UK: Charities - A Briefing For Charitable And Educational Organisations

Last Updated: 19 September 2011
Article by Adrian Wild

Editor's comment

Time to act?

Welcome to the autumn edition of the charities newsletter.

As I write this, research undertaken in the North East reveals that almost half the charities polled expect to close a service or, in some cases, cease activities completely as funding is cut back. At the same time, demand for these services is increasing. In this context, our article on rewards and recognition addressing how charities can motivate and reward their staff is very topical.

We also have two articles on compliance matters. The good news is that the changes for financial reporting are some way off, although for many, the scale of the changes will be substantial. However, once we become familiar with the revised requirements, I am sure that we will look back and wonder what we were so concerned about. The Bribery Act has received widespread publicity and, as with any press comment, there has undoubtedly been some measure of hyperbole. Our article looks at how a typical charity operating in the UK might respond to the Act – and hopefully this will reassure you that this legislation is not as onerous as perhaps has been suggested.

Our guest article from Charles Russell LLP considers whether a corporate structure adopted by some schools in the 1970s continues to be appropriate. While this addresses a specific issue, it highlights the importance of periodically reviewing your structure to ensure that it remains appropriate.

Finally, I am pleased to announce that the Smith & Williamson charities group has teamed up with Quorum Training to provide a range of webinars and other training for charities – please see for more details.

Rewards and Recognition

By Hugh Margesson and Rachel Stone

The current job market suggests that there should be a surplus of good candidates. However, the experience of many employers in the charity sector is that suitable and motivated candidates are in short supply. This has led numerous charities to consider their structure and approach to reward.

A greater focus on performance rather than length of service or 'commitment to the cause' is driving a more business-like view of pay and benefits packages. A comparison of sector pay rises in the three months to the end of June 2011 by the IDS Pay Report shows a 1.3% rise for the charity sector compared to 2.5% over all sectors.


Ensuring a competitive reward offering is important, but who should charities benchmark themselves against in terms of pay?

A common misconception is that charities are only competing with other charities for talented individuals. While there are specialised roles relating to the specific purpose of the charity or to fundraising, many roles, such as administration, finance, HR and marketing, are transferable and many aspects will be common to other employers. A competitive rewards package will therefore need to take account of a wider range of benchmarks, and it will be important to view pay and benefits as a whole. This does not necessarily mean that pay will be subject to upward pressure, and in some charitable sectors there is evidence of undercutting in a 'race to the bottom' to be more competitive. This is particularly prevalent in charities which are largely reliant on contractual funding from the public sector.

Staff motivation

Pay progression, or a lack of it, has an impact on staff motivation and retention. When individuals reach the top of their pay scale, they may need some additional recognition if pay increases or promotions are unaffordable or unsuitable. This could be recognition as an expert in their field or access to a broader range of development opportunities – in fact, anything that adds to the status and profile of the individual.

Striking a balance

In the current job market the not-for-profit sector may be seen as a safe haven, and the risk is that some new recruits may have a distinctly short-term commitment to the charity. Realistically, staff will move on in time to improve their career prospects, and some turnover is actually healthy. Too much turnover, however, plays havoc with team structures and team-working so you will need to make sure that your career and pay progression models cover and encourage the right timescales, keeping people motivated but not pricing them out of the market.

Vital questions to consider in relation to career and pay progression models

  • Who are you competing with to attract good staff?
  • How do you reward and motivate people when pay rises are unaffordable?
  • What sort of turnover of staff is it realistic to expect?

Time to re-merge?

By Mike Scott and Sarah Chiappini (Charles Russell LLP)

Is it time to consider re-merging your school charity with its foundation?

It is not uncommon for the land and buildings of an independent school to be held by one charity – often referred to as a foundation – and for the school itself to be run by a separate school charity. The historical reasons for independent schools being structured in this way will of course vary. One such reason was that in the 1970s trustees were nervous of the Labour Government's attitude towards independent schools. Consequently, in order to protect the charity's assets, namely the land and buildings, the running and operating of the school was hived off to a separate organisation, with the land and buildings being retained by the original charity (the foundation).

