There’s Something Phishy Going on Here…

We’ve seen it before. The classic email with words so exciting they wrote them into Monopoly: ‘Tax Refund’. Everyone dreams of getting a little something back from the tax man. But not all of us are so lucky.

Many of these communications from Her Majesty’s Revenue and Customs (HMRC), will be genuine – for example, you may have received a letter with details of your latest tax code, or for some of you in the Self-Assessment regime, a letter which contains a statement and instructions on how to pay your latest tax liability.

However, you may also receive communication from HMRC in other formats – perhaps an email or text which promises large sums of money via a tax repayment. Or maybe even a threatening phone call in which the caller demands immediate payment of sums under the threat of legal action.

But please don’t be fooled.

Any form of communication that uses threatening or coercive language, or that asks for sensitive or personal information, is likely a baited attempt to ‘Phish’ these details from you.

What is Phishing?

Phishing is an attempt by cyber criminals to acquire sensitive information by pretending to be a genuine organisation, such as HMRC, through communications like emails and texts.

Mobile numbers and weblinks in these messages often lead victims to resources that mimic the organisation. These sites or ‘representatives’ then ask for personal details that are collected by the criminals, not the organisation.

What Does Phishing Have to do With Tax?

Cyber criminals posing as HMRC officers prey on people’s emotions – particularly the excitement over potential tax repayments (because let’s be honest – who wouldn’t want that?), and fear of prosecution if confronted with a fake tax liability. These emotions often make us jump without thinking, falling straight onto the hook of the scam.

For a lot of people, tax can be a complicated subject under normal circumstances, but pandemic vulnerabilities have also made scams in relation to SEISS grants and VAT deferral schemes common.

Since the first lockdown in March 2020, cyber criminals impersonating HMRC has increased considerably, according to HMRC’s own data (see chart).

HMRC Phishing Chart

It is important to note that whatever your situation, HMRC will never inform you of a tax repayment, penalty or liability via text or email, and will never use these forms of communication to ask for your private information or payment details.

What Does HMRC Say?

HMRC have useful information on their website that shows how to spot and report scams to their investigators.

To stay safe, HMRC suggest doing the following:

  • If you receive a text or email from HMRC and you are unsure whether it is genuine, you should never open any attachments or click on any links.  Instead, report the fraudulent email to HMRC and then delete the message.
  • If you receive a phone call, HMRC stresses that you should not provide the caller with any sensitive data if it is asked for. Instead, they request that you keep a note of the number and the time and date of the call and report to their investigators.
  • HMRC suggest that everyone remains alert for any indicators that would suggest the communication is fraudulent.  These may include:

 

  • Spelling errors and poor grammar.
  • The use of a generic address such as ‘Dear Customer’ or ‘Dear email address’.
  • The use of non-legitimate HMRC email addresses: such as an email being sent from a Hotmail or Gmail account.
  • Aggressive wording that pressures the receiver into believing urgent action is required.

Genuine communications from HMRC will always have the following information:

  • They will greet you using the name that you have already provided to HMRC e.g. the name you used when signing up for HMRC services.
  • Communications will include information and instructions on how to report phishing emails or texts.
  • They will never include a personal email address for you to reply to and the email will come from a genuine HMRC account (always double check the sender address in full rather than depend on the title name provided!).
  • The communications should never ask for specific figures or calculations or have any attachments unless you have agreed to this previously with HMRC and have formally accepted the risks.
  • HMRC will never provide you with a link to use to log onto your Government Gateway.  Instead, they will request that you log-in by using the normal processes.

It is important to take some time to read through any communications from HMRC and ensure that the email, text or phone call you have received is genuine before proceeding.

What Can Chiene + Tait Do?

If you have concerns regarding any communications that you have received from HMRC, please get in touch with us at mail@chiene.co.uk. We would be more than happy to review the communication to check if it’s genuine.

Remember: if in doubt, give us a shout!

Museums and Galleries Tax Relief: extending and widening this relief will boost the UK cultural ecosystem

Museum and Galleries Tax Relief came into effect from 1 April 2017, aiming to encourage the development of new exhibitions and incentivise their touring to a wide audience. Unusually, the legislation includes a ‘sunset clause’, which allows the relief to expire in April 2022 if it is not extended by the UK Parliament. We are around a year away from April 2022, so perhaps now is a good time to consider how well the relief is currently being used.

Whilst the relief was modelled on existing creative industry tax reliefs, there are some striking differences. As mentioned above, unless the relief is extended, it will expire next April. Claims are also subject to a cap of £100,000 (for touring exhibitions) and £80,000 (for non-touring exhibitions). This means the value of claims are substantially lower than in other creative industries’ tax reliefs, where no such cap exists.

Despite these caps, take-up of the relief has grown substantially over the years. Figures from HM Revenue & Customs (HMRC) show:

  • For 2018/19 £4 million was paid, covering 300 exhibitions included within 50 claims.
  • In 2019/20 £16 million was paid, covering 1,045 exhibitions included within 170 claims.

This is obviously an impressive increase in both the value and number of claims, especially for a 1-year period. So how does this compare to other creative industry tax reliefs? For 2019/20, the number of claims for Museum and Galleries Tax Relief is comparable to Theatre Tax Relief claims and is almost double the number of Orchestra Tax Relief Claims. The fact that there is a cap on the amount that can be claimed through Museum and Galleries Tax Relief has an impact on the total value of claims, but it does appear promising that the number of claims is comparable to the more established Theatre Tax Relief, which was introduced  3 years earlier.

All of this points to the fact that the relief is well used in the sector.  Many will undoubtedly have been disappointed to note no mention of an extension at the 2021 Budget. There is another chance for the Government to announce an extension; more tax policy details will be announced on 23 March and I hope that the UK Government will take the opportunity to not just approve the extension of the scheme but also to widen its scope. Currently many exhibitions which include live performances are not eligible for relief, nor are exhibitions that include objects which are for sale, and many organisations lose out on a cash injection as a result.

The Government could also consider widening access to the scheme. Currently, those organisations that provide public benefit, but are not charities, are not eligible.

Most museums and galleries are open to the public free of charge, so the money received from these tax relief claims boosts cash flow, giving a welcome boost of funding to these institutions so they can continue developing further exhibitions. An extension to the relief will be especially welcome in the coming years when, no doubt, we will continue to see the financial impact of the COVID pandemic on charity finances.

If you have any questions about Museums and Galleries Tax Relief, or any other creative industry tax relief, contact Catriona Finnie.

Trustees’ Week 2020

This year’s Trustees’ Week runs from 2-6 November 2020.

Each year, Trustees’ Week highlights the work that trustees do for their charities; and shares and promotes the role that trustees play. If you are thinking of becoming a trustee, find our more here.

Read more here: http://trusteesweek.org/

Follow on Twitter here: https://twitter.com/trusteesweek

Chiene + Tait publishes lots of guidance for Trustees – see some below, and watch out for more posts throughout the week.

See also The Informed Trustee: an online course for current and prospective trustees to help promote best-practice and equip people with the skills it takes to govern a charity. Euan Morrison, our Head of Charities, contributed to the course.

 

How to Find Financial Expertise for Your Charity

Most people on charity boards would agree that it is useful to have someone with financial expertise also on the board, so that they can deal with the ‘finance stuff’. However, charities often struggle to recruit people with any financial know-how and charities can survive without this skill set, so does it really matter? In short, yes –  but let me explain why.

It saves money

Charities operate in a highly regulated environment, with very complex tax and accounting rules; having someone on the board who can help you navigate these will help avoid any accidental non-compliance, or unforeseen tax charges, which can save a lot of money.

