INCLUDED IN THIS ISSUE:

Charities Update Spring 2015

INCLUDED IN THIS ISSUE: Charity law update: How does the Lobbying Act relate to your charity? Protecting charities from harm Practice points: The new SORP Changes to the audit thresholds WHEN CAN A COURT INVOLVE ITSELF IN ISSUES OF RELIGION? School Exclusions News from the PWW Church and Charities team: New additions Recent events

CHARITY LAW UPDATE HOW DOES THE LOBBYING ACT RELATE TO YOUR CHARITY? The Transparency of Lobbying, Non-Party Campaigning and Trade Union Administration Act 2014 (otherwise known as the Lobbying Act ) is now in force. As we are now in the run-up to a general election, trustees need to be especially aware of how the Act affects their charities. As a reminder, the rules introduced by the Act apply during regulated periods before elections, and we are currently in the midst of a regulated period that began in September 2014 and ends in May this year. The main points to be aware of are: Charities in England spending more than 20,000 ( 10,000 in any of Scotland, Wales or Northern Ireland) on any of a broad range of regulated activities MUST register with the Electoral Commission if the activities can reasonably be regarded as intended to influence voters to vote for or against political parties, candidates or categories of candidates. Regulated activities can include: the production of election materials, market research, media and public events and certain staff costs, whether or not these activities involve referring to the name of a candidate or party. By way of example, the Electoral Commission has indicated that charities should keep track of how much their staff use social media to engage with the public on potentially political issues. If a charity works with other charities as part of a joint campaign, the combined regulated spending on that campaign will count towards the registration threshold. This means that even if an individual charity s regulated spending is below the threshold, it may still be required to register. There is an absolute upper limit on spending on regulated activities by charities: 319,800 in England, ( 55,400 in Scotland, 44,000 in Wales, 30,800 in Northern Ireland). This maximum spending is limited to 9,750 in any one constituency.

So far only a small number of charities have registered, including the Religious Society of Friends (Quakers) and the Salvation Army. Those that have registered may have felt that the general nature of their activities required registration at the outset of the regulated period. However, all charities involved in campaigning and political activity need to keep an eye on whether they have reached the threshold for registration right up until the May election. Smaller charities may not initially consider that the Act has any bearing on them, but the following examples demonstrate how smaller charities may be more likely to be caught by the Act: When factoring in staff costs, for example the hiring of one campaign officer, it would not be difficult for even a small charity to reach the registration threshold. It does not matter whether a charity intends to influence voters to vote in a particular way, but rather that a person could reasonably regard the intention to be as such. Without expecting it, a charity could find itself in a position where it needs to register during the regulated period if a policy it champions is later endorsed by a particular politician or party, depending on how the charity reacts to that endorsement. So what should your charity do? Continue to campaign! It goes without saying that campaigning can be a very effective way of furthering charitable objectives. Indeed, many charities speak out on issues about which others cannot, and on behalf of those who are less able to speak for themselves. Actively consider whether to register with the Electoral Commission. For many charities the result of such an assessment will be that they are confident that they do not need to, because for example they never engage in regulated activities. Many charities will instead need to monitor matters throughout the regulated period, and/or consider whether there are changes that they could introduce to their strategy that could prevent need to register while maintaining effective campaigns. Some charities will find that they will need to register before May. Once registered they should institute monitoring procedures so that they can report to the Electoral Commission as required and ensure the upper spending limits are not breached.