The trustees of the foundation then granted a lease, usually at less than a market rent, to the new school charity in respect of the use of the land and buildings for the purposes of running and operating the school. In addition, the foundation often provided means-tested bursaries and scholarships to pupils attending the school.

Is it still expedient to operate as two separate charities?

While such a structure may have been appropriate 30 or 40 years ago, it would be prudent for the foundation trustees and the governors of the related school charity to review whether or not this is still the case. It could be that the best interests of both entities are served by operating as one charity. (In most cases a new charitable company (NewCo) is established to which the unrestricted assets, liabilities and undertakings of the school charity and the foundation will be transferred.) However, trustees might conclude that a re-merger would put the foundation assets at risk because of potential liabilities arising from the running of the school.

The rationale for operating as one organisation

Before proceeding with re-merging, the trustees of the foundation and the governors of the school charity must be satisfied that: (a) they have sufficient powers, and (b) it would be in the best interests of their respective organisations. So far as (b) is concerned, they might consider that a re-merger would be the right choice for the following reasons.

1. By only having one operative charity the structure would be simplified, enabling greater transparency and public comprehension. The current structure may be difficult to explain to outsiders when fundraising; operating as a single charity would remove this confusion.

2. There are practical benefits arising from a streamlined structure since NewCo, as a corporate entity, would be running the current activities of both the foundation and the school charity.

3. As a limited company, NewCo would be the appropriate vehicle for conducting the business of the school, both in terms of being a legal entity to hold property and because of the limited liability it confers upon its members.

4. The lease between the foundation and the school charity would be cancelled. This would remove the somewhat circuitous arrangement whereby the school charity pays the foundation rent for use of the foundation's land and buildings and at the same time the foundation pays an amount to the school to fund scholarships.

Legal and practical considerations

Legal and practical considerations include but are by no means limited to the following.

The need to involve the Charity Commission

This will depend on the facts of each case. However, in our experience, provided that the Commission has all the facts and the rationale, it has been most co-operative.

Objects of NewCo

These will need to be sufficiently widely drafted to incorporate the current objects of the foundation and the school charity.

Permanent endowment/objects of the foundation

If the foundation has permanent endowment property it will need to be retained, but with NewCo being appointed its trustee. It is likely that the Charity Commission will need to be asked to extend the foundation's objects so that the land and buildings can be used by NewCo in connection with the running of the school.

Tax considerations

Charity mergers do not usually have tax consequences but in some cases the foundation or the school's accountants might advise that prior clearance is sought from HMRC. Pensions Specialist advice should be sought regarding the ability to transfer pension schemes to NewCo and whether any pension deficits would crystallise upon the transfer to NewCo.


If the foundation and/or the school charity are in receipt of, or are likely to be in receipt of, legacy income, it may be appropriate to ask the Charity Commission to retain either or both as an empty shell for the purpose of collecting legacies and passing them to NewCo.

The facts of each case will vary and this is intended to be an outline only of this matter and cover some of the relevant considerations.

The Bribery Act - What is an appropriate response?

By Adrian Wild

As a minimum, every charity must assess the risks it faces as a result of the Bribery Act 2010.

As has been well reported in the national press, the Bribery Act 2010 was finally enacted on 1 July this year. The Bribery Act 2010:

  • codifies existing common law
  • consolidates existing statutes
  • creates new offences.

The most onerous new offence created is that of the failure by commercial organisations (including charities) to prevent bribery. This offence is committed if a person associated with the organisation proffers a bribe so as to retain or obtain a commercial advantage.

This offence is onerous for a number of reasons.

  • The offence applies to acts undertaken by associates – which could relate to a large number of people, some of whom you may have little control over.
  • An offence is committed if an associate just offers a bribe – no money need actually change hands.
  • The associate need not have been convicted under the Act.
  • It is a strict liability offence – that is, no element of negligence needs to be proved for an offence to have been committed.
  • There is no limit to the fines which can be levied. Assuming that a bribe has been offered/ made, the main defence for a commercial organisation is to demonstrate that it had adequate procedures in place to prevent acts of bribery.

