Author Archives: Martin Bailey - Partner

About Martin Bailey - Partner

T +44 (0)20 7874 8877

I have particular expertise in the charity and the social business sector, working with organisations in 'The Third Sector' since joining the profession and developing vast knowledge and extensive experience in this time.

Charities are unique and have specialised reporting, compliance, and governance requirements. They require someone with specialist skills and knowledge to support them, allowing them to focus on their important work.

I work with organisations rather than for them, providing support and advice to issues as they arise - whether that be core accounts and audit compliance, VAT and taxation planning, governance issues, risk management, strategic reviews and advice, or designing accounting systems.

Talking to a couple of my charity clients last week highlighted that the impact of the coronavirus (Covid-19) on charities is, as with nearly every individual and every business, ever changing.

Ensuring the health and safety of beneficiaries, volunteers, and staff is of course paramount. But in order to ensure this and ensure that charities can continue to provide their much needed and highly valued services as much as possible, it is essential that organisations continue to operate and be managed efficiently and effectively.

Whilst both charities mentioned above are well run organisations, they have seen an impact on their service delivery (whether through cancellation, postponement, or through changing the way their services are delivered).

Their income is also being affected – especially where income is generated from carrying out its activities, but also from cancellations of fundraising events (as part of social distancing measures) and declines in investment performance.

Income generation is always a key concern for charities – and this is likely to become a greater concern over the coming weeks with bills and wages to pay, and services to provide.

Therefore, here are a few key matters that charities should consider:

Communication – talk to your funders. If you have been awarded funding to carry out a particular project and that project can’t go ahead, or needs to be postponed or changed, speak to the funder about rescheduling or the changes to the project.

The charities that I have advised to do this have found their funders to be very supportive and have confirmed their commitment to the funding even if the activities are delayed.

Speaking to them now, will help to keep them onside and demonstrate that as an organisation you are still focused on what you do, and that you are looking at mid-longer term service delivery, as well as adapting to the current circumstances.

Revisit forecasts and plans – business plans and budgets are not set in stone. They are living documents that should be reviewed and revised as circumstances change.

Review planned activities – can they still go ahead? Are they fully funded? If not, is funding available?

Update forecasts and especially cash flow projections. It may be difficult to predict cash flow over the next few months but doing this as accurately as possible will help to identify pinch points.

Build in ‘what if?’ scenario planning into the revised forecasts – if one project doesn’t go ahead, can the funding be used elsewhere (remember, speak to your funders), or can valuable resources be saved by delaying or cancelling non-essential activities??

Don’t be afraid to say no to income – this may sound strange, but don’t blindly chase and accept income without thoroughly understanding what it is for and where it is coming from. It is essential to stay calm and not make knee-jerk reactions – decisions should be taken after careful and thorough consideration of the circumstances.

Things to consider are:

  • Would accepting this income require us to do new services/activities that we don’t currently provide?
  • If so, are these still in line with our charitable objects?
  • Would we have to adhere to new regulations?
  • Would this require us to incur additional costs?
  • Are there potential reputational risks from working with this funder? Or potential conflicts of interest with other existing funders?

Review your reserves policy – there is both a short and longer-term element to this. In the short-term, reviewing your levels of reserves is an essential part of revising plans and forecasts. Going forward, a full review of the reserves policy is recommended to see whether it is still appropriate, especially if your activities and ways of carrying them out have changed.

Also, don’t be afraid to use reserves in this period – it is why they are held.

One other recommendation is to keep notes of everything that you do differently now for future – this will help with future crisis planning and highlight areas where systems/procedures may need improving. For example, do IT systems need improving to work from home? Would moving to the cloud enable better business continuity? Has this highlighted how reliant an organisation is on particular key members of staff or income streams? Does it show how easily or how difficult it was to change delivery of services and ways of working?

The temptation at present may be to operate on a day-to-day basis, but doing as much planning and preparation as possible, will help you during this time.

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One of the ways in which a company can receive finance is through investment by individuals, frequently through the issue of share capital.

In 2014, the government introduced Social Investment Tax Relief (SITR) with the aim of increasing access for social enterprises to finance by offering tax incentives to individuals who invest in qualifying social enterprises. These are businesses that are run to generate profits but whose missions and objects include social purposes, rather than solely shareholder wealth maximisation.