Individuals with financial expertise will also be well placed to assist with the development of strategic aims of the charity, especially in relation to resources, as well as ensuring the effectiveness and robustness of the charity’s internal policies and procedures. Smaller charities in particular would benefit from this expertise as, often, they are too small to support a discrete finance function within the organisation.

In these smaller organisations the day-to-day bookkeeping is often be undertaken by an office administrator with little to no finance knowledge or training. In these circumstances, it would be especially important to plug this knowledge gap through financial expertise on the board. Ultimately the board is responsible for the charity’s finances, and it will always benefit the charity if there is someone on the board who will be able to identify potential financial risks, and ways of mitigating these risks.

Add financial expertise to your board

So, how do you find financial expertise for your charity board? A good place to start is to increase the financial literacy of the current board. Now, I don’t mean the board needs to start taking accountancy exams and become financial experts, but there are lots of excellent training sessions run throughout the year run by professional organisations: and most of these training sessions are free.

I would encourage all board members to learn more about finance matters generally. Not only will it increase the financial expertise of the board, but it will also ensure that board members are more able (and confident) to understand, scrutinise and question the charity financials, which makes for better governance and better decision making.

How to find an expert

If you want someone who is professionally qualified on your board, there are a number of options. You can ask your contacts and see if they know anyone. Professional accountancy bodies such as ICAS will have web pages dedicated for their members to find volunteering opportunities with charities, and it may be worthwhile contacting these organisations to get your job advert posted. And don’t forget your own accountants or independent examiners. They will be able to provide advice on charity matters, and they will also be able to use their networks to recommend someone outside your usual channels.

Gift Aid Emergency Relief Package for Charities

Whilst HM Revenue & Customs (HMRC) have provided a vast amount of support to individuals and organisations throughout the COVID-19 pandemic, a coalition of organisations in the charity sector are highlighting that more can, and should, be done to support the third sector. During the pandemic, many organisations in the third sector have been stepping up to provide vital support to the communities they serve, all while seeing a huge drop off in their income.

The coalition has put together a Gift Aid Emergency Relief Package proposal, which aims to increase relief charities can claim via the Gift Aid and Gift Aid Small Donations (GASDS) Schemes. This is a proposal only at this stage and has not been agreed with HMRC. If the proposal is agreed with HMRC, it is the intention for it to take effect from 6 April 2020 for 2 years.

The proposal aims to:

  • Increase the effective tax rate used in Gift Aid relief calculations, from 20% to 25%. So, for a Gift Aid donation of £100, charities could reclaim £33.33 of Gift Aid;
  • Remove the matching rule in the GASDS, so the amount that can be reclaimed through GASDS is no longer linked to the amount reclaimed through Gift Aid;
  • To increase the GASDS limit from £8K to £10K; and
  • To increase the GASDS effective tax relief to 25%, as proposed for the Gift Aid scheme.

To find out more about the proposal please see https://nmn.org.uk/2020/06/24/gift-aid-emergency-relief-package/

 

COVID-19 – Ways charities can use tax to ease cash flow

Whilst the UK Government announced a package of support for the third sector to assist it through the current crisis, many in the sector have still been left disappointed by the support offered. However, charities can look to established tax benefits to help ease their cash flows and assist them through the current crisis.

1. Consider reclaiming Gift Aid on cancelled events

Charities have seen numerous events cancelled due to Coronavirus (COVID-19) and many have seen their supporters donate money instead of taking a refund for these cancelled events. HM Revenue & Customs (HMRC) has clarified that in these situations, your charity may claim Gift Aid on the donation, provided the usual Gift Aid conditions are met; in particular:

  • The donor does not receive a benefit as a result of their donation;
  • The donor agrees that the cost of their event ticket becomes their donation;
  • The donor completes a Gift Aid declaration form; and
  • The charity keeps an audit trail including the donor’s confirmation that the cost of the event tickets becomes their donation.

Any event which has been postponed, instead of being cancelled, will not be eligible to exploit these relaxations in the Gift Aid rules.

2. Reclaim Gift Aid under the Retail Gift Aid as normal, but ensure all administration is up to date on returning to the office

HMRC has clarified that charities that operate the Retail Gift Aid Scheme can continue to make Gift Aid reclaims, even if they have not yet sent oral confirmation letters. Those charities should send their oral confirmation letters at a later date and adjust any future Gift Aid reclaims if any consent is withdrawn by donors.

Similarly, where charities are temporarily unable to access their mail, they can continue to reclaim Gift Aid where they have no knowledge of returned notifications. These charities should ensure that, when offices are open and mail is being opened, that appropriate action is taken with regards to their returned notifications.

3. Consider reclaiming Gift Aid on Membership Subscriptions

HMRC are aware that some charities are temporarily suspending collections of membership subscriptions during the current crisis. Despite this, members continue to make voluntary contributions to support their charity or Community Amateur Sports Club. Any voluntary donations made by members, or any voluntary donations made over and above their membership subscription, may be eligible for Gift Aid provided the usual Gift Aid rules apply.

4. Make use of Gift Aid Small Donations Scheme (GASDS)

A significant minority of charities, such as churches, will receive regular small donations of less than £30 from donors. These charities may not be receiving these regular small donations and HMRC have now clarified that, where a donor has been ‘saving up’ their usual donation and makes a single large donation of more than £30 once the current crisis is over, then this will still apply for the GASDS. This is provided that the charity is happy that this would have been separate ‘small donations’

5. Consider Whether Gift Aid Payments from Trading Subsidiaries are appropriate

Many charities that operate trading subsidiaries receive Gift Aid donations equal to the subsidiary’s taxable profits. This tax efficient mechanism allows charities to undertake non-charitable trading in a way that protects their own charitable status, and allows the trading subsidiary to reduce its taxable profits to £nil, ensuring a £nil corporation tax liability across both entities.

In recent years legal advice was obtained to confirm that Gift Aid donations from a trading subsidiary are a distribution, and trading subsidiaries need to ensure they have sufficient distributable reserves before making a Gift Aid donation. Many trading subsidiaries will now find that they do not have sufficient distributable reserves to Gift Aid taxable profits to their charity payment, but it is worthwhile bearing in mind:

  • Any interim Gift Aid payments made to the charity during the year will continue to be tax deductible for the trading subsidiary, provided the subsidiary can demonstrate that it had sufficient distributable reserves to make the donation at the time the donation was made;
  • If your subsidiary is planning to continue to make Gift Aid donations during the current crisis, the directors of the subsidiary should ensure that accounts are drawn up to evidence that there are sufficient distributable reserves to make the donation;
  • Remember the subsidiary has 9 months after its accounting year end to make a Gift Aid donation to its charity parent. If your subsidiary does not currently have distributable reserves to make a Gift Aid payment, it will be worthwhile checking the reserves position further down the line;
  • Even if your subsidiary cannot make its usual Gift Aid donation and must make a corporation tax payment, the company can agree a payment plan with HMRC if it is unable to pay its corporation tax liability in full within 9 months of its accounting year end;
  • Check if your subsidiary has a deed of covenant with the charity legally requiring a Gift Aid distribution. If this is the case, the covenant should stipulate that this is provided that there is sufficient distributable reserves. If there is a deed of covenant in place and sufficient distributable reserves, your subsidiary may be legally required to make a Gift Aid payment to its charity parent.

And remember, any donation paid by a trading subsidiary to its charity parent must be physically paid in order for the subsidiary to receive a tax deduction. Many trading subsidiaries themselves may also be strapped for cash, so consider whether it is worthwhile incurring a corporation tax liability in the subsidiary rather than making the usual Gift Aid donation. This may be a better use of the subsidiaries resources, and leave valuable cash reserves in your subsidiary.

