Within this issue we present and comment on an eclectic range of topics.
After much debate, it appears that new UK accounting standards are in sight and the new charity statement of recommended practice (SORP) should follow for consultation soon after. While such fundamental change is not always welcome, I believe that for most charities the impact will be less than feared.
On the taxation front, there is mixed news. For most charities, corporation tax is not a significant issue but, as Claire Perrett explains, getting it wrong can be very expensive. The case she considers highlights the weight that the High Court places on objects and the difficulty that can arise in assessing whether they are charitable. Equally, it is important for all charities to periodically consider whether they are suffering from 'object creep' which could have a tax cost.
In the VAT arena, efforts to mitigate the withdrawal of the listed buildings VAT relief continue and HMRC has published some rather lengthy guidance on the cost-sharing exemption. It remains to be seen whether the complexity will render this relief unattractive. On a more positive note, Nigel Kershaw OBE explains some of the background to the launch of The Big Issue, the subsequent creation of Big Issue Invest and how profits are channelled into The Big Issue Foundation. Of particular interest is the statistic that social enterprises are now estimated to generate a turnover of over £27bn, generating significant funds for charities.
I hope you enjoy this issue.
The ASB has issued three new reporting standards which we anticipate will become the accounting framework for the UK.
In our winter 2011/12 Charities newsletter we reported that the UK Accounting Standards Board (ASB) was considering responses to its consultation on the future of UK Generally Accepted Accounting Principles (GAAP). It proposed a framework based on International Financial Reporting Standards (IFRS) for the UK.
At the beginning of this year, the ASB issued three new exposure drafts which are anticipated to become the new accounting framework for the UK. The expected new standards will replace all current UK standards, other than the Financial Reporting Standard for Smaller Entities (FRSSE) which will remain available for use by small entities. The consultation period for these exposure drafts closed in April 2012 and the standards are expected to be issued in final form early next year.
The new reporting standard, which will apply to all UK entities other than those which qualify as small or those required to prepare accounts under full EU-adopted IFRS, is FRS 102 'The FRS applicable in the UK and Ireland'. (The other two standards are FRS 100 'Application of financial reporting requirements' and FRS 101 'Reduced disclosure framework for IFRS preparers').
SETTING THE STANDARD
By Fiona Reid
The originally proposed three-tier framework has been considerably simplified. In particular, there is no longer a proposed requirement for all 'publically accountable' entities to report under full IFRS. This is good news for credit unions and other not-for-profit entities that might have otherwise been caught by the ASB's definition of publically accountable. The new framework requires only those entities that are currently obliged to prepare accounts under full EU-adopted IFRS to continue to do so, and does not extend this requirement. Company law in the UK does not currently permit charities to prepare accounts under full EU-adopted IFRS.
Other significant changes from the previous proposals were:
- replacing the IFRS formats for the income statement and balance sheet with the formats currently set out in UK company law
- allowing alternative treatments permitted under current UK GAAP, such as revaluation of tangible and intangible fixed assets
- permitting the capitalisation of borrowing costs
- permitting the capitalisation of development costs if certain criteria are met
- the inclusion of guidance for the use of merger accounting in group reconstruction situations and mergers of not-for-profit entities
- the amalgamation of the proposed public benefit entity reporting standard into the draft of FRS 102.
Some consequential amendments to the FRSSE will be made as a result of this changing framework. The presumed useful economic life of goodwill will be reduced from 20 years to 5 years to be consistent with the treatment under FRS 102.
The proposed effective date for the new framework is for accounting periods beginning on or after 1 January 2015. This means that the transition date is 1 January 2014 as entities will have to prepare an opening balance sheet for the comparative period for their first set of accounts under the new standard.
The charities SORP is also undergoing revision. As well as being updated for the changes in FRS 102, the SORP committee is considering other feedback and research findings to improve the SORP, as follows.
- Think small first: the SORP will be written to be more accessible to smaller charities.
- The current SORP contains a lot of guidance and is therefore a long document: the new SORP will seek to rebalance guidance/length.
- Where possible, less technical language will be used, so that the SORP is more accessible.