PROTECTING CHARITIES FROM HARM Ahead of the recent ITV documentary "Charities Behaving Badly" which aired on 18 February 2015, the Charity Commission issued a press release informing that it had opened Statutory Inquiries into two of the charities featured on the programme, Global Aid Trust Limited (GAT) and Hindu Swayamsevak Sangh (UK), and that it had removed the third one, The Steadfast Trust, from the register of charities. Given the present media spotlight surrounding charities with perceived links to extremism, it is more important than ever for charities to ensure that they have appropriate procedures in place to reduce the risk of abuse by terrorist organisations. Over several years, the Commission has released a guidance series entitled Protecting Charities from Harm designed to prevent the abuse of organisations by extremists and terrorism. This article focuses on two chapters from this guidance:- Chapter 2 - Due Diligence, Monitoring and Verification of End Use of Charitable Funds ; and Chapter 5 Protecting charities from abuse for extremist purposes. Chapter 2 - Due Diligence, Monitoring and Verification of End Use of Charitable Funds This sets out trustees legal duties and responsibilities in carrying out due diligence checks and monitoring in relation to a charity s involvement with, and receiving donations from external bodies and individuals. Having an appropriate and proportionate due diligence process in place will minimise the chance of charitable donations falling into the wrong hands. There are three key areas for trustees to consider when designing an appropriate due diligence process for prospective donees:- 1. A Risk Based Approach The starting point is - the greater the risks, the more charity trustees need to do to ensure appropriate due diligence. All charities must have, as a minimum: some form of internal and financial controls in place to ensure that all funds are fully accounted for and spent in a manner that is consistent with the purpose of the charity;

proper and adequate financial records for both the receipt and use of all funds together with audit trails of decisions made; given careful consideration to what due diligence, monitoring and verification of use of funds they need to carry out to meet their legal duties; taken reasonable and appropriate steps to know who their beneficiaries are, at least in broad terms, and carried out appropriate checks where the risks are high. Grant making charities are advised to create a simple risk-assessment checklist with a scoring system, to enable them to determine the level of due diligence appropriate for each grant (i.e. low, medium and high). 2. Translating risk into an appropriate level of due diligence the Know Your principle What trustees need to apply to undertake due diligence can be described as the Know Your principle, specifically making sure that they have carried out satisfactory checks on donors, beneficiaries and partners. The core elements of due diligence across each of the Know Your principles involve trustees taking reasonable steps to ensure they: Identify who they are dealing with; Verify where reasonable and the risks are high, verify this; Know what the organisation s or individual s business is and be assured this is appropriate for the charity to be involved with; Know what their specific business is with the charity and have confidence they will deliver what the charity wants them to; Watch out for unusual or suspicious activities, conduct or requests. The Know Your Donor principle does not mean charities cannot accept anonymous donations. This is perfectly acceptable providing charities look out for suspicious circumstances and put adequate safeguards in place.

3. Maintain records of due diligence undertaken Keep a written record of due diligence processes and the results which informed your decision making, so that it can be provided to HMRC (or the Commission) should they decide to inspect or query any grants made. The file should be able to show that:- the charity s funds can be accounted for; there is an audit trail showing the expenditure of funds by the partner; the partner has actually delivered the project and charitable work expected; the charity s funds have been used for the purposes for which they were intended and the beneficiaries identified by the charity have benefited. Chapter 5 - Protecting charities from abuse for extremist purposes In January 2013, the Commission released Chapter 5 of the Protecting Charities from Harm guidance. The Commission states that the most recent publication is aimed in particular at charities that host regular events involving external speakers, and those with educational purposes that distribute material and information. The guide sets out that all trustees whose charities are involved in relevant activities will need to: ensure that the charity has an adequate level of knowledge about proposed speakers and close partners; carry out due diligence checks on potential speakers and partner organisations; be alert to warning signs that a speaker may promote views that are illegal in the UK and/or intended to radicalise, and/or raise concerns about inappropriate political activities or public benefit issues, such as intolerance of other cultures, religions, ethnic groups, and age, sexuality or gender equality; if a risk assessment identifies a sufficient cause for concern, obtain and consider a copy of the speaker s speech before giving approval for the speaker to deliver it; provide a written briefing for speakers which sets out the charity s expectations and its requirements of speakers and how they should conduct themselves at an event. ensure they do not do anything which would bring the name of the charity into disrepute or damage public trust and confidence in it;

