Charities SORP (FRS102) Update Bulletin 2
The Statement of Recommended Practice for Charity Accounting (‘the SORP’) sets out the reporting framework that charities preparing accounts on the accruals basis are required to follow. Issued in 2014, it is subject to frequent updates to ensure that it remains up to date.
The most recent update to the SORP, Update Bulletin 2, was issued over a year ago. Its impact is only now being felt as charities start to prepare their 2019 accounts.
The Bulletin contains a number of ‘clarifying amendments’ that take effect for accounting periods commencing on or after 5 October 2018. These provide guidance on how the existing requirements of the SORP should be interpreted in the areas of comparative information, the depreciation of fixed assets and the payment of Gift Aid by a subsidiary trading company to its charitable parent. On this last issue a separate Information Sheet has also been published providing guidance on the accounting by subsidiary companies in respect of Gift Aid payments.
There are also a number of changes introduced that take effect for accounting periods commencing on or after 1 January 2019 that are designed to ensure that the SORP remains consistent with the requirements of FRS102, the Financial Reporting Standard on which the SORP is based. The most significant of these relate to investment property, charitable mergers and the statement of cash flows. Although these are the most significant, other less significant changes are likely to impact a limited number of charities.
Charity SORP reform
New plans have been announced that will change the way the SORP will be developed from 2020 so that it better meets the needs of the users of charity reports and accounts. This follows a comprehensive governance review of the SORP development process in recent months.
These changes include:
- reform of the SORP Committee to ensure a stronger culture of constructive challenge, better stability and better representation by small charities and funders with an interest in the impact charities have
- the creation of seven stakeholder groups that will work in partnership with the SORP committee to ensure that the needs of the users of charity accounts are understood and reflected when writing future versions of the SORP.
If you are interested in joining a stakeholder group or applying for membership of the SORP Committee, details are included on the dedicated SORP website: www.charitysorp.org. The intention is to have representation from across the UK and Ireland to reflect the coverage of UK-Irish Generally Accepted Accounting Practice.
External scrutiny benchmark
CCEW has published details of the ‘External scrutiny benchmark’ that it uses to assess filed charity accounts to determine whether they meet the minimum expected standard. Although some may find the criteria included as part of the benchmark quite basic, CCEW’s own research shows that only 76% of the accounts filed by larger charities with income greater than £1 million meet all of the criteria. For smaller charities the failure rate is much higher.
By publishing the benchmark CCEW hopes that charities will be better placed to ensure that the accounts they prepare meet all of the minimum standards. This is true not just for charities that prepare their accounts themselves, but also where they employ a professional accountant to do so, enabling them to assess whether the adviser has the necessary skills and expertise to prepare charity accounts.
Charity Tax Commission report
In July the Charity Tax Commission published a report setting out areas where reform of the tax system could be made for the benefit of the charity sector. Established by the NCVO and led by a former chairman of the Inland Revenue, the Commission’s proposals aim to boost charities and unlock a wave of giving.
Short-term proposals made by the Commission that could be introduced include:
- The reform of Gift Aid, with the value of additional and higher rate tax reliefs directed to charities in addition to the current 20% basic rate tax relief. This reform alone could be worth as much as £250 million to the charity sector.
- The launch of a Universal Gift Aid Declaration Database, a single, enduring declaration that individuals can make covering all future charitable gifts, that would reduce the administrative burden on charities when operating the Gift Aid Scheme.
- Making it mandatory for employers to offer Payroll Giving, to encourage greater uptake of this form of charitable giving.
- Simplification of VAT rules affecting charities, including ways to reduce the amount of VAT levied on the goods and services provided to charities that they are unable to recover, and the disparity in VAT treatment between grants and contracts.
- The removal of VAT from wills that include a charitable donation in order to encourage the potential of legacy giving.
- The extension of business rates relief to wholly-owned trading subsidiaries of charities.
- Greater transparency in the annual reports of charities about the money they receive from tax reliefs.
The Charity Tax Commission is also advocating longer-term proposals for a comprehensive review of Gift Aid, VAT and business rates relief to ensure that they adapt to the changing ways that charities deliver their services in the 21st century.
Of course there is no guarantee that these proposals will ever make it into law, but with a potential change in government in the next few months it is hoped that the time is right for reform of charity tax.
VAT: Making Tax Digital
Over the last few months its been difficult to avoid the introduction of Making Tax Digital (‘MTD’), a new approach to VAT reporting that affects all VAT registered businesses from 1 April 2019 with taxable turnover over the VAT threshold, currently £85,000. There is no exemption from the MTD requirements for VAT registered charities, although many that are not limited companies will have had their start date deferred to their first VAT return period starting on or after 1 October 2019. For those making quarterly returns this means that the quarter ended 31 December 2019 will be the first that needs to be filed with HMRC in accordance with MTD principles.
To comply with MTD charities will need to keep digital records and submit their VAT returns using MTD compatible software. If you have not already done so, you should review your systems to determine whether you are ready for MTD or need to implement changes to be able to continue to meet your VAT reporting obligations.
Gift Aid and donor benefits
Tax legislation limits the amounts of benefits that can be given to donors in relation to gifts made by individuals to charities, so that those gifts remain eligible for Gift Aid.
Earlier this year the Finance Act 2019 simplified these rules, which in certain cases also increased the value of benefits that can be given to donors.
Under the new simplified rules which apply for gifts made to charities on or after 6 April 2019:
- the benefit threshold for the first £100 of the donation remains at 25% of the amount of the donation, and
- for larger donations, charities can offer an additional benefit to donors up to 5% of the amount of the donation that exceeds £100.
There is an overriding limit on the value of benefits received by a donor in a tax year as a consequence of donations to a charity, which is £2,500.