Charity Finance. An update on tax, accounting and emerging issues in the charity sector. kpmg.co.uk

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1 Charity Finance An update on tax, accounting and emerging issues in the charity sector kpmg.co.uk

2 2 Charity finance KPMG hosted an ACI seminar for the charity sector on 20 March This document contains a summary of the presentations. Marianne Fallon Partner, Head of Charities Mobile: +44 (0) KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. Printed in the United Kingdom.

3 Charity finance 2 Charities Governance Benchmarking Our governance benchmarking survey covered trustee boards approach to risk management and policies, internal and external audit, performance and management accounting information. Through December 2011 we surveyed 37 not for profit organisations to understand the level to which they adopted a framework of controls aimed at demonstrating good governance within the organisation. We found the level of governance control applied varied significantly between organisations, often reflecting the perceived operational risks associated with the charity. The area of audit, external and internal, represents a key control over organisational governance. While organisations generally reported good communication with their external auditor, the challenge and rigour applied to the internal audit process was mixed, especially amongst those organisations which had no dedicated internal audit process. The link between internal and external audit disconnected at times, leading to duplication of effort. Management accounting systems were generally appropriate to the needs of the organisation. A number of organisations had enhanced management accounts in the recent past to raise awareness around specific financial risks including cash-flow, funding channels and restricted funds. A retrospective review of Trustees performance was often undertaken as a reactive measure or following the loss of a key individual in post. There were few organisations who systematically reviewed Board performance. The level of oversight Trustees apply to organisational policies was generally high. This often focused on those aspects reserved for the Trustees such as the reserves policy or changes in the regulatory environment. The challenge remains to apply this same level of rigour to key operational policies e.g. child safeguarding where the reputational risk to the charity is such as to warrant a focus from the governing Trustees. For more information please contact Julia Rank, Senior Manager julia.rank@kpmg.co.uk or Here is a link to the benchmarking survey KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. Printed in the United Kingdom.

4 4 Charity finance Financial Grip In a difficult and changing environment strong financial grip across the organisation is essential. By implementing firm financial and operational controls and working in a 'no surprises' environment, the charity s leaders can give themselves the breathing space they need to focus their attention on building strategic plans for the future. To help charities assess their current level of financial grip, we encourage them to ask themselves key questions such as: How well do you understand your true financial position both costs and income and how confident are you that your current operating assumptions are correct? How successful have you been in securing your future funding streams, and do you have the right mix of donations, grants, government funding, and revenue from new business? What actions are you taking to reduce back office costs so you can maximise resources available for your frontline services? Is your reserves management strategy appropriate for the current environment, and are you confident your reserves are sufficient? For more information on these issues please contact Chris Beeley at chris.beeley@kpmg.co.uk or Rajesh Kumarapuram at rajesh.kumapuram@kpmg.co.uk 2012 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. Printed in the United Kingdom.

5 Charity finance 4 Auto-enrolment and Real Time Information Undoubtedly the two biggest challenges facing charity employers over the next 12 to 18 months will be the introduction of Pensions Auto-enrolment and Real Time Information ('RTI'). Here is a brief summary of both topics and the key facts which charities should be aware of: Auto-enrolment All charities must 'auto-enrol' eligible jobholders into either National Employment Savings Trust ('NEST') or their own qualifying workplace scheme: Eligible Jobholders are between the age of 22 and the State Pension Age Requirements phased in between October 2012 and October 2017 When fully in force employers will have to pay a minimum of 3 percent of qualifying earnings Employees can only opt out after three months in the scheme, but must be auto-enrolled again after three years. There may be opportunity to offset the additional cost through salary sacrifice. Real Time Information ('RTI') Under the proposed RTI system, employers will need to provide HMRC with details regarding the amount of tax, NIC, and other amounts relating to each employee's pay when, or before, they make the salary or wage payment to the employee. Currently this happens at the end of every tax year by submitting forms P35 and P14 to HMRC. RTI will be equivalent to carrying out this same end of year reporting but on a monthly 'real time' basis. RTI will be launched on 1 October 2013 and there is no flexibility or concessions available for smaller employers or charities. Over the next year charities will need to review their current payroll reporting systems to see not only whether they hold the required information necessary to deal with RTI but also to consider how best the information can be submitted to HMRC. Charities can access KPMG s free RTI Survey to assess their overall level of readiness by clicking here: TI. KPMG will review your responses and contact you shortly afterwards with a Risk Analysis report detailing any areas where your PAYE systems, processes or controls may need further work. There will be no charge for access to our RTI Readiness Survey and Risk Analysis follow up. For more information on either of these topics or if you have any Employment Tax related queries please contact Stephen Baker, Tax Manager stephen.baker@kpmg.co.uk or +44 (0) KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. Printed in the United Kingdom.