What is Social Investment Tax Relief?

Individuals can deduct an element of the cost of their investment from their income tax liability in the year in which the investment is made, or carry it back to set against income tax in the previous tax year.

How much is Social Investment Tax Relief?

An individual can claim 30% of the cost of investment against their income tax liability.
An individual can also defer a capital gains tax liability if their chargeable gains are invested in a qualifying social enterprise. The capital gains tax liability then only becomes payable when the social investment is sold or redeemed.

When the social investment is sold, no capital gains tax arises on any gain on the investment itself (but it is worth noting that any dividends or interest received on the investment are subject to income tax).

How long must the investment be held?

The investment must be held for a minimum of 3 years.

Is there a maximum amount of investment?

Individual investors can invest up to £1 million and this can be in more than one social enterprise.

Individual social enterprises can receive €344,827 over 3 years – depending on exchange rates, this is around £300,000. An enterprise can receive a maximum of £1.5m social investment over its lifetime.

What is a qualifying social enterprise?

In order to qualify, there are numerous conditions that an organisation must meet:

1. Use of money

The organisation, or its subsidiary, must use the money for a qualifying trade or for preparing to carry out a qualifying trade (which must start within 2 years of receiving the investment).

A trade must not include such activities as (amongst others): leasing, receiving royalties/licence fees, financial services, dealing in land or financial instruments, agriculture, property development, running a nursing home or residential care, or production of gas/fuel or generation of electricity/heat.

2. Characteristics of organisation

The organisation must not:
• Have more than 250 or more full-time equivalent employees at the time of the investments,
• Be controlled by another company
• Have more than £15million of gross assets immediately prior to the investment
• Have more than £16million of gross assets immediately after the investment

3. After receiving investment

For the 3 years after receiving investment, the organisation cannot:
• Be controlled by another company
• Be quoted on a recognised stock exchange
• Be in a partnership
• Control another company that is not a qualifying subsidiary

How are HMRC notified?

The social enterprise must inform HMRC that the organisation qualifies as a social enterprise, that the investment received is a qualifying investment, and that all necessary conditions have been met.

It is worth noting that the investor is unable to claim the relief until HMRC have received this confirmation from the social enterprise.

Future of SITR

Finally, just a few comments about the future of the scheme. The government has announced a ‘call for evidence’ into the scheme and how it has impacted access to finance for social enterprises. This call for evidence has probably been triggered, at least in part, because take up of SITR has been less than thought.

The latest HMRC statistics show that during 2017/18, 20 social enterprises received £1.4m of investment through SITR. Since its launch in 2014, 80 social enterprises have received investment totalling £6.7m.

As it stands, SITR is due to come to an end on 5 April 2021 – but this may be extended, and/or the rules changed, depending on the outcome of the call for evidence.

Tax Planning

The above comments provide an overview of the key elements of SITR but, as with all things tax, there are likely to be additional conditions or factors to bear in mind.

In addition, this should form part of wider tax planning arrangements to ensure that an individual’s full tax affairs are assessed.

At Goodman Jones, we work closely with organisations and individuals enabling us to understand this from both sides of the fence – so do get in touch with any questions or for advice on claiming SITR.

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The “bottom line” is well-known in business parlance as referring to the profit or loss of an organisation. Around 40 years or so ago, the concept of the “triple bottom line” was introduced and this has gained more and more prominence, especially in recent years.

The triple bottom line approach to business expands on traditional financial reporting to include social and environmental performance.

In fact, the triple bottom line has already been extended to, unsurprisingly, the “quadruple bottom line” – the fourth ‘line’ being a future-oriented approach to business where future generations and intergenerationality are considered alongside financial, social, and environmental matters.

The last few years in particular have seen more and more businesses engaging with triple, and quadruple, bottom line reporting, and adapting the way they do business.

One way in which this is evidenced is through the rise in the number of B Corporations (or B Corps). B Corps started in the USA in 2007 and launched in the UK in 2015. There are now over 170 certified B Corps in the UK (as at June 2019).

What is a B Corp?

A certified B Corporation is a business that “meets the highest standards of verified social and environment performance, public transparency, and legal accountability to balance profit and purpose”, source:

B Corps take a triple bottom line approach – they seek to generate not just financial profits, but also change and improvement for the wider world.