6. Consider the tax treatment of income from the furlough scheme to avoid any unexpected tax liabilities

Many charities will have staff on furlough and be receiving 80% of furloughed staff wages from the UK Government. In these cases, the charity is receiving these wage costs as income, but is this income exempt in the hands of the charity? Provided that furloughed staff undertake work that is in furtherance of the charities’ primary objectives, all of this income will be exempt. Where this is not the case, and staff perhaps work on non-charitable activities which the charity claims exemption under the small trade exemption, this income may be taxable.

If you have a question about charity and tax, please contact Catriona Finnie today at charities@chiene.co.uk

Maximise Your Charity’s Income This Christmas

The Christmas season is in full swing and many charities will have started work on their Christmas appeals. But how to you make sure that your charity is making the most of its Christmas appeal income? The short answer is Gift Aid!

How Will Gift Aid Benefit My Charity?

When your charity successfully submits a Gift Aid repayment claim to HM Revenue & Customs (HMRC), the charity can receive 25p per £1 of eligible donations i.e. for donations amounting to £100, your charity could receive £25 from HMRC. So, it is worthwhile considering submitting Gift Aid claims where possible in order to boost your charity’s income!

That Sounds Great: How Do I Claim Gift Aid?

Before you can start claiming Gift Aid your charity must be recognised as a charity by HMRC for tax purposes: it is not enough to merely be registered as a charity with the Charity Commission or OSCR. Once you have been granted charitable status for tax purposes from HMRC, you can register for a Government Gateway account and start to make Gift Aid repayment claims online.

What Donations Can I Claim Gift Aid On?

Any Gift Aid repayment claim must be based on valid donations. These are “donations of a sum of money” by individuals only who have paid or will pay UK tax. This includes contactless donations which are banked in the UK. The following conditions must also be met for donations to be eligible for Gift Aid:

  • There are no conditions for repayment of the donation;
  • The donation is not made via Payroll Giving;
  • The donor will not get a deduction from their income for the donation;
  • The donation is not part of an arrangement for the charity to purchase property; and
  • The benefits (if any) received by the donor do not exceed the statutory limits.

Furthermore, the charity must also have:

  • A valid Gift Aid declaration made by the donor which covers the donation;
  • Evidence that they’ve explained to the donor the personal tax implications of making a Gift Aid donation (this can be on the declaration); and
  • An audit trail linking the donation to the donor and their declaration.

What If I Don’t Have A Gift Aid Declaration?

Don’t panic! You still might be able to claim Gift Aid through the Gift Aid Small Donations Scheme (GASDS). As with Gift Aid, GASDS repayment claims must be based on valid donations. These are cash and contactless donations of up to £30 collected and banked in the UK. Charities cannot claim under GASDS on donations received by companies or where they hold a valid Gift Aid declaration for the donation. The following conditions must also be met for donations to be eligible for GASDS:

  • The charity has been in existence for at least two complete tax years before the year in which the claim is made;
  • Successful Gift Aid claims have been made in two of the previous four tax years, with no more than a year between the two years in which a claim was made;
  • There have been no penalty charges on Gift Aid or GASDS claims for the year in which the claim is made or the previous year; and
  • The charity has made successful Gift Aid claims on donations received in the same tax year amounting to at least 10% on the amount of small donations included in GASDS claims.
  • Any top up payments under the GASDS are subject to a maximum small donation limit of £8,000 per tax year.

A Word Of Warning

Special rules apply when claiming Gift Aid on donations where your charity gives donors an item or service in return for the donation. Special rules also apply to community buildings under the GASDS.

How Can We Help?

Our experts can assist with anything from preparing and submitting Gift Aid and GASDS repayment claims to giving advice on Gift Aid and GASDS in general and for specific donations. Please contact us on charities@chiene.co.uk.

Charity online advertising and VAT zero rating

We published a news item earlier this year confirming that charities have been contacted by HMRC in relation to advertising on social media.  Most advertising for charities is zero rated, however HMRC have been clarifying their interpretation on specific situations and contacting charities whom they believe may be receiving zero rating in error.

HMRC has been in dialogue recently with the Charity Tax Group and the following summarises the result of these discussions.

HMRC has confirmed that:

  • ‘Natural hits’ are not supplies of advertising for the purposes of the zero rating provision so are standard rated;
  • Pay-per-click adverts are advertisements for the purposes of the zero rating provisions as they do not involve selection by address.
  • Direct placements on third party websites are advertisements for the purposes the zero rating provision as they do not involve selection by address. They are therefore zero rated.

The key issue seems to be whether individuals are selected when they access a social media account or a subscribed website, and an advertisement is, effectively, waiting for them because that account has been preselected based on data held by them.

Zero rating for charity advertising

The VAT Act zero rates the supply of advertising to charities.  The law exists to assist with the promotion of charities to the wider public, however it states that this does not include instances where any of the members of the public (whether individuals or other persons) who are reached through a particular medium are selected by or on behalf of the charity.

For this purpose ‘selected’ includes selected by address (whether postal address or telephone number, e-mail address or other address for electronic communications purposes) or at random.

HMRC’s policy is widely interpreted and covers, for example, direct mail and e-mails sent to ‘the occupier’ and even that addressed by inference when it is delivered to every address in a location but not individually marked. It also covers all telephone calls whether or not the person receiving the call is known to the charity even when the number is selected at random. In each of these cases, therefore, an individual (or family) or address has been specifically targeted to receive information rather than an advert being placed that may or may not reach particular members of the public.

Due to the way certain social media works, content is often based on the sites using tools to apply content, including advertising, to the individual’s personal page or presence when signed in. The content is based on the individual’s likes, dislikes, interests, location, etc., associated with the address of that individual’s page, or to their presence as a signed in member of a website. HMRC consider that this is selection of a recipient by an electronic address, and not the distribution of something to a wider public and as such it should be excluded from the relief.

In HMRC’s view, the individual has not made the selection themselves, but had an advertisement targeted directly at their digital address.

 

Retargeting

HMRC also put across their view on ‘Retargeting’ which is when data collected on users when they visit a site and uses this data to reach them again. For example, a user may visit a clothing site, browse products but not purchase – this user is tracked via cookies and then those cookies can be used to find them again as they browse the internet. It is important to note here that no PII [Personally Identifiable Information] is used here, so the advertiser does not know who the individuals are, simply that that a certain device has behaved in a certain way. If you were to use a shared computer, you would likely be retargeted with items which another user has looked at, as a result of this.

As explained above, HMRC’s policy on the advertising zero rating provision holds that cases where an individual, family, or address has been specifically targeted to receive information, rather than an advert being placed that may or may not reach particular members of the public, will be caught by the condition and cannot be zero rated.

 

Practical impact

As a lot of social media providers such as Google and Facebook are based overseas, any VAT that would be due is accounted for using the reverse charge (for VAT registered charities) but crucially it counts towards the VAT registration threshold for charities that are not currently VAT registered.

The whole situation appears to be subject to debate between what charities and HMRC believe is the correct position.  In what is a recurring them in VAT, a lot has to do with the advance of technology and the capabilities of social media not being even invented when the legislation was first drafted.

A VAT case considering these very issues would assist in clarifying the law, however we are not aware at this stage of a case that is in the pipeline.

If any charity has concerns over these issues please feel free to contact our VAT team today at vat@chiene.co.uk.

Do Charities Have to Submit a Tax Return?

It is a common misconception that charities don’t pay tax and so don’t need to prepare and submit tax returns to HM Revenue & Customs (HMRC).

This means some charities may get a shock when they receive a letter from HMRC asking them to submit a tax return – a situation which seems to be on the rise.