6 6 Charity finance Accounting Update Recent and future changes to UK GAAP affecting Charities In January 2012 the ASB issued revised exposure drafts on its proposals for the future of UK GAAP. It plans to replace current UK GAAP with an IFRS-based framework. The new standard is no longer known as the FRSME, it has been renamed FRS 102. The Charity SORP will be amended to ensure it is consistent with FRS 102. These changes will be effective for accounting periods beginning on or after 1 January The proposals apply to all entities that are required to prepare financial statements that give a true and fair view except those in the public sector whose accounting requirements are determined by the government. There will no longer be a separate FRS for Public Benefit Entities ( FRSPBE ). Public benefit entities fall within the scope of FRS102 and the ASB has incorporated sector specific accounting requirements into the main standard. The latest guidance retains merger accounting and the ability to continue to recognise income from charity shop goods at the point of sale rather than donation. The ASB still needs to clarify the definition of 'restricted' which could impact grant recognition for both receipt and expenditure. The proposals are open for comment until 30 April For further information please contact Sarah Hughes, Senior Manager, Accounting Advisory Services sarah.hughes@kpmg.co.uk or +44 (0) Charities Act 2011 The Charities Act 2011 came into force on 14 March It is a consolidating statute, bringing together provisions from the Recreational Charities Act 1958, the Charities Act 1993 and many of the provisions of the Charities Act The Act does not include certain provisions relating to fundraising, which will be reconsidered as part of Lord Hodgson s current review of the Charities Act The 2011 Act does not make substantive changes to the law, rather is intended to make charity law simpler and more accessible. It does, however, change the section numbers that serve as shorthand for various legal provisions. Action required Your charity should refer to the Charities Act 2011 in documents, reports, accounts or statements produced on or after 14 March 2012 (even if they relate to an earlier financial period). However, if you accidentally refer to earlier Acts your documents will still be valid, and you don t have to go back and change any documents that have been finalised before 14 March KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. Printed in the United Kingdom.

7 Charity finance 6 VAT Update Cost Sharing Exemption The implementation of the Cost Sharing Exemption (CSE) into UK VAT law later this year could assist charities and other public sector bodies to work more collaboratively. In the past, VAT chargeable on cross charges made such arrangements uneconomic. The cost sharing exemption allows bodies undertaking non-business and VAT exempt activities (typically charities and most Public Sector organisations) to share resources and collaborate without adding a layer of VAT on cross charges. There are some conditions for participation. The cost sharing group must be formed of a group of independent entities who each undertake nonbusiness and VAT exempt activities coming together and holding an interest in a separate legal entity (one member can hold a controlling majority). To qualify for VAT exemption, the supplies must be directly necessary for the undertaking of non-business or VAT exempt activities (directly necessary is defined as at least 85% for these purposes), provided on a not-forprofit basis. Whilst HMRC accept that benefits will arise to members by virtue of being part of a cost sharing group, the group must not cause a distortion of competition. The CSE offers a great opportunity for many charities to consider how they collaborate with other like minded organisations. In many cases it may allow them to achieve efficiencies from economies of scale. The recently released draft supporting guidance provides further details of how the exemption will work in practice with the warning that until the document is finalised; the content should not be relied upon. However, charities should start to consider whether they can benefit from this new measure as soon as possible. For more information please contact Catherine Cooper, Tax Manager catherine.cooper@kpmg.co.uk or +44 (0) KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. Printed in the United Kingdom.

8 The information contained in this document is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is provided or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. All services provided by KPMG LLP are subject to the negotiation, agreement and signing of a specific contract KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. Printed in the United Kingdom. Document number: MC