations recognise the risks they face, even if they sometimes lack the expertise or resources to manage them. This is particularly important to drive improvement as INGOs face significant financial challenges.

Key points from the report

  • Charity challenges.
  • Protecting funding from foreign exchange volatility.
  • Lack of transparency on FX remittance costs.
  • Lack of competition when making transfers.
  • Use of banks versus FX brokers.
  • Transaction challenges.
  • In-country payments – hard versus local currency.
  • Difficulty setting accurate budget rates.#
  • Use of official policies to manage FX risk.

View and download a copy of the report.

COVID-19-related rent concessions beyond 30 June 2021

In June 2021, the Financial Reporting Council updated the amendment to FRS 102 in respect of Covid-19 related rent concessions, extending the period to which the amendments apply to 30 June 2022.

Under the amendments, any reduction in lease payments are recognised over the period that the change in lease payments is intended to compensate. For example, if a lessee is offered a rent holiday such that the rent due for July 2021 to December 2022 is waived, no lease expense would be recognised in that period.

The lessee will also need to disclose the change in lease payments recognised in profit or loss in accordance with the amendments, unless the entity is a small entity applying Section 1A of FRS 102, in which case such a disclosure is recommended.

The effective date for these amendments is accounting periods beginning on or after 1 January 2021, with early application permitted.

View the updated amendment to FRS 102. 

Updated guidance CC15d ‘Charity reporting and accounting: the essentials’

In July 2021, the Charity Commission updated its guidance CC15d ‘Charity reporting and accounting: the essentials’ to clarify the requirements in relation to signatures in the Trustees’ Report and on the Balance Sheet.

Subject to any specific requirements within a charity’s governing document, signatures do not have to be ‘wet ink’ or handwritten and electronic signatures can be used.

View the updated CC15d ‘Charity reporting and accounting: the essentials’.


New cultural tax relief increase offers limited benefit for larger museum and gallery exhibitions

As announced by the Chancellor in the Autumn Budget 2021, rates of relief for cultural tax reliefs are temporarily doubling with effect from 27 October 2021. However, neither the Chancellor’s speech nor the HMRC press release mentioned the cap that applies to museums and galleries claims. This is fixed at £100,000 for touring exhibitions and £80,000 for non-touring exhibitions. Although this is undoubtedly useful for many organisations, larger exhibitions can cost millions of pounds to deliver, and the temporary doubling of the relief will not provide any benefit.

HMRC has now confirmed that there is no intention to increase the cap.
The relief and the cap apply to individual exhibitions. If a museum or gallery puts on small exhibitions and claims less than half the cap amount per exhibition, they will benefit fully from the new rates. However, museums whose exhibitions are large enough for the cap to apply, unless this is raised in tandem with the credit rates, will get no benefit from the increased credit rate.
A similar cap does not apply to theatres and orchestras, so whilst the changes are welcome for a sector hard hit during the pandemic, some museums and galleries will miss out of the temporary doubling of the relief.

Read our full article for further details on the available reliefs.

Employment tax: The Health and Social Care Levy

The government on 8 September 2021 announced a new Health and Social Care Levy to pay for reforms to the care sector and NHS funding in England.
The levy will apply from April 2022, although will operate slightly differently in 2022–23 compared to future tax years.

From April 2022, the levy will see an increase of 1.25% on the rates of the following.

  • Class 1 Primary and Secondary National Insurance Contributions – paid by employees and employers on gross wages, respectively.
  • Class 1A and Class 1B Contributions – paid by employers on benefits provided to employees.
  • Class 4 National Insurance Contributions – paid by the self-employed on profits.

In 2022–23, this will operate as a simple increase of the National Insurance Contributions rates, so only those liable to pay National Insurance Contributions will be subject to the levy.
From 2023–24 onwards, once HMRC have developed new systems, the levy will operate as a separate payment to National Insurance Contributions, and it will also apply to those above the State Pension age, which is currently not the case for Class 1 Primary and Class 4 National Insurance Contributions. However, existing reliefs for Class 1 Secondary National Insurance Contributions will also apply to the new levy for employers of apprentices under the age of 25, all employees under the age of 21, veterans, and new employees in Freeports (from April 2022). The levy deduction will appear separately on employee payslips.

From an employer perspective, the effective increase in Class 1 Secondary National Insurance Contributions means that employment costs will increase. It is important that employers assess the impact of this increase on their employment costs and assess how it can be funded. Alternatively, employers may wish to consider other means of remunerating their employees, for example, through tax-efficient benefits, which would not be subject to the levy.

Direct Tax: Tax on COVID-19 Grants for charities

Over the last couple of years many charities and/or their trading subsidiaries have claimed payments under the coronavirus job retention scheme (CJRS). The CJRS scheme has now ended and been replaced by the Job Support Scheme (JSS). 