Contrary to popular belief, charities are subject to tax: either income tax or corporation tax (the exact tax being dependent on how your charity is constituted). Being subject to tax does not mean that you will have a tax liability though, as charities do have some tax exemptions. These charity tax exemptions are not blanket exemptions and if charities do not meet certain conditions, they may have taxable income which needs to be reported on a tax return.

In this article, I will outline some of the common situations where charities will need to prepare and submit a tax return to HMRC.

1. If HMRC asks you to

HMRC can, and does, periodically ask charities to complete tax returns, even when charities do not have any tax liability. We have recently seen examples of HMRC insisting that charities prepare and file annual charity tax returns, and we have certainly seen an increase in the number of charities being asked to prepare a one-off charity tax return this year.

If HMRC writes to your charity and asks you to submit a tax return you must do so by the relevant deadline. The specific deadline for your charity will be on the letter from HMRC.

2. If you have any taxable income

It is possible for charities to have taxable income. The question of whether or not an activity constitutes taxable trading is sometimes a complex one and will depend on the specific situation. Generally, the following income streams will be exempt from income or corporation tax:

  • if the charity undertakes trade activities which further its charitable objectives; and
  • investment income that is used for furtherance of the charity’s objectives

Rental income and other trade activities not directly linked to the charity’s objectives may not necessarily be exempt from income or corporation tax.

Charities can undertake a small amount of non-charitable trading, which must be covered by the charity’s small trade exemption in order to be exempt from tax. The small trade exemption is 25% of the charity’s income (note that we are talking about income and not profit here), subject to a maximum of £80,000 and a minimum of £8,000. When the small trade limit is breached, all non-charitable trading is taxable; not just the amounts over the small trade exemption.

Charities need to exercise care if they receive management charge income from their trading subsidiaries and this income is not covered by the small trade exemption. Whilst normally these management charges will be at cost and no tax liability will arise, if the income is above the charity’s small trade exemption a charity tax return will still need to be prepared.

3. If you have any non-charitable expenditure

If your charity makes any payments which are not related to advancement of the charity’s objectives, the charity loses the exemption £1 for £1 on its otherwise exempt income. Expenditure on the general running of the charity (e.g. accountancy fees, staff salaries, heat, light, rent etc) are all examples of charitable expenditure and will not be caught by this. For example, payments made to overseas bodies where the charity does not take steps to ensure that payments are applied for UK charitable purposes will come within the heading of ‘non-charitable expenditure’.

How does this work?

Suppose a UK charity makes a grant of £10,000 to another charity which is based and operates in France. The UK charity does not take steps to ensure that this grant is applied for UK charitable purposes. This £10,000 will be non-charitable expenditure and the UK charity will lose £10,000 of exemptions on its otherwise exempt income and will be subject to tax on £10,000.

4. If you have any non-qualifying charitable investments

Non-qualifying charitable investments can come under the heading of non-charitable expenditure (this is a complex area and warrants separate consideration). In tax legislation, there is a list of all types of approved charity investments which are exempt from tax: this includes bank deposits and shares in companies listed on a recognised stock exchange. Charities can stumble upon issues  where they give loans to their trading subsidiaries. These types of loans do not come under any of the specific items listed as qualifying charitable investments so on the face of it these loans may be taxable for the charity. However, the legislation has a catch-all which states that investments which are incurred for the financial or charitable benefit of the charity are qualifying charitable investments and are therefore exempt from tax.

Generally, loans to a charity’s trading subsidiary will need to bring financial benefit to the charity to be exempt from tax. Broadly, this means that the loan should have reasonable repayment conditions, be physically repaid, have security (if possible) and carry a commercial rate of interest.

How does this work?

Suppose a UK charity makes a loan of £15,000 to its trading subsidiary. The loan is interest free and does not have any repayment terms or security and there is no documentation for this loan. This £15,000 will be a non-qualifying charitable investment and the UK charity will lose £15,000 of exemptions on its otherwise exempt income and will be subject to tax on £15,000.

Extra support

The above points should serve to give you an indication of whether your charity should be submitting a tax return but cannot replace advice from your tax adviser. If your charity has been asked to complete a charity tax return, or you think your charity should be completing tax returns, please get in contact with us on charities@chiene.co.uk.

Charity Commission recommends overhaul of UK charity tax system – Pt 3

In this blog series, Catriona Finnie, charity tax expert at Chiene + Tait outlines the key findings of the Charity Tax Commission report into the current charity tax system and outlines how the recommendations could impact charities in the future.

In this third, and last part, of her series, Catriona reviews the other recommendations highlighted by the Charity Tax Commission including Social Investment Tax Relief (SITR) and Stamp Duty Land Tax.

Blog 3 – Other Recommendations

 

Whilst the report focussed on the main types of relief that charities benefit from; namely Gift Aid, VAT and business rates relief, the report also included recommendations on other areas of charity tax.

 

Social Investment Tax Relief (SITR)

  • SITR was brought in to encourage social investment. This relief works by offering investors a deduction from their next income tax bill (based on the value of their investment into qualifying organisations).
  • The uptake of this tax relief, aimed at philanthropists, has not had a high take up since its introduction. In order to try to increase uptake, the Commission recommends that the list of exclusions and the investment cap are reviewed.

 

Stamp Duty Land Tax

  • A review of the system with respect to simplifying the relief and providing clarity to charities.
  • It was also recommended that charity relief be extended to unincorporated charities.
  • The Commission also believes that the same principles should also be explored in Scotland and Wales; where devolved administrations are responsible for this regime.

 

Mergers and Property Transfers

  • The Government should consider using the accounting definitions of grouping for tax purposes in the areas of merging and property transfers. The Commission felt that the current legislation, by relying on shareholdings, excluded some charities from benefitting from exemptions.

 

Climate Change Levy (CCL)

  • The Government should consider using income from CCL to contribute to energy efficiency grants for village and community halls.
  • Government guidance should also be prepared for energy suppliers to clarify relief available to unregistered charities.

 

Incentivising Giving

  • All employers should offer a payroll giving scheme for employees.
  • Payroll giving schemes can be operated on an account-based system i.e. donations from employees go to a pool of money that donors can then distribute to charities as they see fit. This would avoid employees having to commit to a single charity when they set up their payroll giving scheme.
  • Remove VAT charges on will writing, where there is a gift to a charity included in the will.

 

Charity Fundraising and Trading

  • The Commission felt that this area should be considered further, specifically whether the primary purpose exemption for charities should be extended to apply to all trades if and only if the trade profits are applied for charitable purposes.

 

Catriona Finnie is a member of the HMRC Gift Aid Working Group that was created to consider how to increase the effectiveness of UK Gift Aid relief. Catriona is also the tax specialist on the Chiene + Tait Charity Group that assess new legislation and regulation for charities, which informs our clients on future changes. If you have any queries about this article, feel free to contact our charity team today at charities@chiene.co.uk.

Charity Commission recommends overhaul of UK charity tax system – Pt 2

In this blog series, Catriona Finnie, charity tax expert at Chiene + Tait outlines the key findings of the Charity Tax Commission report into the current charity tax system and outlines how the recommendations could impact charities in the future.

In this second part of her series, Catriona outlines the proposed changes to VAT and long term reforms under consideration.

Blog 2 – VAT and Long Term Reforms

VAT

  • The Commission recommended that a review is undertaken of the rules relating to irrecoverable VAT on charities that share their facilities, equipment or buildings with other entities, including a review of the relevant charitable purpose rules, which will be of particular benefit to research institutions.
  • Public bodies should be required to confirm the VAT status of all funding from them (by reference to guidance, which should be written in conjunction with the charitable sector). This will make it easier for charities of all sizes to access these funding arrangements as they would no longer have to incur expensive fees in order to establish the VAT treatment of arrangements.
  • A review of the VAT treatment of online advertising should also be considered, currently it is taxed differently from printed advertising. The Commission recommended that online and print advertising should have the same treatment, especially given the ongoing decline in print advertising.