How do you become a B Corp?

B Corps are certified as such in the UK by B Lab. In order to be certified, an organisation is assessed by B Lab to see whether it meets the required standards.

An organisation must be re-certified every two years.

What are the required standards for certification?

An organisation completes an impact assessment and disclosure questionnaire – then subject to validation by B Lab. To meet the standards of certification, an organisation must obtain a score of at least 80 out of 200 across five areas: governance, community, workers, environment, and customers.

The required standards are always being reviewed and revised to ensure that B Corps move with the times and reflect what good looks like at the current time.

An organisation must also meet the legal requirement.

What is the legal requirement?

B Corps are legally required to consider the impact of their decisions and activities on all stakeholders, not just shareholders. In the UK this involves updating the relevant governing document to include a commitment to the triple bottom line approach.

Practically, for a UK company, this means changing the objects clause in its Articles Of Association to include a statement that the business exists to have a positive impact on society and the environment, as well as for the benefit of its shareholders.

Who can become a B Corp?

Any for-profit organisation can be become a B Corp. It must generate the majority of its revenue from trading activities, compete in a competitive marketplace, not be a charity, not be a public body or majority owned by the state.

The organisation must have been trading for at least a year – for new business less than a year old, they can still go through the process but will have B Corp Pending status until full status is confirmed after a year.

What are the Pros of being a B Corp?

Having B Corp certification publicly demonstrates an organisation’s commitment to being a socially responsible business. This may make a company more attractive to potential employees, potential customers, and potential investors.

Many organisations already take a triple bottom line approach to business – even if this isn’t documented or made known to stakeholders outside the business, inside the business, and perhaps even to the business leaders themselves (such an approach just coming naturally). So getting formal B Corp certification may just be putting an official public stamp on what a company is already doing.

Any Cons?

The triple bottom line approach may be new to an organisation and require significant input of time, money, and resource – not to mention, a likely change of mindset, focus, and culture.

In addition, although present in the UK for 4 years, B Corps are relatively new and so still a relatively unknown concept. Whilst they may be attractive, the concept may also give rise to increased caution from potential investors who want/need a level of financial return and therefore may have concerns around maximising profits (however, this attitude is starting to change with increased numbers of social investors).

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One of the ways in which charity accounts are ‘different,’ is the use of fund accounting.

Fund accounting splits income and expenditure into different pots depending on the purpose of the donation.

There are four types of fund:

1. Unrestricted or general funds – these are funds that a charity has received from a donor and which are not held for any particular charitable purpose. They can be spent as deemed fit by the trustees.
2. Designated funds – these are unrestricted funds that the trustees have set aside for a particular purpose. Such funds can be undesignated or re-designated.
3. Restricted funds – restricted funds have been given to a charity for a particular purpose and can only be spent on that purpose.
4. Endowment funds – these are funds received by a charity that represent capital. Charity law requires trustees either to invest such funds, or to retain and use them for the charity’s purposes.

Knowing the position on each of a charity’s funds at any point in time is an essential part of a charity’s financial management. In particular, there is a need to be able distinguish between unrestricted (including designated) funds and restricted funds. Restricted funds can only be spent in accordance with the requests of the donor; failure to do this may be a breach of trust.

So why else is it important to monitor restricted fund balances?

Planning and budgeting – not identifying restricted funds at time of donation and not allocating expenditure to restricted funds until the year-end can have a distorting impact on your planning and budgeting processes. This may give rise to the expectation that available funds are greater than the true position.
This could result in:

  • Encouraging you to plan additional activities thinking the reserves are available to fund them – yet once the fund allocations are done, it may indicate highlight that reserves are lower and so these extra activities may put additional pressures on fundraising or cash flow
  • Indications that your reserves policy is not appropriate (see below)
  • Indications that your income streams are not sufficiently diverse – for example tracking funds during the year may help to highlight that most of your income is received in the form of restricted grants and therefore there is a need to look at other sources of funding

Reserves policy – every charity needs to develop its own reserves policy that establishes an appropriate level of reserves for the charity to hold. Restricted funds fall outside of the definition of free reserves – but they still impact a charity’s reserves policy.