Charities may also have claimed the following COVID-19 grants, or ‘coronavirus support payments’ (CSP), which include:

  • the self-employment income support scheme (SEISS), 
  • the small business grant fund, 
  • the retail, hospitality and leisure grant fund, the local authority discretionary grants fund, 
  • the coronavirus statutory sick pay (SSP) rebate scheme, 
  • the equivalent grant funds in Scotland, Wales and Northern Ireland
  • amounts paid under the test and trace support payment scheme and its equivalent in Scotland and Wales, called self-isolation support payments
  • Eat Out to Help Out (EOTHO)

We are often asked if CJRS and other CSP payments are generally taxable for income or corporation tax for charities

If the payments are to support a charitable (ie a non-taxable) activity of a charity, they are not taxable.  If they are to support a non-charitable trade, then they will be included in the profits from that trade, as the expenditure covered will be tax-deductible. If the turnover from the trade is below the de minimis limit for income or corporation tax (currently £80,000 in a tax year, or less if the charity’s total income is below £320,000) then the grant payments will not be counted when calculating whether the turnover goes over that limit. However once the turnover is over that limit, then the CJRS/CSP receipts become taxable income.

If the CJRS or CSP grant relates to two different activities, one charitable and the other non-charitable, then it needs to be apportioned between the two on a reasonable basis. 

EOTHO was implemented separately from other CSPs. HMRC guidance for EOTHO states that “You must include the payments you receive as income when you calculate your taxable profits for Income Tax and Corporation Tax purposes”. 

CJRS claims made by trading subsidiaries

If a subsidiary has made its own CJRS (or other CSP grant) claim then clearly this needs to be recorded on its tax return. However, many charities have claimed CJRS for their employees, and then recharged a portion relating to the employees’ work for the trading subsidiary. It is important that the company that has actually claimed the CJRS reports the full amount on its tax return, before any recharges, otherwise confusion will result.

VAT: Advertising vs Marketing

Charities are allowed to acquire advertising services from suppliers with the zero-rate of VAT but one condition for the relief to apply is that the advertising is made to the general public.

After consultation with the charity and advertising sector, HMRC released its Revenue and Customs Brief 13 in September 2020. The brief indicated that some supplies that are made by suppliers like Facebook could be treated as zero-rated, e.g. audience targeting and location targeting. However, the notice goes on to state that the standard rate of VAT applies to social media accounts because "when individuals log in to their personal pages, sites use tools to apply advertisements to them when they are signed in. The content will be related to the individual’s known likes, dislikes, interests or location, as a signed in member of the website."

We have a number of charity clients that are affected by this as they use suppliers like Facebook for a number of fundraising campaigns. As Facebook is based outside the UK it is up to the UK based charity to account for any VAT due and this is often to a large extent irrecoverable. Therefore, we wrote to HMRC to seek clarification on its position.

HMRC has been provided with numerous examples of services and the terms and conditions applicable.
HMRC's response states that all supplies of Facebook advertising fall outside of zero-rated advertising. Consequently, 20% VAT must be accounted for by charities on such supplies received from suppliers based outside the UK.

HMRC's position is now clear and unless it is successfully challenged, reverse charge VAT should be applied to services received from suppliers such as Facebook.

If VAT has not been applied to these services, HMRC should be notified of the amount of tax due in order that any penalties applicable can be mitigated.

VAT: Grant Funding: Business or non-business

Our insight in January informed you of the decision of the Upper Tier Tribunal in Colchester Institute and the potential adverse effects it could have upon institutions other than those in the Further Education (FE) sector. 

Since our last brief there has been a further unsuccessful attempt by an FE College to exploit the decision made by the upper Tier Tribunal (read the transcript) and HMRC has also responded with its guidance in its business brief 08/21.

The decision has a direct application to those in the Further Education sector that receive grant income. However, in theory the conclusion arrived at by the UTT could be applied to any entity that has received grant income that has treated this as ‘non-business’.

The decision in Colchester Institute reversed the common opinion that grant income is used to support non-business activities as the court opined that funding from The Skill Funding Agency (SFA) and the Education Funding Agency (EFA) was in fact consideration for supplies of educational services. In theory this could have wide reaching application in relation to the zero-rating of buildings used for charitable purposes, the application of reduce rate VAT to Fuel and Power and recovery of VAT on costs using both the standard method and special methods of partial exemption. 

Many VAT commentators have seen the decision by the Tribunal as a threat to common well founded VAT treatments applied by charities.

HMRC’s brief 08/21 does give comfort to the charities’ sector as well as the education sector since it essentially confirms that it disagrees with the Tribunal’s decision and states that whilst it will not appeal, its policy on grant funded education will not change. Therefore, it appears that HMRC has no motivation to use the decision to serve a wider purpose and disturb well established VAT treatments for the charities’ sector. Furthermore, it is willing to retain the status quo in relation to SFA and EFA funding (i.e. treat the income as non-business).

