Don Bawtree: Reflections for annual report season

A new report considers transparency, HMRC makes a last-minute change to VAT rules for charities providing services in the EU and an MP comments on the failures of the Co-operative Bank, writes our finance expert

Don Bawtree
Don Bawtree

The report by the charity Transparency International on transparency in corporate reporting ranks firms by their quality of reporting in areas such as group structures, anti-corruption and taxation. It reflects the increasing focus on organisations reporting not only on profitability, but also on the areas that companies might feel less willing to address.

We are approaching the reporting season for many charities, so it might be time to reflect on some of the topics that charities seem most sensitive about. In some sub-sectors - such as welfare or education - charities are often conscious of the risks of disclosing commercially sensitive information. Many charities feel that the level of analysis forced on them by the charities Sorp gives competitors an unfair advantage in being able to analyse their cost structure.

However, there are some more generic subjects affecting most charities that seem to feature regularly in commentators' pleas for more transparency. Among the most common are executive pay, free reserves and the comparison of financial performance against what was originally planned or budgeted for. As revised annual reports are in the offing with the new Sorp, it might be a good time for boards to consider whether they are getting the balance right in these areas.

Many charities have been wrestling with rules that mean organisations making business supplies of digital services to consumers in the EU must charge VAT at the local rate (the country of the consumer). This affects a surprisingly wide range of charities, such as professional or membership bodies and training organisations.

In the UK, HM Revenue & Customs created the VAT Mini One Stop Shop, designed to simplify the process by allowing such organisations to submit a single VAT return, with the relevant parts forwarded to individual countries' tax authorities. This created a potential VAT trap, because small charities and businesses that trade below the UK VAT threshold would then become liable for VAT on all sales.

However, in a last-minute change to the Moss rules, HMRC has now said that those businesses under the threshold can set up Moss registrations to cover only their EU sales. This is conditional on a charity being able to show that it can differentiate between UK and EU supplies. Should a charity register under the Moss and incur any VAT charged by a member state other than the UK, this can be recovered only through an online EU VAT refund claim.

In November 2013, the Co-operative Bank found itself in trouble when its then chair, Paul Flowers, appeared before MPs on the Treasury select committee. A year later, Andrew Tyrie, chair of the committee, summarised in The Daily Telegraph the bank's key failures and learning points, which included deficient leadership, a ludicrous governance structure, a regulator "asleep at the wheel", lack of stress-testing and the poor quality of due diligence by professional advisers.

All of these could be said to apply to the charity sector: leadership is based on a disparate group of unpaid part-timers; governance is based on a bewildering legal framework stemming from the 16th century; the regulator has limited resources and too much to do; professional advisers who are expert in the sector are thin on the ground, especially for smaller organisations; and reserves policies are often built on the simplest of financial projections. Most of these worries can be managed, at least to some extent, by a charity's board - but they do need thinking about.

Don Bawtree is lead partner for charities at accountants BDO LLP

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