- A modular format will be adopted to make it easier for charities to access the parts which are relevant to their specific circumstances. (For example, there will be separate modules for charities applying FRS 102 and for those applying FRSSE.)
Currently, most charities are eligible to adopt the FRSSE, but many of them do not as the current SORP imposes significant disclosure requirements which eliminate the benefits of the FRSSE. However, in the future, such charities may be tempted to use the FRSSE rather than transition to FRS 102.
The SORP will also have to be issued for consultation, but the timing of this is dependent on the issue of a final version of FRS 102 by the Financial Reporting Council.
PEOPLE, PROFIT, PLANET
The emergence of the social entrepreneur
By Nigel Kershaw
Back in 1991, when The Big Issue was set up, the idea of a 'social entrepreneur' was completely foreign to most people. There were a few pioneers out there involved in 'ethical business', such as The Body Shop, and one or two you might call 'social innovators', like Lord Michael Young, who helped create the Open University and the Consumers Association. But social entrepreneurship itself was largely uncharted territory.
Now, in 2012, the term social entrepreneur is much more widely used, and we are seeing many social enterprises doing business in ways that create a positive social impact.
One of my heroes in life, Thomas Paine, a radical involved in both the American and French revolutions, once said, "A long habit of not thinking a thing wrong gives it a superficial appearance of being right." Paine was talking about the need to always challenge the status quo, and not accept things as they are. This underlies the story of my life, the story of social enterprise and the story of The Big Issue.
The Big Issue is born
Gordon Roddick and A. John Bird launched The Big Issue in 1991 in response to the growing number of rough sleepers on the streets of London. It addressed the problem by offering people who were homeless, or at risk of homelessness, the opportunity to earn a legitimate income, thereby 'helping them to help themselves'. Created as a business solution to a social problem, it has gone on to become one of the most instantly recognisable brands in the UK and a powerful blueprint for social change.
The organisation currently works with around 2,500 homeless and vulnerably housed people across the UK, and circulates over 105,000 copies of the magazine every week. Now comes the really good bit – the vendors pay £1.25 for each magazine and sell it on for £2.50. What we've done here is create 2,500 entrepreneurs and given them a self-sufficient alternative to begging, stealing, prostitution and street crime.
It sounds simple, but this idea really challenged business norms and we came up against a lot of resistance both from charities and business. For example, bank managers just couldn't get their heads around the fact that we might want to use our profits to solve homelessness rather than buy a yacht in Marbella!
Tackling the root causes of homelessness
But our social impact doesn't stop there. When The Big Issue makes a profit we mug ourselves on the way to the bank and give that profit to our foundation to help tackle the underlying causes of our vendors' homelessness. We've created a transformative business model that really works. We're not frightened of making profit. The profit we make, through the simple self-help mechanism of selling a magazine to our vendors, is recycled to seek to dismantle the causes that created the problem in the first place.
And that is what social enterprise is all about: finding a business solution to a social or environmental crisis. Creating profit to reinvest in growing the business and delivering the social mission.
In good company
Thankfully, we are by no means an isolated example. Government figures suggest there are more than 55,000 social enterprises in the UK, generating annual turnover of more than £27bn. Other well-known social enterprises include the Eden Project, Cafédirect and Jamie Oliver's Fifteen Foundation.
Less well known but equally inspiring examples are Cool2Care and My Time. Cool2Care places care workers with families with disabled children, while My Time delivers mental health counselling services. They were both set up by entrepreneurs who had experienced the problems they wanted to solve. Both offer remarkably innovative solutions to big social challenges. And both make a financial profit and deliver a social dividend.
Big Issue Invest
We're now helping to expand the social enterprise sector with Big Issue Invest, which is effectively an old-fashioned merchant bank that is run by social enterprises, for social enterprises. All our funds have been raised in the private marketplace with initial seeding from Government. So far we've loaned nearly £20m to 230 social enterprises – including Cool2Care, My Time and Fifteen – with a loan repayment rate of 96% (and that with 75% loaned against future cash flows).