VAT: Three common trading activity issues for charities

Donated Goods Retail Gift Aid Scheme and VAT

The Retail Gift Aid scheme is used by many charities in order to treat what would have been the sale of donated goods as donations of cash by acting as agent for the owners in selling their goods. This enables the charity to be able to claim Gift Aid.  

It is important to note, that from a VAT perspective, this changes the nature of the transaction entirely. If donated goods are sold the shop is making a zero-rated taxable business activity which enables VAT recovery on associated costs. Whereas, if a charity is selling goods on behalf of someone in return for a donation, this is a ‘non-business activity’ and so while there is no VAT due on the donation, VAT cannot be recovered on the associated costs.  

This can result in the shop being required to apply an apportionment to arrive at the correct amount of VAT recoverable in relation to the shop costs so VAT administration increases and VAT recovery is reduced.

Solution: To properly operate the scheme, the charity should charge a VAT bearing commission to the donor of the goods. This does mean a small amount of VAT being paid to HMRC but VAT on associated costs incurred on the shops can be recovered in full.

Lottery ticket sales from shops

Most charities that operate a lottery sell tickets by entering into monthly agreements with customers who buy directly from a head-office. In addition, some tickets may also be sold in charity shops.
Lottery tickets are exempt from VAT, and therefore, no VAT is due on the sales but VAT cannot be recovered on associated costs. This again results in less VAT being recovered by the charity within the shops. It also adds an extra layer of administration as overhead costs of the shop would need to be apportioned.

Solution: In reality, the VAT bearing costs used by the shop to make the lottery/raffle ticket sales is minimal and so application should be made to HMRC to apply a fairer apportionment on shop costs where these sales exist.

Effect of COVID-19 on VAT recovery rates

The COVID-19 pandemic has resulted in many charity shops, cafes and social enterprise activities to close temporarily. This could have an impact on the amount of VAT recoverable on overhead costs, particularly where the charity uses an income based apportionment as the proxy for recovery (e.g. the standard method of partial exemption). This is because taxable income has been reduced while exempt income may have remained constant. For example, care services in general will have continued during lockdown, while shops/cafes and conference venues have remained closed.

Solution: Apply to HMRC to agree an alternative recovery method for the year. HMRC has released an information sheet which states it will look at these requests sympathetically and has set up a purpose built inbox to review these applications. We would suggest that charities review their recovery rates to see if there has been, or will be (using a forecast), a heavy reduction input tax recovery so this can be addressed. HMRC’s release can be accessed here. 

VAT: 12.5% VAT rate on hospitality

From 1 October 2021 the VAT rate applied to hospitality changed to 12.5%. This will require changes not only by suppliers in those sectors, but by all organisations that can recover some VAT on employee expenses. It may also affect future holiday plans for individuals and could have wider repercussions for other sectors.

From 15 July 2020 VAT was chargeable at 5% on:

  • on-premises catering and non-alcoholic drinks sold with catering
  • hot takeaway food and drinks
  • admissions to attractions including theatres and amusement parks
  • hotel and holiday accommodation.

This was always intended to be a temporary measure to boost the hospitality sector at this difficult time. Rather than return to 20% VAT in one go, the VAT rate applicable to these goods and services has changed to 12.5% where these are supplied between 1 October 2021 and 31 March 2022.

It should be noted that none of the above affects situations where no VAT is chargeable, such as cold takeaway food.

View further guidance and actions for both suppliers and customers.

VAT: COVID-19 testing

HMRC has recently released its policy, Revenue and Customs Brief 11, in relation to the VAT treatment of COVID-19 tests, and is relevant to any organisation who is involved in the provision of tests for COVID-19 or receives these services from suppliers.

HMRC’s recent brief has confirmed its policy on the VAT treatment of COVID-19 testing and the requirements for VAT exemption to apply. These should be followed to avoid HMRC issuing VAT assessments and penalties.

HMRC has stated that the medical care exemption will apply in instances where:

  • the service incorporates the administration of the test to the patient
  • the provision of the results
  • by a medical professional or somebody supervised by a medical professional such as a qualified registered nurse, doctor or a state regulated institution.

Exemption can still apply where the service is supplied by a non-registered person but the services are ‘wholly performed’ by a medical professional.

Exemption does not apply where:

  • the service is provided by UK Accredited Service or the Care Quality Commission as HMRC does not consider these as being state regulation 
  • the service is administered by the patient themselves. Therefore, lateral flow tests are standard rated
  • tests are supplied by manufacturers to hospitals/pharmacies.

HMRC’s policy may be challenged as the application to some scenarios could be complicated and provide results that will appear inequitable.

However, if your organisation’s treatment is not in line with the policy corrective action should be taken both retrospectively and going forward. 

Furthermore, if a supplier has been applying standard rate VAT where exemption applies, the over-charged VAT can be recovered by seeking a credit from the supplier.

Contact us

Naziar Hashemi
Naziar Hashemi
Head of Social Purpose and Non Profits