 

Long Term Reforms

In addition to highlighting short term improvements, the Commission also looked at what could be done in the long term to ensure that the charity tax system is fit for purpose in the future. These recommendations are:

  • Consider whether the current tax system adequately supports new models for delivering public benefit, such as social enterprise organisations.
  • Consider whether tax breaks should be given to organisations that attract volunteers.
  • Ensure Gift Aid is compatible with the digital world.
  • The report noted that evidence suggested business rates relief provided only limited support to the smallest charities and questioned whether a property-based relief was appropriate, given the increasing online presence of most organisations and their decreasing physical presence in the high street. Should business rates relief be withdrawn, there is the potential to produce a new relief or extend existing reliefs. Note that the report did not recommend the scrapping of business rates relief.
  • Data on VAT reliefs and their impact on the charitable sector were in urgent need.  It was noted in the report that no figures for this were known and estimates only were produced.
  • If VAT is found to be a net cost for charities, the Government should consider exempting charities from VAT altogether. Conversely, if VAT is found to be a net benefit, existing VAT rules should be examined to ensure they decrease unnecessary administrative burdens for charities and remove any uncertainties in the treatment of certain items (such as funding agreements).
  • More research was also recommended in Gift Aid area in general. The report noted some alternatives to the current system which may provide more benefit to charities.

If you have a query about charity taxes, please contact Catriona at charities@chiene.co.uk or call 0131 558 5800.

Charity Commission recommends overhaul of UK charity tax system

In this blog series, Catriona Finnie, charity tax expert at Chiene + Tait outlines the key findings of the Charity Tax Commission report into the current charity tax system and outlines how the recommendations could impact charities in the future.

Blog 1 – Gift Aid and Business Rates Relief

The Charity Tax Commission has published its report into the charity tax system. The last review of the charity tax system took place 20 years ago and this latest report had set out to assess whether the system remains fit for purpose. Perhaps surprisingly, the Commission has found it difficult to gather sufficient data and research about how the tax system currently operates and, as a result, it has been limited in its ability to make recommendations.

Despite this, the report stretches to 68 pages outlining an array of short-term reforms and long-term recommendations. If you don’t have a spare few hours to read the report, we have summarised the key recommendations which will be discussed over the next 3 blog posts.

 

Short Term Reforms

Gift Aid

If you have ever made several Gift Aid donations to different charities, you will have had to complete multiple Gift Aid declaration forms (one for each charity you donate to). The Commission proposes setting up a Universal Gift Aid Declaration Database (UGADD) to overcome this administrative burden. The UGADD will store Gift Aid declarations made by all donors. Under this system, donors will be able to donate to multiple charities whilst only completing one Gift Aid declaration. Charities will be able to log into the UGADD and search for a donor by searching the donors’ unique identification number (this could be anything from the donor’s national insurance number to a specific Gift Aid card number). The Commission believe that technology is such that this system is now both technologically and economically feasible.

Currently, higher and additional rate taxpayers can claim tax relief on Gift Aid donations they make to charities through their own Self-Assessment tax return. The Commission recommends that this additional tax relief is redirected to charities. You may wonder how this will work in practice, especially as some taxpayers (the self-employed for instance) may not know what their tax rate will be at the point of making a Gift Aid donation. The Commission anticipates that the UGADD will assist, as will the ability to make retrospective Gift Aid donations.

Promotion of Gift Aid and donor awareness via the following:

  • Via literature that can be sent to the general public with annual correspondence from HM Revenue & Customs, along with videos and other forms of media.
  • Government should consult with the charity sector in order to provide guidance on the audit trail requirements for text donations.
  • Review how emerging technology can make Gift Aid administration easier and more efficient.
  • Increase accessibility and reduce administration for the Gift Aid Small Donations Scheme. The Commission states that possibilities include removing the matching requirement and increasing the amount that can be claimed under the Small Donations Scheme as well as including text donations within the scheme.
  • Review corporate Gift Aid rules to ensure it continues to work to maximise the amounts received by charities.

Business Rates Relief

A common tax planning tool used by charities that wish to undertake non-charitable trading is to set up a wholly owned subsidiary. The trading subsidiary will undertake the non-charitable trade activities and then Gift Aid its taxable profit to its charity parent. This structure allows charities to raise further funds without risking their own tax-exempt status. A common example of this is charity shops. In its report the Commission noted the disparity between the treatment of charities and their trading subsidiaries when it comes to business rates relief. Under the current scheme charities are entitled to a mandatory 80% relief from business rates. Local authorities can then decide to grant additional discretionary relief of up to 20%. These exemptions are not available for trading subsidiaries despite the fact that most will Gift Aid taxable profits back to the charity. The Commission has recommended that the Government consult on extending the relief to trading subsidiaries.

  • It was recommended that the Government produce guidance to counter a misconception that charities enter into some business arrangements with the aim of avoiding business rates.
  • Criteria for discretionary relief is set by local authorities and the Commission has found that it can often be difficult for charities to find sufficient information to check whether they are entitled to any discretionary relief. To counter this, the Commission recommends that the criteria for discretionary relief be published and easily accessible on all local authority websites.
  • It is also recommended that the Government ensures that local authorities are aware that mandatory business rates relief also extends to small unregistered charities.
  • The Government should also create a standard form that can be downloaded from the Gov.uk website for mandatory relief. This form should be downloadable, with electronic submission, and should be recognised by all local authorities. It is hoped this will ensure standardisation of the discretionary relief application process and will be easier for charities.
  • The situation for business rates relief in Scotland is different as business rates is a devolved matter. The Scottish Government introduced a bill to the Scottish Parliament on 25 March 2019 which proposes to exclude independent charitable schools from business rates relief; except under specific circumstances.

If you have a query about charity taxes, please contact Catriona at charities@chiene.co.uk or call 0131 558 5800.

Informed Trustee Certificate Launched

Chiene + Tait’s Head of Charities Euan Morrison has supported the development of an online certificate for current and future trustees. The Informed Trustee course, run by The Society of Trust and Estate Practitioners (STEP), aims to equip current and aspiring trustees with the knowledge they need to be successful charity board members.

The majority of UK trustees are older, white men, with men outnumbering women two to one*. Unfortunately, having everyone from the same demographic narrows the types of skills, experiences and attitudes each trustee can bring to a charity. This means that the leadership of third sector organisations doesn’t always reflect the end-users, creating a cognitive dissonance between what users need and where trustees lead. Additionally, boards of trustees can find it a challenge to recruit younger members, which is essential to the lifeblood of a charity particularly in the current digital age.

The Informed Trustee course covers legal, regulatory and financial requirements for charities across the UK and is endorsed by Edinburgh Napier University and supported by the Charity Finance Group. Programme editor in chief, Julie Hutchison, charity specialist at Standard Life Wealth was supported by a number of charity specialists to ensure the course fully took into account geographic variances in charity law and accounting. Euan Morrison, provided assistance with the Scottish accounting and taxation element alongside C+T charity tax specialist Catriona Finnie. To find out more about the Informed Trustee course, visit the STEP website at https://www.step.org/qualifications/informed-trustee

*Source: https://www.gov.uk/government/news/charities-must-do-more-to-promote-diversity-on-their-boards-new-research-shows

Charity SORP Changes

The SORP making body has recently confirmed, in its Invitation to Comment on Draft Update Bulletin 2 issued in February 2018, that it will not be issuing an updated SORP, and instead the December 2017 amendments to FRS 102 will be brought into charity accounting by issuing a second Update Bulletin.

