Our charity specialists offer tailored audit and advisory services, assuring trustees that their charity is managing its resources effectively
On Thursday 12th November, we held our latest Charity & NFP webinar which was focused on the importance of financial management to navigate financial challenges following a global pandemic. Bishop Fleming teamed up with VWV to bring insights and top tips on how you can prepare for the future, as we look ahead to 2021. The webinar was chaired by David Butler, Bishop Fleming’s Head of Charities and NFP and included sessions from:
The webinar covered topics such as
You can view the full recording of the webinar and summary of Q&A below. If you have any questions, please do get in touch with your usual Bishop Fleming adviser or a member of our Charity and Not for Profit team.
... or do you think it is too early to say whether charities have been carrying too little, or perhaps, too much in reserve? Do you think the pandemic will provide a useful insight into what level of reserves charities really need? (report: https://bird.direct/cdd8f)
My personal view is that the pandemic has brought reserves policies into much sharper focus. Many Trustees were not overly concerned about the level of reserves, provided that there was plenty of money in the bank. However the financial pressure arising from the pandemic has had a rapid and negative impact on the reserves of many charities, leaving some with a very small financial buffer. In some cases this will be because the reserve being held was too low, but in many cases it is a result of unprecedented financial pressure.
There are very few charities that would previously have spent much time considering the impact of a global pandemic when reviewing their risk registers, and what the financial and operational impact would have been - the risk would have been considered too remote. Furthermore, if charities had built up reserves to protect against the risk of a pandemic then they would probably have been accused of not spending enough on their beneficiaries. Also, many charities have not been negatively impacted by the pandemic, some have seen their reserves increase. Consequently I don’t think it is possible to say that all charities should increase their reserves, but the pandemic has made all charities spend time to properly consider what is an appropriate level of reserve for their charity and its specific circumstances.
You should look to review internally, each year if possible and seek an external review every three years, as recommended by the charity commission.
The exemplar model for charity governance is articulated within the charity governance code, where there is also a template to use as a basis for self-assessment. It is aspirational, but defines the skills, knowledge and behaviours to aspire to.
An annual appraisal of Trustees (particularly the chair) is also good practice, as well as the clerking function.
One of the most important things is to seek independent professional advice as soon as possible. We regularly find that we’re consulted when it’s too late, meaning that options are limited, so if there is any kind of issue, please talk to us at the earliest opportunity. Planning and documenting key decisions is also really important because if there is subsequently a problem and prior actions are reviewed, if there is a detailed paper trail it will help to evidence the rationale behind decisions.
The key will be to review your management accounts for the year to date to calculate whether you have sufficient cumulative distributable reserves at the date of the payment to cover the proposed donation to the parent charity. If there are sufficient reserves then the donation can proceed as normal. If there are not, because of losses in the current year, then the maximum donation you can pay is limited by the amount of reserves.
Where that is the case (or the current year loss exceeds the reserves) then it will be beneficial to look to make a provisional loss carry back claim with HMRC. Ordinarily if a company is loss making it can carry back its losses one year to claim a reduction of the tax paid for that earlier year. This process normally has to wait for the latter year’s accounts and tax computations to be finalised and submitted to HMRC; which can be 9 – 12 months after the tax for the previous year is payable.
There is currently a concession which allows HMRC to accept provisional loss carry back claims where the taxpayer can provide evidence of the loss in the following year e.g. through management accounts or projections for a full year. Where Gift Aid cannot be paid because of losses, trading subsidiaries could use this process to make a provisional loss relief claim to reduce or eliminate any tax payable.
Yes, the Trustees of the charity will need to take advice in writing under section 124 of the Charities Act 2011 on the following matters before the security is entered into:
- whether the loan is necessary for the purposes for which it is being sought
- whether the terms of the loan are reasonable (taking into account the status of the charity as the prospective borrower)
- whether the charity can repay the loan on the terms set out.
This advice needs to be given by someone reasonably believed by the Trustees to be qualified by practicable experience of and ability in financial matters and who has no financial interest in the loan. Where a loan is large and/or complex or the charity is facing financial difficulties or indeed where the trustees feel more comfortable doing so then it may be appropriate to take this advice externally.
In many cases it is possible to release a permanent endowment restriction, provided (in brief) the Trustees are satisfied that it is expedient and in the best interests of the charity to do so. The mechanism for that (and whether the consent of the Charity Commission will be required) will depend on the origin and size of the fund. In most cases the statutory procedure under the Charities Act 2011 will be available.
In order that a charity can have appropriate oversight over its trading subsidiary on all matters, including financial matters it is appropriate in most cases for a Trustee to be on the board of a trading subsidiary. However, an individual who is both a Trustee of a charity and a director of its trading subsidiary will need to manage any conflicts of interest that arise (and should look carefully at the constitution of each in order to do so). In most cases it will be appropriate for there to be more than one individual in any event. Charity Commission guidance is that there should be at least one person on the board of a trading subsidiary that is independent and is neither an employee nor trustee of the parent charity.
The main kinds of income streams which may have VAT implications are as follows:
The first thing to do is make sure detailed and well thought out forecasts are prepared, which we can help you with. Once we have a clear understanding of the cash requirements, we can help you build a plan which might involve securing new funding or restructuring elements of the charity, for example.
There is a charity commission guidance document specifically for this.
If you have concerns about how to interpret your financial information, or would value a second opinion, seek professional advice.