Adequate procedures

Like a lot of modern law, the Bribery Act 2010 is rather unsatisfactory in providing definite answers; the Act basically delegates the assessment of what adequate procedures are to the courts. Until a number of cases have been brought before the courts, there is no guidance carrying the force of law for charities to follow.

However, the Ministry of Justice has issued guidance together with a Quick start guide to the Act. The Charity Commission has also updated its Compliance Toolkit to cover the Act and guidance for NGOs has been published by Bond (the UK membership body for NGOs working in international development). Taking into account the guidance, we suggest some practical actions which you might wish to take.

Do you actually need to do anything?

The Bribery Act does not compel you to do anything and it would be easy to ignore it, but is that an acceptable response? For a small owner-managed business it may be that the risks are small and that the owner/manager would be the only person in a position to proffer bribes and to suffer any loss arising (from the possible unlimited fines).

However, for charities we don't think that doing nothing is acceptable, for a number of reasons.

  • Charities exist to help their beneficiaries – any loss to the charity would represent a loss to those beneficiaries, rather than to those who were at fault.
  • Trustees are volunteers with limited day-to-day involvement – but they bear overall responsibility for the charity.
  • There is a presumption that trustees will undertake reviews to identify the risks to which the charity is exposed. While the risk of bribery might be considered small, the impact of any breach could be significant.

What is the potential impact?

As well as unlimited fines, there are a range of other possible consequences. Probably the most serious would be the reputational loss for the charity which could adversely impact future funding. Since bribery is a crime, the Proceeds of Crime Act could apply if the charity has received money (for example a grant) as a result of paying a bribe and the courts could confiscate the entire grant.

For trustees the position could be more serious. Under charity law if a charity suffers loss from trustees' negligence, then the trustees could be obliged to make good that loss. If the charity had not put in place procedures to prevent bribery and suffered losses as a result, the trustees could be held to be negligent.

Risk assessment

As a minimum, every charity must assess the risks it faces as a result of the Bribery Act 2010.

Without such a risk assessment, trustees have no basis for either taking further action or to justify why no action is required.

How to assess risks?

So far as bribery is concerned, there are two areas of risk.

1. The receipt of a bribe by staff which influences their decisions.

2. The payment of bribes to procure a commercial advantage for the charity (it is this area which the new offence covers).

For most charities considering these questions and their implications is unlikely to be an onerous exercise. We would assume that for most small UK-based charities few, if any, risks would be identified.

Factors charities operating in the UK should consider

Past history

Have there been instances of bribes being paid or requested in the past?


What activities are undertaken? What scope is there for bribery?

For example:

  • If a charity incurs significant external expenditure (e.g. in constructing properties) is there scope for contractors to proffer bribes?
  • Where a charity is tendering to provide services, is there a possibility that bribes might be requested or proffered by staff?

Business relationships

What entities does the charity have relationships with? Do they have appropriate policies and procedures in place to prevent bribery? For example:

  • public sector tendering processes are usually designed to prevent bribery
  • most grant giving charities have written policies as to how grants are allocated and decisions are made by committee, rather than any one individual
  • grant funders usually have formal processes setting out how such income is allocated.

Third-party reliance

What third parties provide services for the charity? Is there scope for them to proffer bribes on behalf of the charity? For example, could an external fundraiser use funds raised to proffer bribes?

Responding to the risks

The Ministry of Justice's Quick start guide states that "if there is very little risk of bribery... you may not feel the need for any procedures to prevent bribery". While this might be attractive, given the risks of non-compliance with this legislation, to do nothing is probably unwise. This does not mean that substantial additional procedures are needed. All charities should already have systems in place to cover the control of expenditure which should protect against the payment of any bribe by charity staff and the proffering of bribes by third parties in return for favourable treatment of contractors. On this basis, our suggested actions are given in the table to the right.

There has been a lot of press comment relating to the Bribery Act and its potential impact. However, we believe that for most UK-based charities, the Act is unlikely to pose a significant burden. As people become used to the requirements, it will become just one part of the annual risk assessment and management process.