ensure that funds are not collected or raised for any external organisation or cause without express permission of the trustees; ensure there are clear procedures in place for dealing with an incident/complaint and taking action, if the charity s rules on inviting speakers are breached. Decisions made on inviting speakers and the factors that were considered should be documented and recorded, particularly where they may be controversial. Conclusion Charities Update Spring 2015 It is clear from the above guidance that there is an overlap between the steps which need to be taken when assessing potential donees and the steps taken when inviting speakers to participate at events which a charity has organised. In both circumstances the Commission expects charities and trustees to assess the risk, carrying out appropriate due diligence in light of any risk and then making adequate records of the decision-making process and due diligence undertaken. Ultimately the Commission cannot determine whether any decision was right or wrong, but it can investigate a charity s processes if things do go wrong. Therefore the trustees need to be able to explain the reasoning behind any decisions and show evidence of this, in order to counter any regulatory action which may arise. PRACTICE POINTS THE NEW SORP The Statement of Recommended Practice (SORP) for charities was first introduced in the 1990s and has been updated over the years to ensure consistency with developments in the Generally Accepted Accounting Principles (GAAP) and new Charities Acts. Since the 1 st January 2015, the UK GAAP has been more closely aligned with international financial reporting standards. This has, for the first time, necessitated the introduction of two new SORPs, FRS102 and the FRSSE (Financial Reporting Standard For Smaller Entities). All charities, including company charities, preparing accounts on accruals basis need to adopt one of the new SORPs for accounting periods that started after 1 st January 2015 (except where they are required to follow an alternative SORP such as for Further or Higher Education Institutions).

Which SORP should you use? The first thing to note when choosing between FRS102 and the FRSSE SORP is that the FRSSE is due to be reviewed again in 2016. Any change in the FRSSE will require a new FRSSE SORP which may in turn lead to charities choosing the FRSSE to change their accounting policies twice. In order to adopt the FRSSE charities must meet two of the three following criteria:- Gross income not exceeding 6.5m Gross assets of not more than 3.26m No more than 50 employees FRS102 may be used by any charity. What are the main changes in SORP 2015? The Statement of Financial Activities (the SOFA) the main changes include a reduction in the number of headings and a plain English style adopted. There is an option to present as a single column if materially appropriate. Comparatives will need to be shown either on the face of the SOFA or in the notes to the accounts. Narrative descriptions have been simplified and governance costs are absorbed into other costs. Net gains/losses on investment will now form part of net income (FRS102 only). Trustee s Annual Report The disclosures required are the same for both SORPs and any changes are minimal. All charities are now required to compare the amount of reserves held to their reserves policy and list the names of all trustees who served from the start of the accounting period until the date on which the accounts are signed. If a charity is subject to an audit then there are further requirements to identify potential risks; explaining arrangements for setting pay and remuneration of key management personnel and an explanation of social investment policies and programme related investments. The Balance Sheet this is largely unchanged apart from a requirement to show mixed use properties split between fixed assets and investment properties. Investment properties should be shown initially at cost but thereafter at fair value at the date of the reporting period. The Cashflow Statement FRS102 also introduces a requirement for a cashflow statement based on either the direct or indirect method.

Other points to note:- Income to be recognised when it becomes probable rather than virtually certain ; The requirement to recognise a liability in the balance sheet for any outstanding paid annual leave and sick leave (FRS102 only); Donated goods for resale should be recognised as income when the charity first receives the goods unless it is impractical; Disclosure of any material uncertainties when making the going concern assessment or, if there are none, a statement to that effect; Revised guidance on how to account for legacy income and income received under the retail gift aid scheme; A revised definition of related parties and additional disclosures for related party transactions including the disclosure of the number of employees whose total employee benefits (excluding pension costs) fall within each band of 10,000 from 60,000 upwards; Detailed disclosures for income from government grants; Debtors recoverable more than 12 months after the year end must be discounted to present value, if the effect is material. Further information and useful help sheets can be found at www.charitysorp.org. If Trustees have not already given consideration to which of the new SORPs to adopt then they should put their minds to this as soon as possible. CHANGES TO AUDIT THRESHOLDS In 2012, Lord Hodgson undertook a review of the Charities Act 2006. As part of that exercise he recommended an increase to the income threshold above which charities must have their accounts audited, in order to decrease the regulatory burden on charities. In January 2015 the Government consultation on these proposals closed, the outcome of which is a decision to increase the following thresholds from 500,000 to 1 million: income threshold at which a charity should have its accounts audited; aggregate group income threshold at which parent charities should have group accounts audited; preparation threshold for group accounts. The Government has said that the changes will be introduced by statutory instrument and should come into effect on 31 March 2015. These changes will therefore benefit those charities and groups of charities that have an income of between 500,000 and 1,000,000, in relation to accounting years ending on or after 31 March 2015. However, the asset threshold remains unchanged, so charities with income of 250,000 and assets of 3.26 million or more will still require an audit.

