Don Bawtree: Introducing the new annual return

Also: guidance on the relationship between charities and non-charitable organisations; a social investment consultation; and HMRC on Gift Aid

Don Bawtree
Don Bawtree

In 2016, a new social investment law was brought in, at the prompting of the Law Commission, which has issued its regular progress report. It comments in the report that it also recommended that the government introduce a way for charities to get advance clearance from HM Revenue & Customs as to the tax treatment of a proposed social investment. This recommendation was rejected on the grounds of cost benefit. It is a reminder that this is a somewhat obscure topic and trustees need to clearly consider both the financial and mission returns before making such an investment.

There is no legal definition of social investment in Scotland. It is for a charity’s trustees to assess the suitability of any investment, so it is useful that the Office of the Scottish Charity Regulator has issued draft guidance and good practice on charity investments. The guidance includes more specific guidance on social investments, specifically including these two recommendations: to consider how you connect your investments with your charity’s purposes and delivery of your strategy; and to understand that there are different kinds of returns, measured in different ways, which are financial, social, environmental or otherwise.

The consultation on the draft ends on 21 September.

Gift Aid

The average cost for HMRC to process a Gift Aid claim is less than £3, and the total cost of processing Gift Aid claims is less than 0.1 per cent of the total amount of Gift Aid repaid in 2017/18, according to a Treasury response to a written question. Despite this, the Charity Tax Group has pointed out that small claims are disproportionately expensive, with 20,000 claims a year valued at less than 50p. Charities are encouraged to combine their claims into less frequent, larger ones, where possible.

After the implementation of the General Data Protection Regulation, HMRC has updated its guidance on Gift Aid claims, noting that sometimes charities need to add additional information. This might relate to standing order mandates or GDPR information, for instance.

Non-charitable organisations

Earlier this year the Charity Commission issued draft guidance on the relationship between charities and non-charitable organisations. The guidance was long and rather convoluted and affected financial issues in several places, such as grant funding, partnership working and commercial relationships. The regulator has now announced what looks like a substantial overhaul, while maintaining that the core of the draft is based on sound principles. We can expect something pithier, with less duplication and with a more pragmatic approach to some relationships, especially trading subsidiaries.

HMRC has now issued further clarification about the application of the cost-sharing exemption. It has clarified that costs on services received from a cost-sharing group that relate to both taxable and exempt and/or non-business activities can qualify as being "directly necessary", but exemption will apply only where they are used for a CSG member’s relevant exempt and/or non-business activities. This means that CSGs continue to be useful for charities.

Annual return

The new annual return service has started and the Charity Commission has drawn attention to its new questions about charity finances. To increase confidence in the sector, it now asks about salaries across income bands and the amount of total employee benefits for the highest-paid member of staff. They will not publish those last details.

A new optional question asks how money is transferred overseas. The commission is also introducing questions about the breakdown of sources of income from each country a charity receives funds from, but some of the analysis will not be compulsory until next year. Trustees should always make sure they have all seen and approved an annual return before it is submitted – this is especially important as more sensitive information becomes public.

Financial Reporting Council

The setters of the charity Statement of Recommended Practice have waded into the debate about the effectiveness of the Financial Reporting Council. They have suggested that at least three members of any future board should have detailed knowledge or professional expertise relating to the not-for-profit sector. Although this group, of course, deals only with charities.

They also opine that the nature of audit needs a fundamental revision if it is to serve trustees and charity stakeholders. Clearly, having sorted out charity accounts, the Sorp-setters feel they can now sort out auditing.

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