The expressed aim of the Charities Act 2006 was to increase public trust and confidence in charities. So it’s discouraging to note that, just as the fourth commencement order of the Act took effect at the start of April, think tank nfpSynergy reported a sharp decline in public trust in charities.

Its latest survey, covering the period to last July, found that only a minority of respondents (42 per cent) expressed confidence in the way that non-profit organisations use their income. As the survey canvassing was carried out before the tougher economic times ushered in by the credit crunch took hold, it suggests that charities may now be experiencing even more of an uphill task.

The Charity Commission has collaborated with the government in proposals to raise a number of financial thresholds while maintaining an effective regulatory framework. But it would be unfortunate if measures designed to lighten the burden and expense of regulation for smaller charities turned out to be to their detriment.

Among the changes introduced by the fourth commencement order was an increase, from £10,000 to £25,000 in the annual income threshold above which charities are required to submit annual accounts.

The increase means that around 23,000 charities, or more than 10 per cent of all registered charities, no longer need submit their accounts to the Charity Commission, says Nick Sladden, a partner at Baker Tilly. But he shares concerns that the change may not be entirely beneficial.

“We’re living in an electronic age, and it’s understandable that there should be some attempt to reduce the number of accounts submitted by smaller charities,” he observes. “However, the move could irritate some members of the public, who will no longer be able to access the accounts of many smaller charities.

“If I were a trustee, I might want to ensure that the accounts were publicly available to those who wanted to see them,” he adds. This might persuade some smaller charities to work around the new rules and post the results on their website.

Michelle Wilkes, a partner in the charity division at Wilkins Kennedy, agrees. “Charities often overlook the fact that their accounts serve as a useful marketing tool,” she observes. “If the thresholds are raised, then they need to stand back and consider that it’s still vital to inform people of what they are doing and the impact they are making – especially at a time when soaring fuel and food bills are squeezing the disposable income of donors.”

More potential increases to financial thresholds are in the pipeline, with the Charity Commission having proposed the following changes:

• registered charities with annual income below £25,000 would in future be exempted from the need to prepare a Trustees Annual Return
  
  
• the income threshold of £10,000, above which charities must have their accounts externally examined, would increase to £25,000, and
  
  
• the threshold of £100,000, above which a charity must prepare accrual accounts – as opposed to simpler receipts and payments accounts – would be raised to £250,000 for many charities depending on their sources of funding (the lower limit could remain for those dependent on a large organisation, for example).

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Concern over the new thresholds is shared by organisations such as NAVCA. Its chief executive, Kevin Curley, wrote to the Charity Commission earlier this year to express its opposition to the proposed increases.

NAVCA warned that the changes would not only reduce public confidence in local charities, but also increase the likelihood of fraud and mismanagement. This, in turn, threatened to attract adverse media publicity and deter individuals from serving as charity trustees. The Association suggested that the Commission’s existing regime was already light-touch and its requirements were not overly demanding.

Wilkes agrees that the proposed increase in the accrual threshold could see charities inadvertently failing to meet accounting requirements. “It’s a concern that, while there are certain statements that have to be included, there is no standard format for receipts and payments accounts that needs to be complied with,” she comments. “With a less onerous review and accounting regime there is an increased risk that charities could also potentially have liabilities, particularly with the complexity of some tax and VAT rules, that they are unaware of.”

An improved platform?

Other provisions taking effect from 1 April under the fourth commencement order of the 2006 Act include the following:

• a new legal definition of ‘charity’, that reflects a range of charitable purposes and public benefits. All organisations that already qualified as a charity before this effective date will continue to do so. According to the minister for the third sector, Phil Hope, the new definitions and public benefit requirements “will give charities the platform to explain their good work and help the public see their true value.”
  
  
• to qualify as a charity, an entity must have exclusively charitable purposes and work for the public benefit. This means that organisations established for the advancement of education, the advancement of religion, or the relief of poverty are no longer automatically presumed as being for the public benefit
  
  
• charity trustees must be guided by the Charity Commission’s guidance on public benefit when exercising powers or duties addressed in the guidance
  
  
• the provisions of the Charities Act 2006 to formalise and redefine the preparation and auditing of the charity’s accounts take effect; as do those setting out the ‘whistle-blowing’ duties of auditors or independent examiners. In addition, professional fundraisers who are remunerated by the charity for their work must reveal to potential donors how much they are being paid for their efforts (see the full article on this Facing the facts).

Since the 1993 Charities Act, charities with limited income have been able to win an exemption from the requirement to have their accounts audited. The respective thresholds were: for unincorporated charities, a gross income or total expenditure of £250,000 in the current or any of the previous two years; and for incorporated charities gross income of £250,000 or assets of £1.4 million.

Qualifying charities were subject to further tests to determine whether another form of external scrutiny of their accounts was needed – in the case of unincorporated charities an Independent Examination, and in the case of incorporated charities an Accountant’s Report; both of them less detailed and less expensive than an audit.

From the end of February 2007, under the 2006 Act the gross income threshold for both doubled from £250,000 to £500,000, while unincorporated charities with assets of more than £2.8 million were also eligible for audit exemption if their gross income was no more than £100,000.

It’s too early to determine the effect of this increase says Sladden, as it only applies to financial year-ends from 27 February 2008 onwards. However, among the consultation proposals is a further doubling of the gross income thresholds, this time from £500,000 to £1m.

Lighter touch

Another change brought into effect by the Charities Act 2006 and the Companies Act 2006 is that Independent Examination rules will apply equally to unincorporated and incorporated charities for accounting periods commencing on or after 1 April 2008. The Accountant’s Report option will be scrapped to create a consistent reporting framework.

A ‘light-touch’ audit, where the auditor doesn’t have to comply with the international standards of audit (ISA) regime, has a significant impact on fees. An audit fee of £5,000 would equate to an Independent Examination fee of £3,000. The consultation suggests that some 5,400 charities should be able to save by moving from the audit regime to the Independent Examination regime.

Sladden is in favour of the proposal, as well as the higher audit threshold, and believes the distinction between an audit report and an Independent Examiner’s report will be lost on all but a few individuals. He adds that the introduction of the ISA regime in 2005 had as its remit the blue chip companies of the FTSE 100. However, as ISA standards have been applied across the board small charities have not been exempted and bear a heavy cost of compliance.

And as Wilkes points out, private companies now have an audit exemption income threshold of £5.6 million, increas-ing to £6.5 million, on annual turnover that caused much debate when the higher thresholds were first introduced.

While not advocating that charity audit thresholds should also be at this level she concludes, “although the higher thresholds raise a number of concerns, it could be that we are being overly sensitive to increases and their impact.

“However charities do need to think about who their stakeholders are, who might want to continue looking at their accounts, and what their requirements are.”

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