DEPARTMENT FOR EDUCATION WITHDRAWS SCHOOL EXCLUSION GUIDANCE The Government recently issued revised statutory guidance in relation to school exclusions from maintained schools, academies and pupil referral units in England. It took effect from 5 January 2015, replacing previous guidance issued in 2012. However the Department last month withdrew the revised guidance, having been quoted in the press as needing to address some issues with the process. The guidance followed the approval last December by Parliament of the Education (Provision of Full-Time Education for Excluded Pupils) (Amendment) Regulations 2014. The Regulations amended the definition of the period of exclusion to be taken into account when making provision for suitable full-time education for a pupil of compulsory school age who is excluded for a fixed period on disciplinary grounds. A governing body is required to provide education on any sixth day following five consecutive days of exclusion. The change means that consecutive periods of exclusion are to be considered as one continuous period which can make up the five days. The guidance generally set out how to apply exclusion criteria and was intended to clarify the current procedure. The 2012 guidance provided that exclusion should be a matter of last resort and that a child should only be excluded if allowing them to remain would seriously harm the education or welfare of others. However, the revised guidance lowered this threshold from seriously harmful, to actions that were merely detrimental. A grouping of claimants and the Communities Empowerment Network, a charity that supports parents whose children have been excluded from school had threatened a judicial review of the guidance and it is likely that the Government withdrew the guidance with the prospect of such a challenge looming. New guidance will be issued at a later date. Until then, the 2012 guidance has been re-issued. However governing bodies should be aware that the provisions brought in by the Regulations relating to consecutive periods remain good law even though guidance referring to them has been withdrawn.

NEWS FROM THE PWW CHURCH AND CHARITIES TEAM NEW ADDITIONS Catherine Durant joined us in September 2014. Before joining she served a two-year training contract, during which she assisted in advising a range of charities and was also seconded to the legal team of a large household-name charity. Gerald Kidd, Head of Church & Charities, comments Catherine is a welcome addition to the firm. Her appointment reflects our continuing investment in the Church & Charities area and enables us to expand our offering to new and existing clients. Peter Spencer joined us in October 2014. Before joining Peter served a two-year training contract during which he worked closely with schools and religious organisations on a wide range of matters. Gerald Kidd comments Peter s appointment supports our growth strategy in the Charities sector and he is a welcome addition to our existing team We are also pleased to announce that Nadeem Azhar, who joined the firm in 2008, became a partner in the Church and Charities team on 1 March 2015.

RECENT EVENTS ACEVO Breakfast Seminar - Facing Adversity in the Muslim Charity Sector PWW partners with the Association of Chief Executives of Voluntary Organisations (ACEVO). On 10 December 2014, we hosted a joint seminar run by The Muslim Charities Forum and ACEVO titled Facing Adversity in the Muslim Charity Sector. Approximately 25 people attended, including Diane Abbot MP, representatives from the Charity Commission and delegates from across the Muslim Charity sector. The Panel chaired by Sir Stephen Bubb included Dr Hany El-Banna, the founder of Islamic Relief and Tom Keatinge from the Royal United Services Institute together with input from Tom Cadman of our Church and Charities Team. Foundation for Social Improvement - Skills Workshop PWW was pleased to sponsor and exhibit at the Skills Conference hosted by the Foundation for Social Improvement, which took place in Russell Square on the 11th February 2015. The event was particularly aimed at those charities with a turnover of under 1.5 million and provided up to 160 delegates access to expert speakers who delivered sessions on a variety of topics essential to small charities. We were pleased to meet many of the delegates on the day and look forward to discussing various issues raised in the future. The information provided in this note is guidance only and is not in any way meant to be the provision of an opinion or legal advice. For further information see www.pwwsolicitors.co.uk or contact Gerald Kidd 020 7821 8211 gkidd@pwwsolicitors.co.uk