If the nature of a charity’s activities is such that significant levels of its income and reserves are restricted, then the level of unrestricted reserves the charity should hold may be reduced. However, if restricted fund balances aren’t being monitored, then the reserves policy established may not be appropriate and the charity may be holding too high, or too low, a level of unrestricted reserves.

Keeping track of restricted funds during the year will allow better monitoring of financial performance, unrestricted reserve levels, and the level of unrestricted funds needed – and will help to drive review and setting of the reserves policy.

Donor reporting – it is often the case that that when restricted funds are awarded to a charity, the donor specifies that a report be provided on how these funds have been spent. Such a request may be made for unrestricted funds too. These donor reports will not necessarily coincide with your accounts year-end.

Many charities, both large and small, perform the analysis and allocation of expenditure by fund as part of the annual accounts process. Therefore, you need to make sure that you can easily identify the expenditure connected to each restricted fund at any time during the year. Ensuring that your accounting system allows allocation of income and expenditure to a particular department/project/cost centre should make extracting the information for the donor report more straightforward.

Accounting system and resource –good questions to ask include: does the absence of monitoring funds during the year indicate that your charity has outgrown your accounting system? Is the system still fit for purpose? Does it highlight a training need for your accounts team? Are the trustees receiving the financial information they require?

Overheads – unrestricted funds are often seen as the holy grail of charity financing as they can be spent as the trustees deem appropriate. There can be the belief that “unrestricted funds = overheads”, and that restricted funds cannot be used towards overheads or support costs.
However, this is a slight misconception. Donors are aware that projects and activities don’t just happen – for example, a charity might need premises to carry out its activities so it’s only right that a proportion of premises costs relate to the projects funded by the restricted reserves.
Not tracking restricted funds until the year-end may mean that overheads are not apportioned until the year-end – by this time, the restricted funds may have been spent, resulting in support costs being funded out of unrestricted reserves.

It may also indicate that support costs are not being allocated appropriately – a charity’s activities are likely to change over time (either in terms of what activities are carried out, or the way in which they are carried out). Therefore, previous methods of support cost allocations may not continue to be the most appropriate method.

The above are just a few reasons as to why restricted funds should be monitored on an ongoing basis – but it’s certainly not a definitive list!

Reviewing your charity’s processes around tracking reserves is an important exercise and shouldn’t be dismissed as a year-end accounts process.

Do get in touch if you have any questions on how your charity can best monitor its funds.

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I blogged recently about various tax changes affecting charities from April 2019. One change related to the Gift Aid Small Donations Scheme.

I have had a few questions from charities recently about this scheme so I thought that a reminder of what this is and how it operates would be useful – not least because, whilst this is a very helpful relief, the rules regarding eligibility are not the most straightforward.

What is the Gift Aid Small Donations Scheme?

The Gift Aid Small Donations Scheme (or “GASDS”) was introduced back in April 2013 to allow eligible charities and Community Amateur Sports Clubs (“CASCs”) to claim Gift Aid on small cash donations – for example cash collected in tins or buckets via street collections, or at religious services.

Can any charity or CASC claim?

To qualify as an eligible charity or CASC, an organisation must:

1. Be registered as a charity with HMRC

2. Have claimed Gift Aid:

  • in the same tax year as you want to claim GASDS
  • without getting a penalty in the last 2 tax years
  • in at least 2 of the last 4 tax years (without a 2-year gap between claims) if you’re claiming on donations made before 6 April 2017

What is an eligible donation?

The scheme is available to cash donations (including contactless card payments from April 2017) of:

  • £20 or less – for donations on or before 5 April 2019
  • £30 or less – for donations on or after 6 April 2019 (the increase reflects the limit on contactless payments).

The donation must have been made by an individual, banked in a UK bank account, and must be used for charitable purposes. No benefit can be received by the donor in return.

Membership fees do not qualify as GASDS donations – not amounts given through payroll giving.

How much can a charity or CASC claim?

You claim 25% of the eligible donation. A total of £2,000 can be claimed – i.e. on gross donations of £8,000 (up to 5 April 2016, the limit was £1,250 of relief on gross donations of £5,000).

However, as well as the £2,000 cap the GASDS claim can’t be more than 10 times your Gift Aid claim – so for example if, in the same tax year, you’ve received £100 of Gift Aid donations then you can claim on up to £1,000 worth of donations through GASDS.