Suggested activities charities should undertake

Update policies

Your policies should be updated to cover bribery and should state that you have a zero tolerance approach. You might like to make this available on your website – for an example, visit anti-bribery-corruption-policy

Staff handbook

Your staff handbook should refer to bribery and include a specific statement that acts of bribery may constitute gross misconduct. The handbook should also give guidance to staff as to what to do if they are offered a bribe or a bribe is solicited from them.


Trustees and key staff should be made aware of the Act and all staff should be made aware of any changes to the staff handbook.


A system for recording any bribes offered or solicited should be implemented. This should simply be added to existing systems for whistleblowing and reporting of frauds. (If these do not exist, a requirement in the staff handbook that acts of bribery should be reported to the chief executive or the chairman would probably suffice).

Reliance on third parties

If you have any significant reliance on third parties (perhaps a fundraising company), as a minimum you should satisfy yourselves that the third party has adequate procedures in place. This might be as simple as asking the third party to confirm this in writing.

In addition, if your risk assessment highlights any specific risks then you should implement appropriate procedures in respect of those risks.

Financial reporting in the charities sector

By Fiona Reid

The ASB has issued an exposure draft of the proposed public benefit entity accounting standard.

The UK Accounting Standards Board (the ASB) has a current project called "The future of UK GAAP" with the long-term goal of converging UK Generally Accepted Accounting Practice (UK GAAP) with International Financial Reporting Standards (IFRS). The initial ASB proposal was for a three-tier approach.

Tier 1

Full IFRS should apply for publicly accountable entities. It is proposed that publicly accountable entities should include those with listed debt or equity instruments, or entities that hold assets on behalf of a large group of outsiders (e.g. banks, insurance companies). There will be a small number of charities that fall within this tier. The Companies Act will have to be amended to allow charities to apply IFRS as this is currently not permitted under UK law.

Tier 2

Entities that are not publicly accountable but do not meet the small company criteria as defined by statute will apply the Financial Reporting Standard for Mediumsized Entities (FRSME), a proposed UK version of IFRS for medium-sized entities.

Tier 3

Entities that are not publicly accountable and qualify as small companies can prepare accounts under the existing UK Financial Reporting Standard for Smaller Entities (FRSSE).

In response to public consultation, the ASB has suggested that these proposals might be changed, so that:

  • tier 1 would be applicable only to those entities required by law or other regulation to use full IFRS
  • the FRSME would be changed to allow greater consistency with existing UK GAAP and full IFRS
  • the effective date will be put back from 1 July 2013 to 1 January 2014.


The FRSME has been developed for use by for-profit entities. The ASB is developing the Financial Reporting Standard for Public Benefit Entities (FRSPBE) for not-forprofit entities that will follow the FRSME, and issued an exposure draft (FRED 45) of this in March 2011.

The FRSPBE will be mandatory for public benefit entities (PBEs) applying the FRSME and will be considered best practice for other PBEs. The aim of the FRSPBE is to provide guidance on transactions which are unique to not-for-profit entities and are not covered by the FRSME.

PBE statements of recommended practice (SORPs) will be retained as part of the financial reporting framework. The Charities SORP Committee is currently developing a new SORP which reflects the proposed changes. The draft of this will not be issued for consultation until the FRSPBE is issued in final form, which means that the SORP consultation period is likely to be in the first half of 2012, at the earliest.

The draft FRSPBE deals with a number of issues specific to PBEs:

  • concessionary loans
  • property held for the provision of social benefits
  • entity combinations
  • impairment of assets
  • funding commitments
  • income from non-exchange transactions.

Property held for the provision of social benefits

Property held for the provision of social benefits would include housing properties for social rent, care homes, schools, hospitals and similar properties. The exposure drafts of the FRSME and the FRSPBE require that such properties be measured at cost if held for use in the charity's primary purpose service provision.

While revaluation of charitable property is relatively rare, in the social housing sector it is more common. This would be a significant change and it seems likely that the ASB will be forced to reconsider following responses received during the consultation period.

