Update on charity law and accounting: With a focus on the specifics of CIOs

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Update on charity law and accounting: With a focus on the specifics of CIOs Management Development Network: Annual Members Conference London 25 April 2017 GARETH

1 Update on charity law and accounting: With a focus on the specifics of CIOs Management Development Network: Annual Members Conference London 25 April 2017 GARETH G MORGAN Partner, The Kubernesis Partnership LLP Yorkshire & East Lothian Emeritus Professor of Charity Studies, Sheffield Hallam University 1

2 CIOs: History of the Concept and Legislation - I The Background: Charitable structures Problems of existing legal forms recognised around time of Charities Acts 1992/1993, but no scope for further legislation at the time Idea of a new CIO legal entity was proposed by Charity Law Association in mid- 1990s. Report prepared by Univ of Liverpool/NCVO/CLA Government Consideration DTI Modern Company Law Review 2000 sought views on a new vehicle (CII) for charities Charity Commission supported proposal and issued its own report 2001 Private Action, Public Benefit (Cabinet Office 2002) recommended various updating of charity and not-for-profit law including: A new legal form of CIOs be created for charities 2003 Home Office White Paper Charities and Not-for-Profits: A Modern Legal Framework agreed to include CIO framework in new Charities Bill 2004 Scottish Ministers accepted need for new Scottish charity legislation - including SCIOs 2

3 CIOs: History of the Concept and Legislation - II Implementation Legislation had to await new Charities Acts: CIOs (England & Wales) - Charities Act 2006 section 34 SCIOs (Scotland) - Charities & Trustee Investment (Scotland) Act 2005 sections In both regimes, the Acts contained the overall framework, but details of CIOs/SCIOs delegated to regulations requiring consultations: England & Wales: Draft CIO regulations and constitutions published autumn 2008 Scotland: Initial consultation winter 2009/10; draft regulations consultation autumn 2010 Final steps in Scotland: Commencement 1 April 2011 Conversion of charitable companies from 1 Jan 2012 Final steps in England & Wales: Charity Commission published its final CIO guidance and model constitutions April 2011 Regulations cleared Parliament Nov 2012 Commencement 2 Jan 2013 Conversion of charitable companies - late 2017? 3

4 CIOs versus Charitable Companies CHARITABLE COMPANIES Corporate entity with limited liability and charitable status Governed by company law and charity law Members must give a small financial guarantee towards wind-up costs Governed by Articles of Association (& Memorandum by initial members) Accounts must comply with company law and Charities SORP Cannot normally register as a charity if < 5K income Well proven Can form company quite quickly and apply later for charity registration But then have period with uncertain charitable status Can convert directly to a CIO if needed (when implemented) Can wind up or merge with other charities But no automatic transfers of assets/liabilities Charges register at Companies House (and Land Registry) CHARITABLE INCORPORATED ORGS Corporate entity with limited liability and charitable status Governed solely by charity law Has a membership but no members guarantee required Governed by a (fairly simple) Constitution Accounts comply only with charity law (as applied to CIOs) No lower income for registration (from Jan 2014) Still relatively new Formation of CIO and charity registration take place simultaneously But likely to take 1-3 months from application CIOs cannot directly convert to any other legal form Can wind up or merge with other charities Very simple process for transfers/amalgamations with assets and liabilities transferred directly: Charities Act 2011 ss Charges maintained only by the CIO itself (except for land charges) 4

5 CIOs: Where are we now? By Jan 2017 we have had four years of CIOs in E&W Nearly six years of SCIOs "CIOs - nice idea but what s the point? I doubt they will take off much. (Heard at Charity Law Association) Now over 13,000 CIOs in the UK as at 23 April 2017: 10,460 CIOs registered in England & Wales 2,753 SCIOs on Scottish charity register No CIOs regd as yet in N Ireland but primary legislation is in 2008 Act CIOs now account for 59% of new charity registrations in E&W 2016/17: 6,278 charity registrations in E&W of which 3,711 were CIOs Of all registered charities: CIOs are now account more than 6% of E&W charity register (after 4 years) SCIOs are now more than 10% of Scottish charity register (after 6 years) CIOs are not all small: CIOs in E&W: 101 have income over 1M including 8 over 10M income Largest CIO: Leverhulme Trust 74M income and 2.3bn assets 5

