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Challenges ahead for the charity sector

The past year has been one of considerable change for the charitable sector in Northern Ireland and in the recent Ulster Bank & CO3 3rd Sector Index, 78% of respondents categorised the environment in which their organisation is operating as very or quite challenging.

As well as financial challenges, charitable bodies are facing a raft of financial, legal and administrative changes including new financial reporting, statutory registration, complex tax issues and increased scrutiny of charity governance arrangements.

For reporting periods starting on or after 1 January 2015, a new financial reporting framework (FRS102) is mandatory for the majority of UK entities including charities. The changes introduced in FRS102 have been applied to the Statement of Recommended Practice ‘Accounting and Reporting by Charities’ (the Charities SORP).

Best practice would suggest charities ought to adopt the new financial reporting regime, requiring the adoption of new accounting policies and the restatement of comparative balance sheets. The new Northern Ireland legislation relating to charity accounting and reporting came into effect from 1 January 2016 will however yield some concessions for smaller organisations.

Charities with significant grant income, unusual financing arrangements (such as loans, or related party loans at non-commercial rates) or significant fixed assets may expect revisions to the measurement of assets and liabilities in their financial statements.

In terms of regulation, most charities in Northern Ireland are now aware of their obligation to register with the Charity Commission for Northern Ireland (‘CCNI’), irrespective of their size, income or whether the organisation has charitable tax status. Indeed, CCNI’s process of registering the thousands of charities in Northern Ireland is well underway.

Statutory reporting has also become more onerous. The form and content of charity accounts and annual reports, the level of independent examination or audit required and also in respect of the new requirement for public disclosure of individuals and entities with a beneficial interest in the organisation, may increase the administrative burden.

In response to funding cuts, many charities have sought to increase their incomes from commercial activities. The commercial approach however, brings exposure to commercial taxes and VAT compliance in many instances has been overlooked in the pursuit of revenue.

VAT remains a complex and challenging area for charities but with proper planning charities can plan to maximise the specific reliefs available to them and to minimise the ‘VAT leakage’ or ‘VAT cost’ within the organisation.

On the positive side, the Treasury has launched a consultation on simplifying the Gift Aid donor benefit rules. At present, Gift Aid can “gross up” donations by 25%, although the charity must ensure the system is correctly administered and does not fall foul of HMRC’s rules. The Gift Aid Small Donations scheme has been a welcome development since 2013 and permits charities to claim up to £5k in income without the need for Gift Aid declarations provided individual donations are less than £20.

In these challenging times charity governance is becoming more critical and it is an area of increased public scrutiny. In the forthcoming weeks this column will consider the implications for charity trustees and executives.