The ‘10 times’ rule does allow a planning opportunity – whilst it may increase administration requirements, the more donations that can be claimed under Gift Aid (by getting donors to complete declarations – even if these are small cash donations too), then more eligible donations can be claimed under GASDS.

Is a donor declaration needed like Gift Aid?

No – the scheme was designed to provide some relief for small cash donations where obtaining a signed gift aid declaration is difficult or impractical (such as street collections). A charity or CASC does not actually have to know the identity of the donor, unlike with Gift Aid. Therefore, there is an admin cost saving (from not having to obtain and store Gift Aid declarations) as well as a cash receipt benefit.

If Gift Aid is claimed on such a donation, then it does not qualify for GASDS.

Does the donor claim tax relief?

No, donations made via GASDS are not a tax relief for the donor. Therefore, higher-rate tax payers cannot claim further relief on their tax return for small cash donations made under GASDS.

What if the charity is connected to another charity?

If two charities are connected then all of the connected entities share the £2,000 limit between them. If you are connected through recent merger, then you may be able to take on the other charity’s claims’ history.

If you are connected and share a community building, then you may be able to make an additional claim as if you have a community building.

Community Buildings

Every charity is entitled to claim up to £2,000 per annum (on donations of £8,000 as noted above). However, charities that also have one or more ‘community buildings’ are able to claim additional top up payments of £5,000 per building, subject to meeting certain conditions.

These conditions can be quite complex but in essence a ‘community building’ is a building, or part of a building, to which the public or a section of the public have access at some or all of the time. Buildings used wholly or mainly for residential purposes, for the sale or supply of goods, or for commercial purposes (except at times when the charity is carrying out a charitable activity in the relevant part and the charity has exclusive use of that part)

How do I claim?

Claims are made via the usual Gift Aid claim form. Where amounts are claimed for different community buildings, the donations must be split be building (and the addresses o the building noted on the claim).

Is there a time limit for claiming?

GASDS claims must be made within two years of the end of the tax year in which the donation was collected.

GASDS is a very useful scheme, especially for small charities or charities that receive lots of cash donations. If you have any questions about the scheme, and whether your charity would qualify, do get in touch.

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With the start of the new tax year rapidly approaching, here is a reminder of a few key tax changes impacting charities that come into effect in April 2019:

Charities’ Small Trading Exemption

Charities can still be exempt from paying tax on trading income that does not relate to their primary purposes as long as such turnover does not exceed the small trading tax exemption.

From 1 April 2019, the limits are as follows:

Annual charity income Maximum level of non-primary purpose trading
Under £32,000

(was £20,000)


(was £5,000)

£32,000 – £320,000

(was £20,001 – £200,000)

25% of income

(no change)

Over £320,000

(was £200,000)


(was £50,000)

The increases in these limits will allow charities to carry out more non-primary purpose trading activity before a trading subsidiary is required.

Gift Aid Small Donations Scheme

The Gift Aid Small Donations Scheme (GASDS) allows charities and community amateur sports clubs to claim a ‘Gift Aid style’ top-up on cash donations received without the need for the donor to complete a Gift Aid declaration. This scheme therefore allows Gift Aid to be claimed on donations in collection tins or buckets.

In order to be eligible for the top-up payment, individual donations must not exceed £30 (this limit is £20 up to 5 April 2019). The total claim of £2,000 (on donations of £8,000) remains unchanged.

Gift Aid Donor Benefits

With effect from 6 April 2019, the rules around the value of donor benefits are being changed. As long as the value of the benefit does not exceed certain limits the donation will still qualify for Gift Aid.

The new rules are:

Donation amount Value of benefit
Up to £100 25% of amount of donation
Over £100 25% on first £100; and

Up to 5% of donation in excess of £100

(subject to maximum benefit value of £2,500)

For any advice on how these changes impact your charity, please get in touch.

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The latest update to the Charities SORP has come into effect for accounting periods beginning on or after 1 January 2019. Update Bulletin 2 sets out various changes following amendments made to FRS102.