6 CIOs: Some key issues for charity advisers (E&W) Under what circumstances is a CIO not the best structure for a new charity? The registration process always involves applying for registration/incorporation of a proposed charity Different way of thinking for applicants and CCEW The applicants for formation of a CIO are the proposed members (not the proposed trustees) Charities Act 2011 s.207 How do we handle this in practice? Why is CCEW not more interested in the members? How do we ensure CIO members are aware of their duty in s.220? Use of CIO (or SEC in Wales) as part of the name? Is status clear? No protection of limited liability if third parties do not realise they are dealing with a CIO Access to register of members in large association CIOs Constitutional amendments Amendments only take effect when registered by CCEW (s.227) NB: E&W CIOs and SCIOs have some fundamental differences And some E&W CIOs are dual-registered with OSCR but that does not make them SCIOs 6

7 Charity Financial Reporting: Thresholds from 2016 Minimum requirements for preparation of charity accounts in E&W: Income level All Over 5,000 Over 25,000 Over 250,000 Over 500,000 Unincorporated charities CIOs Must produce financial statements comprising trustees annual report (TAR) and accounts (accounts can be on R&P basis) Must apply for charity registration TAR+Accounts and Annual Return must be filed with CC (All CIOs are registered charities) (All CIOs must file accounts: no lower limit) Charitable companies Must produce trustees annual report and accounts (must be on SORP basis) Must apply for charity registration TAR+Accounts and Annual Return must be filed with CC Accounts must be on accruals basis following SORP framework (except that simplified headings on SOFA are permitted) Accounts must follow SORP in full including functional breakdown on SOFA and include statement of cash flows (if applying FRS102 SORP) 7

8 Audit & Independent Examination: Thresholds from 2015 Minimum requirements for scrutiny of charity accounts in E&W: Income level Assets up to 3.26m Assets > 3.26m Up to 25,000 Approval by trustees only Approval by trustees only Up to 250,000 Independent examination by a lay examiner Independent examination by a lay examiner Up to 1m (Years ending or later previously 500K) Independent examination by a professionallyqualified examiner Audit Over 1m Audit Audit For charitable companies that are small (generally those under 10.2m) the audit could be under Charities Act or Companies Act but still need audit exemption statement on balance sheet if a Charities Act audit is used. Audit exemption statement is always needed when a charitable company only has an independent examination. 8

9 Independent Examination Reports: Proposed new report wording in draft revised CC32 Independent examiner s report to the trustees of ABZ Trust I report on the accounts of the Trust for the year ended [date], which are set out on pages 00 to 00. Responsibilities and basis of report As the charity s trustees you are responsible for the preparation of the accounts in accordance with the requirements of the Charities Act 2011 ( the Act ). I have examined your charity s accounts as required under section 145 of the 2011 Act and in carrying out my examination I have followed the Directions given by the Charity Commission under section 145(5)(b) of the 2011 Act. My role is to state whether any material matters have come to my attention giving me cause to believe: 1. that accounting records were not kept as required by section 130 of the Act; or 2. that the accounts do not accord with those records; or 3. that the accounts do not comply with the accounting requirements of the Act; or 4. that there is further information needed for a proper understanding of the accounts. Independent examiner s statement I have completed my examination and I have no concerns in respect of any of the matters (1) to (4) listed above and in connection with following the Directions of the Charity Commission I have found no matters that require drawing to your attention. Name: Relevant professional qualification if any: Address: Date: 9