The Charity SORP Changes can be viewed here.

Creative industries tax reliefs

Museums and galleries tax relief became the latest addition to the Government’s suite of incentives for the creative industries, which can make arts and media projects affordable. Catriona Finnie, who heads up our Creative Industries Tax Relief offering, looks at a selection of reliefs most relevant to our clients. (This article first appeared in the Winter 2017/18 edition of our Connect newsletter.)

The UK has a package of tax reliefs designed to encourage investment in certain arts and media projects. Broadly, they all work in the same manner: eligible organisations can claim an additional deduction on qualifying costs and may be able to surrender some of their loss for cash from HMRC, equating to 20% or 25% of the core cost.

Museums and galleries tax relief can be claimed on costs incurred on temporary or touring exhibitions, but does not include general day-to-day running costs. The relief is open to charities, trading subsidiaries of charities, or subsidiary companies under the control of local authorities. Commercial organisations that run museums or galleries will not be eligible. Exhibitions must be open to the public to qualify, so exhibitions that are solely for selling purposes will not be able to claim.

Theatre tax relief, in general terms, is available for productions of a play, an opera, a musical, a ballet or other dramatic piece. Theatre tax relief is applied to each qualifying production, giving  potential tax relief for every theatrical production undertaken during the financial year. Tax relief is given according to qualifying expenditure which is, broadly speaking, the production and closing costs.

Video games tax relief allows companies to claim on qualifying UK expenditure, including those involved in the designing, production and testing of the game.

Film tax relief is a tax incentive for film production companies operating in the UK: limited budget films can claim a cash repayment worth 20% of qualifying expenditure, which usually encompasses costs related to principal photography and pre- and post-production.

Orchestra tax relief is available to orchestras comprising at least 12 instrumentalists who perform to live audiences. Eligible organisations can claim a cash repayment from HMRC of up to 25% of the costs incurred in producing the concert.

There are also tax reliefs available for:

  • High-end television production
  • Children’s television production
  • Animation

As you can see, each creative industries tax relief has specific eligibility criteria so get in touch to see if you qualify, or if you’d like more information on 0131 558 5800 or email catriona.finnie@chiene.co.uk.

Independent schools to lose rates relief?

(This article first appeared in the Winter 2017/18 edition of our Connect client newsletter.)

The Scottish Budget announced measures to scrap the business rates relief that independent schools receive as charities.

This was the result of the Barclay Review, which thought it “unfair” that independent schools receive rates relief, whereas state schools do not.

However, critics have pointed out that a state school pays its rates to the council, which funds the school, meaning there is no actual loss of funds. Other studies estimate that the fee increases that independent schools will need to make to afford the rates increase will drive pupils to the state system, with one estimate suggesting this will cost the government £5m more than the rates increase will generate. The Scottish Council of Independent Schools said that this move may also cut the amount of support independent schools can provide in the form of bursaries and grants.

The Budget is in draft form and will be voted upon in February.

The Trustees’ Report: tips and key points when drafting, part two

My first blog on this subject covered general pointers on the drafting of the annual Trustees’ Report for the statutory financial statements. For this second instalment, I will go into some of the specific requirements of the Financial Review section of the Trustees’ Report for charities with more than £500,000 of income that are often overlooked, or treated with too light a touch.

(It is also worth noting that these requirements are “encouraged” (ie good practice) for smaller charities, where relevant.)

Financial effect of significant events

Where there has been a large impact on the financials – such as a big new source of grant income, loss of major funder, cessation of a large project, or significant unanticipated liability arising – it is important to set out how this fits into the context of the overall figures.

This contextualising can help to explain the charity’s financial performance, which helps particularly with prior year comparisons and understanding plans for the future.

Defined benefit pension schemes

As employers are only too well aware, fluctuations in valuations of assets and liabilities of such schemes can have major impacts on reserves. Where significant, you must explain the impacts with reference to defined benefit pensions schemes.

While the effect on net assets can appear severe, it is important that it is put into context. The timing of meeting financial commitments, if not immediate, should also be made clear.

Principal risks and uncertainties

This was one of the more controversial requirements when introduced by SORP FRS102, and some charities still struggle with it.

It is just the main risks the charity faces. I often suggest people note the ones most likely to keep the trustees awake at night. And don’t forget to briefly set out how these risks will be mitigated against; highlighting a problem and omitting how it is to be managed does not inspire confidence!

‘Free’ Reserves?

Partly because of recent high-profile failures, and ever more important as the effects of austerity feed through into the sector, there has been increasing focus on how charities report on their reserves.

While most readers of accounts are familiar with the concept of different types of reserves, and the importance of the ‘unrestricted’ form in terms of financial sustainability and going concern, the components of these reserves need to be understood clearly by readers of accounts and trustees alike. A high level of unrestricted funds may appear positive, but if it is mostly made up of fixed assets that cannot be readily liquidated (especially if the assets are vital to charitable activities) it raises questions about availability of ‘free’ reserves to carry out day-to-day core activity. For this reason, it is important to be clear about unrestricted reserves excluding fixed assets, and even designated funds and commitments where applicable.

There may even be benefits to more detailed disclosure in this area. Some funders are reluctant to make awards to charities with high levels of reserves, and may be more accommodating if they can see that, actually, the reserves are tied up in assets critical to meeting charitable objectives effectively.

The above points will hopefully provide some help when the year-end reporting cycle looms over the horizon, and also align with some of the financial and governance considerations already well understood by senior management and the trustees.

If you have a query about your Trustees’ Report, please contact Euan at euan.morrison@chiene.co.uk or call 0131 558 5800.

Some more specific guidance on Trustees’ Reports and reserves is at:

The Trustees’ Report: tips and key points when drafting, part one

In my experience of producing or auditing annual accounts for charities, it is not unusual for the trustees’ report or directors’ report to be left to the end of the process.

Often the mere mention of the report as an outstanding item can elicit a sigh and a level of enthusiasm usually deployed during dental visits or preparation of a personal tax return.

Ironically, this part of the annual reporting process should be the fun bit – the figures should, in theory, appeal more to accountants like myself. If a Hollywood star advertised charity accounts like hair shampoo, they would start off with explaining the wonderful things the product was meant to do and how it changed their life, and only for completeness at the end go into the science bit of the figures.

So, for those who find drafting the trustees’ report rather a painful process, here are some general pointers which may be of assistance:

Start working on it early

There is no need to wait until the dust has settled on the financials. While these are important, they are a nuts-and-bolts representation of the charity’s activities and achievements during the year; the substance of what the organisation is all about and how it has performed should, in most cases, be clear at any time of the year. This has the added benefit of goals, activities, and outcomes being fresh in the mind – it is generally easier to write about things soon after they have happened, especially if you have something positive to report!

Delegate specific areas of the report

Delegation is a key skill of effective management, so think about who else on the board or senior management team can help with different elements of the report, depending on their particular focus. This can also promote ownership of what is, after all, the report of the trustees plural. This delegation is something that many charities, in particular larger and more complex ones, frequently do, though it remains important for one person to review the overall report and ensure messages are consistent and that it hangs together.

Look at how other charities draft their trustees’ reports

While copying what others do word for word is not advisable, the voluntary sector has a much better record of working collaboratively with third parties than the commercial sector. Using examples of good practice from different areas can also be applied to drafting the trustees’ report – and don’t just look at direct peers. Consider both larger and smaller charities, as well as those working in completely different areas of charitable endeavour – there are some great and innovative ways of conveying information in narrative reports out there.