Below are the main changes that have been made:

1. Comparative information

This isn’t a new requirement but an extra paragraph has been added to the SORP reiterating that charities are required to include comparative information for all amounts presented in the accounts, including the notes and all additional disclosures required by the Charities SORP. In effect, for every figure included for the current period, the corresponding figure for the prior period must also be included.

2. Payments from subsidiaries to parent charities

The idea of a charity’s wholly-owned trading subsidiary gifting its profits to the parent charity is not new. Nor has this changed.

FRS102 requires donations from subsidiaries to parent charities that qualify for gift aid to be accounted for consistently with the accounting treatment for dividends – i.e the payments are not a donation expense but a distribution of profits from reserves. This follows guidance issued by the ICAEW.

Update Bulletin 2 now clarifies that when such a gift aid payment is made, the income is accrued by the parent charity when there is a legal obligation at the reporting date for the payment to be made.

Putting a Deed of Convenant in place would allow the payment to be recognised as a liability by the subsidiary and the income to be accrued by the parent charity in the period in which the subsidiary generated the profits – and I find that many charities prefer this as it helps to keep things neat. If there is no legal obligation, such as a Deed of Covenant in place, the payment will be recognised when the obligation is established – in practice, this will generally be when paid.

3. Depreciating assets comprising two or more components

Prior to this amendment, such assets could be depreciated as one whole asset where splitting it into its separate components required undue cost or exemption. Now, under Bulletin 2, where a charity holds an asset that comprises two or more major components, these components must now be depreciated separately over their separate useful lives.

4. Mixed-use property

Where a property is held partly for operational use and partly as an investment property, the two different elements should be recorded separately (as a tangible fixed asset and investment property respectively) if they could be sold or leased separately.

Note that this requirement is a ‘should’ – i.e. it is best practice to do this but not mandatory.

The whole property should be accounted for within tangible fixed assets (and not as an investment property) if the fair value investment property element cannot be measured reliably – and it is worth noting that the ‘undue cost or effort’ exemption for valuing the investment property element has been removed.

5. Renting investment property to a group entity

Where a charity rents investment property to a group entity, it can chose whether to account for such property at fair value (with any gain or loss taken to the SoFA), or at cost less accumulated depreciation and impairment. If the latter cost option is adopted, the notes to the accounts must disclose the carrying amount at the balance sheet date of the investment property rented to a group entity.

6. Cash flow statement

An additional note is now required that analyses the movements in net debt during the reporting period. This note should disclose how cash, overdrafts/loans, and finance leases have moved since the start of the year. Page 11 of the Bulletin includes an example of how this may look.

The requirements for Trustees’ Reports remain unchanged.

Early adoption of Update Bulletin 2 is permitted – but all amendments must be applied at the same time.

For any questions on how these changes may your affect your charity and how we can help you to implement them, please do get in touch.

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Good governance is key for your charity. It helps to provide a strong foundation as you works to achieve your aims and help your beneficiaries. It supports compliance with applicable laws and regulations, and promotes attitudes and a culture throughout the organisation that can help to unite everyone and everything as you fulfil your objectives.

Good governance can also send a strong message to funders, regulators, and other stakeholders. It allows you to demonstrate that you are well-run organisation, helping to increase trust and confidence. It may also help to attract funding for expanding current projects or for running new projects.

On 14 July 2017, the new Charity Governance Code was published. The Code has been developed by a steering group of sector umbrella bodies, with the help and input of over 200 charities, individuals, and related organisations through public consultations.

It is not a legal requirement and it has not been designed to be used as a regulatory framework. It should be used alongside other guidance, in particular the Charity Commission’s formal guidance.

The Code has been developed with the aim of being a support tool that charities, their trustees and key management, can use to aid improvement in governance matters.

The Code is formed of seven different sections:
• Organisational purpose – guiding the Trustees and management on understanding your charity’s aims and objectives
• Leadership – helping promote the organisation’s culture, values and ethos
• Integrity – maintaining your charity’s reputation, and managing conflicts of interest
• Decision making, risk, and control – guidance on delegation of day-to-day management and risk management process
• Board effectiveness – promoting board behaviours and skills, and effective monitoring of board performance
• Diversity – encouraging openness and inclusivity
• Openness and accountability – building public trust and confidence

There are two versions of the Code – one for larger charities (generally those with annual income of around £1million and above), and one for smaller charities (those organisations with annual income below £1million).