10 CIOs: Accounting issues A CIO is not a company So the accounts are prepared in accordance with the accounting provisions of the 2011 Act and the Charities (Accounts and Reports) Regulations 2008 Independent examination reports must be refer entirely to Charities Act 2011 (no mention of Companies Act) Trustees report must make clear that the charity is a CIO Including constitution and date when last amended Accounts must be filed with CCEW up to 10 months from year end But the trustees report and accounts must always be filed and are available online no exemption for CIOs < 25K income Receipts and payments accounts are permitted up to 250K income As a corporate body with limited liability the Statement of Assets and Liabilities is critical CIO General Regulations 2012 reg.62 make additional requirements for notes: Details of any guarantees given by the CIO if in force at year end Details of any secured debt if secured at year end on any assets of the CIO 10

11 CIOs and other non-company charities: Which SORP to use? Charitable companies Under the Companies Act 2006, accounts must give a true and fair view in the light of applicable accounting standards Hence use SORP 2015 (FRS102) for financial periods starting 1 Jan 2016 onwards Non-company charities including CIOs Accounts are prepared under Charities Act 2011 s.132 which empowers the Minister to make regulations The current regulations are still the Charities (Accounts and Reports) Regulations 2008 Reg 8(5) requires the accounts to be prepared in accordance with the methods and principles set out in the SORP Reg 2(1) defines the SORP as SORP 2005 The dilemma Strict compliance with the 2008 Regs means SORP 2005 should still be used However, reg.8(4) requires the accounts to give a true and fair view and where compliance with the regulations would not achieve this, trustees are required to depart from the regulations to the extent necessary to give a true and fair view So maybe SORP 2015(FRS102) can be applied, using T&F override? Commission says in CC15d that this is acceptable subject to discussion with auditor/ie But the accounts will need a clear note to explain the departure Some suggest such departure also needs an emphasis of matter para in the audit/ie report But SORP 2015 (FRS102) itself says (Introduction, para 18): In those jurisdictions where the applicable SORP is specified in regulations, this SORP cannot be adopted until the applicable regulations are made allowing its application 11

12 Accounting and filing issues when an unincorporated charity converts to CIO First accounting year of a CIO must start from date of registration/incorporation Charities (Accounts and Reports) Regulations 2008 reg.3(2) This will often be earlier that the date of transfer of assets: e.g. CIO formed 13 October 2016 Assets transferred 1 April 2017 End of first financial years of the CIO 31 March 2018 First reporting period of the CIO: 13 Oct 2016 to 31 March 2018 First financial year cannot exceed 18 months under the 2008 regulations So may need an initial set of CIO accounts with no activity But there is no such thing as dormant accounts for a CIO must still file Trustees Report explaining the trustees plans for public benefit and Accounts showing nil Possible use of merger accounting? See SORP for details The old (unincorporated) charity: Have final accounts been prepared for the old charity? Do they show the transfer to the CIO leaving a final balance of nil? Did all transfers take place on a single date? Are all transfers of restricted funds clearly identified? Do the first accounts of the CIO agree? Charity Mergers Register Charities Act 2011 ss If the old charity is being dissolved: have the trustees requested the old charity to be place on the Charity Mergers Register as having merged into the CIO? 12

13 The Charities (Protection and Social Investment) Act Background Lord Hodgson s (2012) review of Charities Act 2006 Made recommendations some of which would require changes to legislation Parliamentary criticism of Charity Commission not using its powers more to crack down on charity abuses CC raised two main reasons: (a) Lack of resources (b) Insufficient powers to act in some situations Government more willing to act on (b) rather than (a)! Law Commission s 2014 review of charity law Raised questions on whether charities had sufficient powers in relation to social investment 2015 charity fundraising scandals Etherington review Minister decided to use the Bill to strengthen fundraising regulation Charities (Protection and Social Investment) Act 2016 Royal Assent 16 March

14 Scope of the 2016 Act (1) Greater Powers for Charity Commission Sections 1-12 (2) Regulation of Fundraising and New Requirements in Trustees Reports Section (3) Power to Make Social Investments Section 15 Miscellaneous (Commencement, reviews etc) Sections Timescales Provisions only take effect when the Minister for the Cabinet Office makes relevant orders Most provisions now in force 14