Not seeing the wood for the trees

A trap that some organisations can easily fall into and one that usually springs up in the activities and achievements part of the report. Problems can occur when trying to include too much detail. A long list of items in the style of a ‘what I did on my holiday’ exercise might fulfil a does-what-it-says-on-the-tin approach, but can detract from an understanding of the overall objectives of an organisation. It is important to stand back a little and think of reporting in a top-down approach: start with general objectives and then link each specific achievement and activity back to how they helped you work towards your strategy. Detailed examples can be a good way of highlighting the day-to-day actions of your strategy, but an overabundance can muddy the waters and risks reader fatigue: this is, after all, the ‘fun’ part of financial reporting.

If you have a query about your Trustees’ Report, please contact Euan at euan.morrison@chiene.co.uk or call 0131 558 5800.

Some more specific guidance on Trustees’ Reports is at:

For more hints and tips, read part two of this blog.

Catriona Finnie in Scottish Financial News: Chiene + Tait charity tax specialist appointed to UK Gift Aid group

Catriona Finnie, a key member of the Charities and Education Group at Edinburgh accountancy firm Chiene + Tait (C+T), has joined HMRC’s newly-formed working group, set up to consider increasing the effectiveness of UK Gift Aid relief. The assistant tax manager becomes one of the first Scottish-based members to join the group, while C+T is the sole accountancy firm to be represented on it.

Full details about Catriona’s appointment can be found online here – http://www.scottishfinancialnews.com/14533/chiene-tait-charity-tax-specialist-appointed-to-uk-gift-aid-group/

Charity Accounts Update (SORP FRS 102 Information Sheet 1: Implementation Issues)

In the past the Charity SORP making body has produced “information sheets” which “seek to clarify the application of the SORP or particular recommendations contained within the SORP”. Information Sheets are advisory in nature and do not form part of the SORP, however, they are considered ‘best practice’ in terms of application of the SORP.

In April 2017 the SORP making body published “Information sheet 1 – Implementation issues” (in addition to the Help Sheets and Update Bulletins they have previously published) which contains guidance regarding interpreting and applying the requirements of the FRS 102 SORP and which should be applied immediately.

This Information Sheet covers various points of clarification and some of the key ones all charities should  be aware of are as follows:

Statements of Cash Flow

Parent and subsidiary charities may take advantage of the provisions of FRS102 which state that a parent charity can be exempt from preparing a Statement of Cash Flow in its individual financial statements that are presented alongside its consolidated financial statements. Similarly, a subsidiary charity is exempt from preparing a Statement of Cash Flow in its individual financial statements, where this statement is included in the consolidated financial statements of the parent. If you take advantage of these exemptions, you do need to disclose this.

However, for Scottish charities, while technically it is possible to take this exemption, it appears that it was not the intention of the Scottish regulations to reduce disclosure in this way, and accordingly it is recommended that it not be used for Scottish charities at present until clarified by OSCR.

Fundraising disclosure brought in by the Charities (Protection and Social Investment) Act 2016

Charities in England and Wales only must include extra information on their fundraising practices in the trustees’ report under provisions of section 13 of the Charities (Protection and Social Investment) Act 2016 (‘the Act’). Further guidance about the particular disclosures required can be found in Charity fundraising: a guide to trustee duties (CC20) and Charity reporting and accounting the essentials November 2016 (CC15d) as issued by the Charity Commission for England and Wales.

The provision applies to charities registered in England and Wales which must have their accounts audited by law, and applies for reporting periods beginning on or after 1 November 2016, although it may be applied early.

Comparative figures for fund disclosures

FRS102 itself (not the FRS102 charity SORP) states that “an entity shall present comparative information in respect of the preceding period for all amounts presented in the current period’s financial statements”. The SORP making body has interpreted this as requiring comparative figures to be provided when making the disclosures required for the summary of assets and liabilities of each category of fund of the charity and for the detail in the movements in material individual funds.

The Information Sheet notes that analysis of charitable funds should therefore, include fund movements from the beginning of the prior reporting period to the end of the prior period; and from the beginning of the current reporting period to the end of the current period.

This would clearly add to the already extensive fund reporting in the notes to charity accounts, and it is difficult to see that adding detailed information from the previous year improves clarity to the user of the accounts. We shall review interpretation of this particular element of the Information Sheet by the sector and consider application when use in practice becomes clearer and when the interpretation is clarified by OSCR.

Aggregate disclosure of the total amount of donations received without conditions

The SORP requires all charities to provide an aggregate disclosure of the total amount of donations received without conditions. Disclosure is considered only to be necessary if the total amount of donations received from trustees or related parties without conditions is judged to be material in the context of the total income from donations and legacies.

Inclusion of Employers NIC as part of employee benefits

When calculating “employee benefits” for the disclosure of remuneration and benefits received by key management personnel the definition of employee benefits should be in accordance with FRS 102 itself. Employers National Insurance Contributions should therefore be included where employee benefits are disclosed as part of KMP remuneration.

Where you are disclosing the numbers of employees that receive employee benefits of more than £60,000 however, employers NI should be excluded (as employer pension contributions currently are).

Other Topics included in Information Sheet 1

In addition to the matters discussed above, the Information Sheet also includes commentary relating to:

  • governance costs;
  • treatment of funding “clawed back” by funders;
  • exemptions from disclosure of related party names;
  • treatment of losses on disposal of assets;
  • and the company charity requirement for a fair value reserve.

Should you require to discuss any of the matters contained in the Information Sheet, or have any queries regarding the charity SORP, please contact Euan Morrison at euan.morrison@chiene.co.uk.

 

The Common Reporting Standard (CRS)

The Common Reporting Standard (CRS) is a new initiative designed to increase tax transparency. Though primarily aimed at financial institutions such as banks, it has ramifications for many types of organisations.

The regulations imposed by CRS are onerous and complex. We have produced Comment On factsheets showing the impact CRS will have on:

Additional Common Reporting Standard resources

You can also see Euan Morrison, our Head of Charities, present a webinar about the implications for Charities from CRS. Euan has also published a piece on why charities need to think about CRS in Third Force News.

Common Reporting Standard – preparing your charity

The Common Reporting Standard (CRS) is a new HMRC reporting initiative aimed at increasing tax transparency and may affect your charity if you have investments, and particularly if you are a grant-giving organisation.

Each year, charities judged to be ‘financial institutions’ will have to identify, perform due diligence and report on certain people who have an interest in your charity or to whom grants are awarded.

Any form of charity can be caught but the reporting requirements will differ according to whether the charity is corporate or unincorporated. If applicable, the first reports must be made by 31 May 2017.

To help you prepare for this change, we have produced a free factsheet and will host a breakfast seminar.

Factsheet: Comment On – Common Reporting Standard

We have prepared a series of Comment On factsheet with more information on the CRS – download it from our website here.

Common Reporting Standard Webinar

We held a free webinar about the Common Reporting Standard (CRS) on Thursday 30 March, presented bb Euan Morrison, Chiene + Tait’s Head of Charities.

You can watch a recording of the webinar here.

The Common Reporting Standard for Financial Institutions – impact on charities

The Common Reporting Standard (CRS) could affect charities that have large endowment funds. The CRS was implemented into UK law in 2015, via the International Tax Compliance Regulations 2015, and is part of a wider drive to prevent the global use of off-shore structures to evade tax.

How does the CRS affect charities?

All UK financial institutions, such as banks and investment managers, are required to perform due diligence procedures to identify certain information in relation to their account holders and make reports to HMRC where required. To enable them to do this charities may receive forms from their bank and/or investment manager asking them to categorise themselves as a financial institution or a non-financial entity for the purposes of CRS.

Is my charity a financial institution?