Adopting the Code will help to promote good governance within your organisation, and to demonstrate to stakeholders that you are an effective organisation.

If you have any questions about how your organisation can use the Code, please do get in touch.

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In my previous blog I looked at what can distinguish between a grant and a contract, and what indicators can be used when considering what form of income a charity has received.

In this blog, I provide some examples on the differences in accounting treatments.

Different accounting treatments:  Examples

Example A – a charity provides after-school sports/social/arts clubs in disadvantaged areas. A donor (let’s assume an institution such as a foundation) likes what the charity does and offers the charity funds to cover the costs of running these clubs. The foundation is not receiving anything in return (other than knowing they have helped a worthy cause) and so this is a grant.

Example B – now let’s suppose that the foundation offers the funds to the charity on the condition that the charity runs a singing club at a specific school. In this case the donor is specifying on what the funds should be spent (known as a ‘performance condition’) and so the charity is only entitled to this income when it runs the singing club in this particular school. Whilst the donor is specifying the use of the funds, they are not receiving anything in return (again other than knowing they have helped a worthy cause) and so this is still a grant.

Example C – what happens if, instead of a foundation, it is a local authority that asks the charity to run sports clubs at schools in their area? Well the fact that it is a local authority doesn’t mean that this is not a grant, and it being for specific schools means it is restricted grant – but not necessarily a contract.

Example D – however, if the local authority was responsible for providing these clubs and asked the charity to run the clubs in return for a fee, then under these circumstances the local authority is contracting the charity to carry out specific services in return for consideration. Therefore, this would be income received by the charity under a contract.

Recognising the income

So how would the income be recognised?

The income recognition criteria are:
1. there is evidence that the charity is entitled to the gift,
2. the receipt is probable, and
3. the amount can be measured reliably.
If, using the examples A and B, the foundation wrote to the charity confirming £x would be given towards the costs of running the clubs and this would be paid upon acknowledgment of the charity of this award, then the charity would recognise all of the income at this point.

If the grant is paid in monthly instalments over the next 12 months, or if some of the expenditure falls in the next accounting period of the charity, neither of these are sufficient to prevent the charity recognising the full amount as income. This is because the 3 recognition criteria above are met. The charity recognises the full amount upfront.

In example B, the funds are given for a specific club in a specific school. So whilst the charity can meet points 2 and 3 above, it does not have entitlement until it runs the specific club and the specific school. The income is therefore deferred until this is the case. When recognised, the grant is treated as a restricted fund since it was given for specific circumstances.

For example C, the circumstances are the same as for example B so the above points also apply.

Example D related to fees received under a contract. In this case, the income is recognised to the extent that the services detailed in contract have been provided. Therefore, an appropriate basis for determining stage of completion should be used. An appropriate basis here would be looking at the number of clubs run compared to the total number that will be provided under the entire contract. So say the contract specified 5 clubs a week at 10 schools for a 12 week term, this would be 600 sessions (5 clubs x 10 schools x 12 weeks); after the first 4 weeks of the contract, the charity is required to run 5 clubs at 10 schools over 4 weeks – a total of 200 sessions. If all 200 have been run, the charity is entitled to 200/600 of the total fees due under the contract. Any monies received in excess of this amount, are deferred.

Example E – let’s take this to an extreme and say that the foundation in example A notifies the charity on the last day of the charity’s accounting period (201X); and that the contract in example D is signed on and effective from the last day of the charity’s accounting period (201X). Let us also say that the total amount being given to the charity is £500,000 and this is paid on the last day of 201X. In both cases, the first club is run on the first day on the charity’s next accounting period (201Y).

In this case, there are no conditions attached to the grant award in Example A, and the charity meets the 3 income recognition criteria (it has been informed of the award, has no reason to suspect this will not be received, and the amount is known). Therefore, the charity recognises all £500,000 of income in 201X– even though the funds will be used to run the clubs in the next accounting period (201Y).

Whereas, for the contract in Example D, the charity is not entitled to the income until 201Y when the first club is run, but it has received the cash. Therefore, the £500,000 is treated as deferred income and so income recognised in 201X is £nil.