15 The 2016 Act: A: GREATER POWERS FOR CHARITY COMMISSION 2016 Act makes numerous amendments and additions to sections of the Charities Act 2011 dealing with CC powers New powers in terms of disqualifying and suspending trustees Many more offences will now result in automatic disqualification as a trustee CC also give much wide discretionary power to disqualify individuals as trustees The CC is also given more explicit powers to direct a charity: to wind-up or to transfer its assets to another charity or to direct a charity not to do something. Now CC power to issue formal warnings CC new power to issue an official warning to a charity, which it can publicise Although the Act requires the Commission to give advance notice of such a warning so the charity can make representations before it goes live there is no right of appeal to the Charity Tribunal against these new official warnings. In theory these provisions should have no impact on law-abiding charities BUT a charity which gets into disagreements with CC could face new sanctions Charities working in offender rehabilitation seeking consultations on new powers 15

16 The 2016 Act: B: REGULATION OF FUNDRAISING Specific provisions (1) USE OF PROFESSIONAL AGENCIES IN FUNDRAISING 2016 Act s.13 amends the rules in the Charities Act 1992 regarding the use of professional fundraisers and commercial participators (A commercial participator sells products with a promise that part of the price will go to charity). The written agreements which are already required between a charity and a professional fundraiser/commercial participator now have to include specific provisions to protect vulnerable people and to ensure that the public are not subject to unreasonably persistent approaches. (2) INCREASED DISCLOSURES IN TRUSTEES ANNUAL REPORTS Charities over the audit threshold) to include six additional issues in their Trustees Annual Report (TAR) (alongside the accounts) (s.13 of 2016 Act) TAR must explain various aspects of the charity s practices on protecting prospective donors/supporters and the numbers of fundraising complaints received. Over the audit threshold those charities over 1M income in E&W (over 250K if more than 3.26M assets) but the extra disclosures could be considered good practice for all (3) FUNDRAISING REGULATOR COULD BE GIVEN STATUTORY FORCE 2016 Act s.14 includes provisions that could compel charities to sign up and pay fees to support the work of the Fundraising Regulator But the Government still hopes the Fundraising Regulator will work on a self-regulatory approach so they hope they will not use the powers under this section 16

17 The 2016 Act: C: POWER TO MAKE SOCIAL INVESTMENTS The Act makes it explicit that charities have the power to make social investments as a means of advancing their charitable aims. New provisions added to the Charities Act 2011 by s.15 of 2016 Act. A social investment is defined as: An investment or commitment made by a charity where it expects to achieve some financial return [so not a pure grant] as well as advancing its charitable aims. Common examples include: Providing loans at low rates of interest or interest-free in order to support beneficiaries, or soft loans which only have to be repaid under certain circumstances Charities taking shares in non-charitable social enterprises, even if such shares would not generally be a prudent investment for a charity (provided the trustees consider that the investment will deliver social outcomes that further the charity s objects) Giving loan guarantees on behalf of beneficiaries Many charities have, of course, been making social investments for many years But there have been suggestions that trustees making social investments could breach duties to maximise the financial return for their beneficiaries. The changes made by the 2016 Act make it clear that non-financial returns can be considered. 17

18 Thank you! Update on charity law and accounting: With a focus on the specifics of CIOs MDN Conference London 25 April 2017 Gareth G Morgan The Kubernesis Partnership LLP Yorkshire, England / East Lothian, Scotland gareth.morgan@kubernesis.co.uk Please note that legal information in this presentation is at an overview level only it is not a full statement of the law and quotes from legislation may be paraphrased or summarised Gareth Morgan/Kubernesis Partnership LLP. These slides are provided for the participants at the above event, and should be interpreted in the light of the verbal presentation on the day. Please contact the author before sharing them further. 18

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