Don Bawtree: Every charity will be financially affected by Brexit

Plus: Friends of the Earth's VAT case and Sorp

In February, the Financial Reporting Council warned companies to consider including Brexit in their principal risk statements within their annual report.

The Charity Commission has been remarkably silent, despite publications from a number of umbrella bodies. Indeed, the Charity Commission’s annual report includes only the following rather surprising statement: "The result of the referendum held on 23 June 2016 was in favour of the UK leaving the European Union. This is a non-adjusting event with no financial impact on the Charity Commission."

While technically accurate in relation to the year-end accounts, it is hardly the whole picture. Every charity on the register will be financially impacted by Brexit. For instance a quick review of the sector’s typical income streams is not reassuring.

Donations will be potentially affected by higher taxes and inflation, legacies by changes in house prices and investments, grant income by the same factors, EU funding is of course jeopardised, and investment income is uncertain. Trading income will not be immune, especially retail. For instance BDO’s monthly commercial high-street sales tracker recorded a 3.6 per cent fall in overall year-on-year sales last month, making it the worst June in more than 10 years. Charity retail generally tracks commercial.

The largest costs for charities are people related. Inflationary pressures will not help (especially for charities with final salary pension schemes), and this will be on top of the introduction of the national living wage and apprenticeship levy. Pending guidance from the Charity Commission, trustees would do well to refresh their key policies around reserves, risk and investment and reconsider them in the medium term. In doing so, they should also consider the impact on their beneficiaries, other stakeholders and supply chain.

The financial environment is already tough for charities, so it was sobering to note that the Public Fundraising Association’s annual report says that members experienced an 8 per cent drop in donors, with a 14 per cent drop in the number of donors recruited through door-to-door fundraising, a drop of nearly 100,000, offset by an increase in street fundraising.

And then another blow for charities trying to reduce their VAT bill: Friends of the Earth has lost its attempt to prove that the VAT costs incurred on materials provided to donors should be recoverable. Supporters recruited by chuggers who agreed to pay more than £3 a month to the charity were entitled to receive, among other things, a copy of Earthmatters magazine, a discount in the charity’s online shop, a free download from its music website and a discount on organic wine. Mainly because these benefits were given a very low profile, if any, in the donor conversation, the tribunal thought that it was not the case that the person was paying for a subscription to the magazine and other benefits. Various written materials appeared to describe the monthly payment as a gift and the magazine as complimentary. This is broadly consistent with the principle in the High Court’s decision in the Church of England Children’s Society case in 2005.

As charities still struggle through the first year of the Statement of Recommended Practice, they may be slightly encouraged by an announcement from the Financial Reporting Council. It has noted that certain types of bank loans, common but not exclusive to social housing providers, are not entirely catered for by the new standard, FRS 102, on which the Sorp is based. It therefore accepts that different organisations, and auditors, may arrive at different conclusions as to whether or not these can be accounted for as basic or complex (essentially that label tells you all you need to know about the accounting implications).

Several important points arise: that charities will have some diversity of application of this, and other areas in their accounts; that some of these differences will be ironed out over the coming months and years requiring more change; and that in the meantime charities need to explain their judgments and estimates clearly, so that readers of the accounts can understand these policy choices.

Don Bawtree is lead partner for charities at accountants BDO LLP

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