Financial institution

Although charities do not normally provide financial services and so would not therefore expect to be classified as a financial institution, the definition is wide which means that some charities, particularly grant giving charities and/or those with large endowment funds, may be caught by the definition of a type of financial institution called an investment entity.

A charity may be considered to be an investment entity if it meets these criteria:

  1. It is investing on its own account; and
  2. It is managed by a financial institution, meaning that it has appointed a financial institution to manage all or part of its assets on a discretionary basis; and
  3. At least 50% of the charity’s gross income is attributable to investing, reinvesting or trading in financial assets.

Charities that are financial institutions will need to apply specified due diligence procedures to identify whether they maintain “financial accounts” which must be reported to HMRC. Financial accounts in this case are not the annual accounts prepared by charities; rather charities that are deemed to maintain these financial accounts include, for example, trusts that make grants to beneficiaries.

Charities deemed to hold financial accounts will have to perform due diligence upon their account holders or beneficiaries and report certain information about them to HMRC. Therefore if a grant-making charity is a financial institution, everyone to whom a grant is made will be an account holder and so the charity will have to perform due diligence on each grant made.

It is important to note that you can be a financial institution but not maintain financial accounts, in which case it is not clear whether HMRC will require these charities to submit some sort of “nil return”.

Non-financial entity

If you conclude that you are not a financial institution you will then have to look at whether you are an active or passive non-financial entity which will determine whether or not you have reporting obligations to HMRC relating to its controlling persons.

When does this take effect?

Reporting deadlines for financial institutions begin in 2017 however charities that think they may fall within the scope should consider now how they will address their due diligence and reporting requirements.

Guidance

Guidance specifically for charities was released by HMRC in June 2016 and can be found here.

More information

We’ll provide more updates when HMRC issues its guidance; in the meantime, if you have any questions please contact charities@chiene.co.uk.

Murky waters for VAT treatment of charitable buildings

An ongoing charity VAT case could have important implications regarding recent and future capital projects. The case of Longridge on the Thames [2014] UKUT 504 is currently with the Court of Appeal and we’re awaiting the (imminent) ruling.

In the current economic climate charities are feeling the pinch and funds are being stretched, particularly when it comes to capital projects. A positive saving grace available for charities comes in the form of the 0% VAT rate, which is available on the construction of a new charitable building. Needless to say, not having to worry about funding an additional 20% can be a huge bonus.

One of the conditions of this rate is that the building must be used “solely” for charitable purposes, which HMRC take to mean “otherwise in the course or furtherance of a business”. HMRC interpret this as a charity not raising any charges for activities within the building – the point that could have significant ramifications for Longridge and many other charities.

Longridge is a charity formed ‘for the advancement of education in water, outdoor and indoor activities for young people generally’. It arranged for the construction of a training centre on a site that it owns on the River Thames assuming zero rating would be available; however, HMRC issued a ruling that the construction of the centre was standard-rated, and the charity appealed.

Both the VAT Tribunal and Upper Tribunal agreed with Longridge and considered that, although charges were made for participation in activities at the centre, it was run by volunteers and access to activities was largely heavily subsidised so it was not run in the course of furtherance of a business. HMRC has appealed the case to the Court of Appeal.

In the current uncertain context, charities should consider carefully what activities will take place in their buildings to ensure that the 0% VAT rate can be obtained on works, particularly as HMRC can revisit this and apply VAT retrospectively if the building is not used for its original purpose and there are different activities taking place.

Some charities may have obtained zero rating on the basis of this case so should take note of the outcome, as it may have a significant impact on past and future projects.

OSCR Announces New Charity “Notifiable Events” Requirement

To prevent problems from happening, reoccurring or affecting public confidence in the charity sector, from 1st April 2016 the Office of the Scottish Charity Regulator (OSCR) will ask charities who have, or have had, a serious problem to notify them. OSCR has brought in this new guidance in order to “encourage charities to deal with issues quickly and effectively, to prevent them from becoming a serious problem for the health of the charity and, potentially, for the wider charity sector.”

What OSCR means by a serious, or as they define it, “notifiable” event depends on the size, structure and nature of the charity, however ultimately it’s the responsibility of the trustees to decide whether or not a “notifiable event” has occurred and therefore if it should be officially reported.

What are “notifiable events”?

OSCR has given which examples focus on events that have significant impact on the charity, as follows:

  • Fraud and theft;
  • Substantial financial loss;
  • Incidents of abuse or mistreatment of vulnerable beneficiaries;
  • Insufficient charity trustees to make a legal decision;
  • The charity has been subject to a criminal investigation or an investigation by another regulator or agency; sanctions have been imposed, or concerns raised by another regulator or agency;
  • Significant sums of money or other property have been donated to the charity from an unknown or unverified source;
  • Suspicions that the charity and/ or its assets are being used to fund criminal activity (including terrorism);
  • A charity trustee is acting whilst disqualified

What to do if your charity has a “notifiable report”?

Once a notifiable event has been identified by trustees OSCR should be informed by email as soon as possible via notifiable@oscr.org.uk with the following details:

  • What the event is and how it has (or may have) a serious impact on the charity;
  • What action (if any) has already been taken by the trustees;
  • What further plans the charity trustees have in place to deal with the event;
  • What plans the charity trustees have in place to stop similar events happening in the future.

One point to note – if a charity is registered with the Scottish Housing Regulator or the Charity Commission for England and Wales, then OSCR does not need to receive a report. However for charities registered with any other regulator, OSCR will need a “notifiable event” report.

In addition, criminal events should still be notified to the police regardless. Recent high profile charity failures have highlighted more than ever the importance of good governance. Although there is no legal requirement to report an event to OSCR, this step emphasises the responsibilities and accountability of trustees in running a charity. The Regulators’ focus is to help the charity trustees be responsible and accountable for the running of a charity in order to make sure lessons are learnt for other organisations in the sector and improve public confidence.

Read OSCR’s guidance on notifiable events here.

What is Theatre Tax Relief and who qualifies?

Theatre Tax Relief (TTR) is a generous relief, which was introduced on 1 September 2014 to recognise the cultural and economic significance of theatres in the UK. The Government hopes the relief will encourage and support UK theatre producers.

TTR is available to any business within the charge to corporation tax, including not for profit organisations such as charities. To qualify, the business must carry on a qualifying theatrical production. In general terms, productions of a play, an opera, a musical, a ballet or other dramatic piece would qualify for TTR.

You can download our Comment On Theatre Tax Relief here (pdf).

How does Theatre Tax Relief work?

TTR is applied to each qualifying production, giving businesses potential tax relief for every theatrical production undertaken during the financial year. Tax relief is given according to the productions’ qualifying expenditure which is, broadly speaking, the production and closing costs.

Tax relief comes in the following forms:

  • An additional deduction for corporation tax purposes amounting in most cases to 80% of all qualifying expenditure.
  • If there is a loss on production after the additional deduction has been taken, the business has the opportunity to surrender this loss for a tax credit equal to 20% of the surrenderable loss for a non-touring production or 25% of the surrenderable loss for a touring production.

Example

Income £400,000
Expenditure (£450,000)
Loss before relief £50,000
Enhanced expenditure (80% x £200,000) £160,000
Loss after relief £210,000

Loss available for surrender

Lower of:

Available loss of £210,000 and

Enhanced expenditure of £160,000

 

 

£160,000

Tax credit payable at 20% £32,000

If you would like to find out how you can make a TTR claim, please contact Catriona Finnie at charities@chiene.co.uk

We are also able to help with other creative sector tax reliefs: orchestra, computer games, films,  certain television and animation productions, and (from 2017) museums and galleries all qualify for tax relief. Contact us for advice and support.