Why it matters

I have used the extreme circumstances in these examples, but this illustrates how different the accounting treatment can be. For those agreements that fall within the grey area, treating something as a contract when it should be treated as a grant could mean that income is significantly understated in a charity’s accounts. This could be the difference between being subject to audit or not, and may distort figures provided as part of funding applications. Each grant/contract should be reviewed individually to ensure the correct treatment.

Hopefully this provides some guidance when reviewing grant agreements and contracts, but please do get in touch if you require assistance with prepare your charity’s accounts.

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One of the most common charity accounting questions I get asked and an issue that arises during many a charity audit is whether income is received in respect of a grant or a contract.

With changes in the way charities are funded, and with more charities carrying out services for local (and national) government, this issue shows no sign of disappearing.

My colleague Andrew Walls recently blogged about whether income is a grant or a fee for VAT purposes. But what about the accounting treatment? Does it make a difference whether income is a grant or a fee under a contract?

Definitions of Grants and Contracts

Perhaps the first place to start is with definitions:

  • Grant – in accounting parlance, this is a non-exchange transaction – in effect this means that the money is gift from the donor with the recipient giving nothing in return
  • Contract – conversely, a contract is an exchange transaction between two or more parties where at least one party receives consideration from the other party in return for provision of goods or services to this other party

So how are grants and contracts distinguished? Well there are no hard and fast rules – each individual agreement and amount of income will have specific features and each should be considered on an individual basis. The table below looks at some key and common things to look out for:

  Grant Contract
What is received? Monies given by donor Consideration given (doesn’t have to be in the form of money)
What is given to the donor in return? Donor receives nothing in return Contractor receives goods/services in return
Is VAT due? No

(donations or gifts are outside the scope for VAT purposes as nothing is given in return- but watch out for service level agreements)

Yes – subject to the services being supplied
What happens if there are unspent funds? If given for specific purposes, these are either returned or carried forward as restricted funds;

If not given for specific purposes, these are carried forward as unrestricted funds

If all services/goods have been provided, any unspent funds are a surplus earned by the charity and carried forward as unrestricted funds (subject to any clauses saying otherwise)
What law is applicable? Trust law Contract law
Can the charity reclaim gift aid? Yes – Gift Aid may be available if received from an individual No – Gift Aid is not reclaimable for income received under a contract
Is this restricted or unrestricted income? Either – restricted funds if the funds are given to be spent on specific purposes; otherwise unrestricted funds which can be spent on the charity’s activities as the Trustees deem fit Unrestricted funds – in nearly all cases contracts are unrestricted funds partly because the charity can make a surplus on a contract and use this for its charitable purposes as the Trustees deem fit

(however, if the contract restricts the use of any surplus made by the charity on a contract, this may in substance be the same as for a restricted grant and so this income could be classed as restricted)

Income recognition criteria 1.       There is evidence that the charity is entitled to the gift;

2.       The receipt is probable; and

3.       The amount can be measured reliably.


1.       There is evidence that the charity is entitled to the income;

2.       The receipt is probable; and

3.       The amount can be measured reliably.


What if the grant agreement specifies how the funds should be spent? Income is recognised to the extent that these specified activities have been carried out (consider service level agreements) A contract requires the charity to provide specific goods / services – income is recognised to the extent that these have been provided
What if the grant agreement does not specify on what the funds should be spent? The full amount is recognised as income when the 3 income recognition criteria above are met N/A – a contract will always require the provision of specific goods / services in return for consideration
What terminology is used? Key terms include: grant, performance conditions, repayment terms, no references to VAT Key terms include: contractor, provision of services, performance standards, applicable law, references to VAT
How is income classified in the accounts? Voluntary income – donations Income from charitable activities

As hinted above, there can be grey areas. For example, increasingly grants are being given for specific purposes, i.e. the donor attaches conditions that the recipient must meet in order for the recipient to be entitled to the income. However, this doesn’t mean that this becomes a contract instead of a grant – but it does mean that this is a restricted grant, meaning that the funds can only be spent on the purposes specified by the donor when granting the funds.

I asked at the beginning whether it makes a difference whether income is a grant or a contract, and in my next blog I will look at some detailed examples that show it can make a difference and that the numbers can be significant.

Please do email Martin with any queries you have about your own charity.

This is part of a series of blogs on charity management. If you’d like to know when future instalments go live, please sign up for updates.


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