In 2010, we launched a fund to raise private capital to invest in social enterprises, with reasonable financial returns and high social impact. Investors include HSBC, Deutsche Bank, the Esmée Fairbairn Foundation and NESTA, as well as individuals and family trusts, such as Tony Nutt from Jupiter Asset Management, Eric Lonergan of M&G Investments and Henry Tinsley, formerly of Green & Blacks.
With Big Issue Invest we've had to turn the traditional finance model on its head. We're challenging the status quo again – extending the boundaries of traditional investment and philanthropy.
Making a difference
The culture of saying, "Yes, we can do things differently" comes from being a social enterprise. It comes from the kind of radical thinking upheld by Thomas Paine. And it's the kind of thinking that will continue to drive increasing numbers of social entrepreneurs as they look to address both inequalities and social and environmental problems with business solutions that can really transform our society.
Big Issue Invest
By social entrepreneurs – for social entrepreneurs
Big Issue Invest is a specialist provider of finance to social enterprises. Part of The Big Issue group of companies, it is led by social entrepreneurs and experienced social financiers. Big Issue Invest pays any dividends generated up to its parent, The Big Issue, a social enterprise with a charitable arm, The Big Issue Foundation.
For further information, visit
LORD HODGSON RECOMMENDS...
By Adrian Wild
Adrian Wild discusses Lord Hodgson's review of the Charities Act 2006, and outlines the actions he recommends that charities themselves should take.
As detailed in our summer 2011 issue of Charities, Lord Hodgson was appointed by the Government to review the operation of the Charities Act 2006. (You may recall that the Act was unusual in that it contained a requirement to be reviewed after five years).
Lord Hodgson issued his report in July 2012. Although running to 159 pages in length, it is clearly laid out and surprisingly easy to access. However, the value of any such report is in the conclusions drawn and, in particular, whether any action is taken as a consequence. In the report, Lord Hodgson has come up with nearly 110 conclusions and about 100 suggestions for future action. Of immediate interest to charities will be those actions which Lord Hodgson suggests that they themselves should take. (He also proposes actions for the Charity Commission (the Commission), the relevant minister and identifies where legislation is required).
We summarise the key suggestions aimed at individual charities which can be applied immediately.
Public benefit and impact reporting
Charities exist for the public benefit and always have done. However, there is a perception that some charities' annual reports do not always adequately demonstrate the benefits that they deliver. It is suggested that charities should recognise how public benefit reporting forms an essential part of their annual reports and one which should enhance public confidence in the sector. In part, this can be achieved by changing the focus of reports, with more emphasis on how the lives of charity beneficiaries are enhanced, as opposed to the nuts and bolts of service delivery.
Some charities have difficulty recruiting and retaining trustees, particularly if the position requires particular skills or attributes. For other charities, trustee bodies comprising long-serving trustees can put off potential recruits and occasionally, if the trustees are unwilling to consider change, can stymie the development of the charity.
For these reasons, the report makes a number of recommendations relating to trustees.
- Charities should consider reimbursement of trustees' expenses. Our experience is that most charities do this, but that not all trustees claim expenses.
- Charities should limit the length of service of trustees to no more than three terms of three years each.
- Where there is no such limit on length of service, the annual report should include an explanation for this.
Charity fundraising has a high profile, be it TV campaigns, door to door collections, mail shots or the solicitation of donations in the street. For many individuals, their sole interaction with a charity will be making donations. Standards of probity and compliance with the law must be demonstrably high. In 2006 the Fundraising Standards Board (FRSB) was set up to be a self-regulatory body for UK fundraising. While membership of the FRSB is currently voluntary, Lord Hodgson recommends that:
- all fundraising charities with an income of more than £1m should be members of the FRSB (and this limit should be reduced over time)
- members of the FRSB should use the FRSB tick logo on all fundraising material.
- Unregistered charities should disclose that they are unregistered on all correspondence, fundraising materials and cheques.
- Charities should have policies on dealing with disputes and complaints, and those policies should be published. Lord Hodgson also sees a significant role for umbrella bodies. Umbrella bodies are organisations which seek to represent charities with common characteristics – examples being the Northern Ireland Council for Voluntary Organisations and the Hospital Broadcasting Association. Such bodies also offer guidance and support to their members.
