Most
commentators on the charity sector would agree that regulation
needs to be proportionate for charities, while at the same
time respecting the interests of the general public and other
stakeholders. So far so good, but in practice the issues arising
can be far from clear-cut.
Take, for instance, the question of the financial thresholds
for preparing a Trustees’ Report and financial statements
and putting these on the public record by filing with the
Charity Commission. Charities, especially smaller ones, would
benefit from a relatively high threshold. The amount of income
of the registered charities involved would be relatively low
compared with the total of such income.
In contrast, those concerned with transparency and accountability
would prefer to see a relatively low threshold. A low threshold
would lead to an increase in the number of charities whose
financial reporting is in the public domain. This openness
would help to maintain public trust and confidence in charities
and their work.
Related questions include the basis of preparation of financial
statements and the scope of external scrutiny. At what financial
threshold should a charity prepare its financial statements
on the accruals basis rather than the simpler receipts and
payments basis? And at what threshold should there be external
scrutiny, whether by independent examination or external audit?
A final question is on the flexibility of the framework to
deliver these thresholds. Most commentators agree that a ‘one
size fits all’ approach is too inflexible. However,
the more flexibility that is built in, the more complex the
framework becomes and the more difficult for those charities
affected to understand and follow.
The new financial thresholds
This Focus looks at the new thresholds relating to non-company
charities which came into force on 1 April 2008 as part
of the phased implementation of the Charities Act 2006.
Note that under the Companies Act 2006, the relevant thresholds
for charitable companies are being harmonised to remove
inconsistencies arising as a result of corporate status.
This Focus also looks at the proposed financial thresholds
on which the Charity Commission consulted recently. This
consultation was in response to comments during the passage
of the Charities Bill that thresholds should be simplified
and increased.
The Charity Commission is generally sympathetic to deregulatory
proposals but wished to consult with the sector on this
matter. In reviewing these thresholds, the Charity Commission
uses five criteria as guidelines:
- Is the change logical?
- Will it reduce the administrative burden on charities
and their trustees?
- Will it simplify/rationalise the regulatory framework?
- Is it consistent with an effective regulatory framework?
- Does it provide for transparent and accountable reporting?
To what extent is there a consensus?
This is not an easy question to answer. The Charity Commission
believes in the proposed financial thresholds and has put
this case in the consultation, recognising that some of
the more significant changes could lead to a reduction in
public trust and confidence in small charities. For instance,
as noted in the consultation:
- Increasing the threshold to prepare a Trustees Report
from nil (i.e. all must) to £25,000 would mean that
118,000 charities would no longer have to prepare one.
Trustees’ Reports prepared and filed on the basis
of the proposed threshold would still cover 98 per cent
of the total income of registered charities
- Increasing the limit for filing their financial statements
with the Charity Commission from £10,000 to £25,000
would mean that 23,000 charities would no longer be required
to file their financial statements. Again, financial statements
filed on the basis of this threshold would also cover
98 per cent of registered charities’ income. The
income of the remaining two per cent which would not be
covered amounts to some £280 million.
Some commentators such as NACVA (National Association
for Voluntary and Community Action) have a concern that
these proposals would reduce public confidence in small,
local charities and should not be adopted. This view is
explored further in this Focus.
Others take the view that some increase in thresholds is
called for, but perhaps not yet to the levels proposed,
given that the Charities Act received Royal Assent under
a year ago.
A final thought
This debate is not only about probity and accountability,
important though these are. The Charity Commission’s
Quarterly Facts and Figures (March 2008) shows that 94,000
charities have an income of under £10,000, making
up over 56 per cent of registered charities. There will
be many more with an income of under £25,000.
These charities will be small, local and grass roots in
nature; local people understanding local needs and finding
local solutions, building social cohesion and capacity.
Whether required by regulation or not, there is a huge benefit
to the community in those concerned writing down what they
have achieved with the resources they have and communicating
this to all those who are interested. Let the debate run.
Paul Gibson is a senior manager in the Charity
Sector Group at Mazars LLP
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