Impairment of assets

The FRSME requires that an asset be written down to its 'recoverable amount' if it is impaired. This requirement is the same under existing UK GAAP. 'Recoverable amount' is defined as the higher of fair value less selling costs, and value in use. Determination of value in use for a for-profit entity is based on the present value of future cashflows generated, but this method is not appropriate for PBEs. Therefore an alternative valuation method has to be applied, usually depreciated replacement cost. This is defined as "the most economic cost required for the entity to replace the service potential of an asset at the reporting date". This definition sounds simple, but in reality could be difficult and potentially costly to assess. In contrast, UK GAAP currently allows charities to use non-financial measures of impairment, the most common method being the use of the service potential. Currently a financial impairment would not necessarily need to be recognised if the property was being fully utilised to provide services to the charity's beneficiaries.

The FRSPBE requires that PBEs carry out an impairment review if any of the indicators of impairment that are included in the FRSME are present. This is a contentious requirement as one of the indicators listed in the FRSME is "the carrying value of the net assets of the entity is more than the estimated value of the entity as a whole". This is relevant to profit-making entities, but is irrelevant to not-for-profit entities.

The existence of an impairment indicator requires an entity to undertake an impairment review. That is, calculate fair value less selling costs and value in use, and consider whether any write down is necessary. This is potentially an expensive exercise as charities are likely to require the assistance of external advisers.

The FRSPBE introduces an additional indicator for charities, being any indication that the service potential of the asset has been impaired, for example if there is reduced demand for the service provided. This does not represent any change from the current requirements of the Charities SORP. However, as noted, the key difference is that under UK GAAP service potential is both an indicator of possible impairment and a method by which any impairment can be assessed. Under the FRSPBE, the service potential is simply one of a number of impairment indicators.

Incoming resources from nonexchange transactions

The two important areas covered by this section of the FRSPBE are Government grants and donated assets.

The FRSPBE is relatively silent on Government grants and refers to the treatment required by the FRSME. Many in the charity sector consider that this is an omission in the FRSPBE, particularly as the accounting for grants varies significantly within the PBE sector, where social landlords and education establishments have differing treatments compared to charities. This is an area where clarification would be useful.

Charity accounting requirements state that Government grants should not be deferred just because they are for capital expenditure. The FRSPBE does not intend to change this, but it also does not explicitly deal with this scenario therefore leaving it open to misinterpretation. There is also concern in the sector that the FRSPBE does not distinguish between performance conditions and restrictions on income; the former might give grounds for deferral whereas the latter would not.

In general, donated assets are recognised as a donation at their value when received. However, the exception to this has always been goods donated to charity shops which have previously only been recognised as income when sold.

The FRSPBE requires PBEs to value goods received via a non-exchange transaction at fair value. This will apply to goods donated to charity shops as well as – for example – donations of major assets. It is the widening of this requirement to value goods donated to charity shops which has caused the most contention. The guidance allows an entity to "estimate the value of those [donated] goods taking into consideration past experience and expectations". In the case of stock donations, such estimations are unlikely to be accurate, and, if the stock figure represents a significant value in the accounts, it is likely that the valuation method would become a contentious audit issue.

In some areas the FRSPBE serves to retain the accounting treatment that charities have been following for many years. However, some of the proposals, if included in the final version of the FRSPBE, could have a significant impact on charities. (For example the valuation of stock in charity shops and the requirement to carry social housing properties at cost).

Charities will no doubt be hoping that the ASB takes on board their comments from the consultation period and revise some of the more contentious requirements of FRED 45 before the standard is issued in final form.

VAT update

By Ian Stinson

In the summer 2011 edition of charities, we reported on several VAT developments relevant to the charities sector.

This update included discussions on the proposals for VAT-exempt cost-sharing arrangements and new VAT recovery rules for independent academy schools.

HMRC has since published a consultation document on the implementation of the cost-sharing exemption in the UK, with a view to publishing draft legislation in 2012.

HMRC invites comments on a potential model allowing groups of eligible bodies (including charities, housing associations, universities and further education colleges) to share certain resources without generating irrecoverable VAT on the costs charged to group members. It also asks specific questions about the potential impact of implementation.

The consultation will run until 30 September 2011 and the document can be found on the HMRC website.

HMRC has published VAT Information Sheet 09/11 (available on the HMRC website) since the last charities newsletter, detailing the new VAT refund scheme for academies and providing guidance on what VAT can be reclaimed and the method available for claiming the VAT.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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