Lord Hodgson also suggests that they should:
- provide guidance on recruitment best practice, in conjunction with the Commission
- work with Government and the Commission to create a centralised portal for trustee vacancies to continue to develop a partnership role with the Commission so that, for example, such bodies could assist with resolving queries (we believe that this is pragmatic, given the reduced funding available to the Commission)
- work with the Commission, Government and the FRSB to enhance the self-regulation of fundraising and promote membership of the FRSB. There is an expectation that individual charities should be a member of one (or more) umbrella bodies. (The Charity Commission lists such bodies on its website: www.charity-commission.gov.uk).
While many of Lord Hodgson's recommendations require action by Government and/or the Commission, we believe that the actions identified for charities will be seen to represent best practice in the sector. It is therefore incumbent on all trustees to consider the recommendations and take any actions which are appropriate for their particular charity.
ARE YOU SURE YOU HAVE NO TAX REPORTING REQUIREMENT?
By Claire Perrett
Decisions upon charitable status rarely reach the higher courts. The Court of Appeal judgment in Helena Partnerships Ltd v HMRC is therefore particularly important. The decision includes consideration of whether objects 'for the benefit of the community' are for the public benefit and therefore charitable. The Court of Appeal unanimously dismissed an appeal by the housing association against the decision.
Helena Partnerships Ltd was incorporated in January 2001. It was a registered social landlord and its objects were the provision of housing, accommodation, assistance to help house people and associated facilities and amenities, and any other object that could be carried out by a social landlord for the benefit of the community. It therefore believed itself to be charitable with no tax reporting requirement; however the Court of Appeal found otherwise.
The key points of the judgment are as follows.
- A statement in the objects that the activities of an organisation must be for the benefit of the community is not enough to confer charitable status.
- The provision of good quality housing stock is not analogous to the other public works that have been regarded as charitable.
- The provision of housing is only charitable if it is directed at the relief of a charitable need such as the relief of poverty or illness.
This case has cost Helena Partnerships Ltd £6m in corporation tax relief and emphasises the importance of the objects. In November 2004, Helena changed its objects and registered as a charity with the Charity Commission, thus achieving excluded status from 2004.
Although it is time consuming, if you are in any doubt regarding your charitable status it is worth considering obtaining clearance from HMRC or Charity Commission registration. Smith & Williamson can help you with this.
A round-up of topical VAT issues affecting the charity sector
By Ian Mullen
Places of worship grant scheme extended
In the March 2012 Budget, the Government announced the withdrawal of the VAT zero-rating for approved alterations to listed buildings with effect from 1 October 2012.
At that time, the Government also announced that it would extend the grant scheme offered by the department of culture, media and sport (DCMS) to incorporate approved alterations to listed places of worship to mitigate the removal of the zero-rating.
Under the extended scheme, grants may be claimed towards the VAT paid on the approved alterations. The existing scheme will also be simplified so that the same eligibility conditions apply for both approved alterations, and repairs and maintenance.
Some minor changes will be made to the scheme, including:
- a return to monthly payments from November 2012
- the removal of restrictions on claims for plumbing and electrical work, kitchens, toilet fittings, floor coverings, handrails, decoration work, repair work to pews and asbestos removal
- the inclusion of claims for security systems to prevent crime.
In addition, DCMS and HM Treasury have announced a review of grants for the VAT element of costs not paid for by an insurance company, with a view to removing such claims from the grant scheme from April 2013.
The extended scheme and the aforementioned changes came into effect on 1 October 2012 and full details of how the scheme will work and the new application form are now available on the listed places of worship grant scheme website (www.lpwscheme.org.uk).
In past editions of the Charities bulletin, we have reported on proposals to introduce a VAT exemption for services supplied between specified organisations, including charities.
The relevant legislation has now been enacted and HMRC has recently issued guidance on how the exemptions will be applied. VAT Information Sheet 07/12 can be found on the HMRC website.
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.