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.

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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Senior female doctor gestures as she talks with doctors and administrators in hospital board meeting. The diverse group are discussing hospital policy.

In the final blog in my series on the key areas of trustees’ responsibilities, I continue the theme of examining important financial management and governance matters of which trustees (and CEOs and FDs) should be aware, focussing this time on the Board of Trustees:

1. Board of Trustees:  structure and skills

The Board of Trustees has various roles – including setting the charity’s mission and values, developing strategy, ensuring compliance and accountability, oversight of the charity’s resources, and not least promoting the organisation.

Each organisation is different, with different needs and requirements. As a result the structure of the board of each organisation will be, and should be, different. Some may have sub-committees; some may not consider these to be appropriate. A board should be structured in the best way for the charity, so consider:

• How many trustees should there be? – not too many so decision making is difficult, but not too few that the board may lack all necessary skills
• Do trustees have appropriate skills and backgrounds? – make sure you have people with the required skills, whether that be legal, financial, communications, business, sector-specific etc. But don’t forget that whilst boards should be comprised of individuals that bring these skills to the table, they should also bring passion and a genuine interest in wanting to help the charity and its beneficiaries.
• Are sub-committees essential? Don’t have these for the sake of it – they can aid decision-making and management by enabling the best people to focus on specific matters, but too many and there could be the risk of becoming too process driven and losing sight of the core objectives.

2. Strategy

Does your charity have a strategy in place? Strategies are a way of ensuring there is a clear focus and vision for the organisation, both short-term and long-term. Strategies can also help to obtain ‘buy in’ from everyone in the organisation, which can only be a good thing in helping drive the charity forward.

Strategies should not be viewed as something set in stone that cannot be changed. A good strategy will allow flexibility and the opportunity to adapt to changing circumstances.

In developing a strategy, think about who the beneficiaries are, what you are hoping to achieve by doing these activities, and how the strategy can best be carried out – by whom and with what resources.

Thinking about these things will allow you to develop a strategy that sets out both the ‘big picture’ (the charity’s overall vision and values) and the ‘day-to-day’ (the operational specifics that will be carried out to meet the objectives).

3. Risk management

Trustees are ultimately responsible for a charity being compliant with laws, regulations, its governing document, and for safeguarding a charity’s assets. So naturally caution and prudence will raise their heads.

Make sure that there is a proper risk management process in place: link it to your strategy; use it as part of the planning and decision making process; assess outcomes and learn from them in future risk management processes.

Most importantly, make sure there is a purpose to the process – for example, don’t just keep a risk register because it is seen to be the right thing to do. If it is viewed as a box ticking exercise, then it may be time to consider a new approach to risk management and how this can work for your organisation and be of benefit.

However, don’t be afraid to be bold and take a risk. As the old adage goes, for every problem there is an opportunity. There may be bumps along the way but the rewards can definitely be worth it.

As with the topics discussed in my other blogs in this series, all areas should be considered and planned in accordance with the specific circumstances of your charity – one size doesn’t necessarily fit all.

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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Forecasting

In a recent blog, I started to look at some of the financial management and governance areas and responsibilities that charity trustees need to focus on.  These are not new but their importance has been heightened in light of the collapse of Kids Company.

This blog considers three more key financial areas for trustees:

1. Budgeting and Forecasting

Trustees should ensure that full budgets have been prepared, reviewed, and approved. These should be realistic and based on reasonable assumptions.

Budgets should be monitored and compared to actual performance regularly, which can help to identify as early as possible any potential risks on the horizon. They should also be flexible –  if activities change or certain funding is lost, budgets and forecasts (including cash flow forecasting) should be updated accordingly.

Whilst not limited to the budgeting process, consider your funding mix and whether there is a reliance on one particular source. Have contingency plans been considered if this source disappears, and if so has this been factored into budgets?

2. Cash Management

Cash flow management is essential with both cash balances and future cash needs being monitored. Furthermore, for accounting periods on or after 1 January 2016, larger charities (ie those with income over £500,000) will have to include a cash flow statement in their annual accounts, in accordance with the Charities SORP.

Cash flow forecasting should be carried out and this should reflect the charity’s strategy and budgets, and relate to the planned activities.

Sufficient levels should be maintained to cover any shortfalls if urgent expenditure arises, or funding is received late. As with other budgets, these forecasts may need to incorporate contingency plans or “what if?” scenario planning.

3. Manage reserves

Charities are required to set a reserves policy and monitor the level of reserves held against this policy. An explanation of the charity’s reserves policy must be included within the Trustees’ Annual Report, as required by the Charities SORP, together with details of the level of reserves held and why.

There is a balancing act between holding too high a level of reserves that future donors may be put off, and holding too few reserves that the charity cannot weather a storm.  There is no hard and fast rule – setting the level of reserves requires judgement but should be appropriate to the size and nature of your charity.

For example, a grant making charity with low overheads may not need high levels of reserves that cover many months / years of core expenditure. On the other hand, a charity that is providing important frontline services to vulnerable beneficiaries may need to hold a slightly higher level of reserves to ensure that, in event of a funding cut, they can continue to meet the needs of their beneficiaries in a short-term whilst it sources new funding or adjusts its activities gradually to avoid an instant decline in services.

The reserves policy and the level of reserves should both be reviewed regularly to ensure that the policy is still considered appropriate, and that the actual level of reserves is within the policy.

As with the topics discussed in the first blog in this series, all areas should be considered and planned in accordance with the specific circumstances of your charity – one size doesn’t necessarily fit all.

Please do get in touch with any queries you have about your own charity. In the next blog in the series, I will consider some non-financial governance topics.

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The failing of a charity with the public profile and popularity of Kids Company came as a shock to both the sector and the wider public, and has prompted much to be written about the lessons that can be learned from these events, including a report by the Public Administration and Constitutional Affairs Committee.

But in many ways there aren’t any new lessons to learn – these lessons are more of a reminder to trustees about the need for good governance and financial management. After all, the legal responsibilities of trustees are not new – they are long established in law and explained in Charity Commission in their guidance notes.

charity asking questions

So let’s look at some of the key financial management and governance matters of which trustees (and CEOs and FDs) should be aware:

1. Financial Management – don’t shun responsibility

Don’t forget the financial management side of running a charity, or think that this responsibility lies with the treasurer, financial controller, bookkeeper, professional advisor, etc.

As trustees you are ultimately responsible and may (in certain circumstances) be personally financially liable – so make sure you are happy that the organisation is being managed well and you are getting the information you require to monitor performance. This information should be complete to the extent that you are able to gain an understanding on the financial position of the charity, but not so detailed that you cannot see the wood for the trees and you get bogged down in the detail. By no means an exhaustive list, but consider the need for full management accounts, variance analysis, KPIs, forecasts, scenario planning (for example if some future funding is uncertain), etc.

If you don’t feel you getting answers to your questions, keep asking them!

2. What are your charitable objectives?

The world is an ever changing place and the needs of your beneficiaries may also change. Or you may find resources are more readily available for funding different types of projects. Mission creep can take hold perhaps without noticing.

But a charity’s resources should be spent on meeting its charitable aims as set out in its governing document. Are you happy that expenditure is being incurred on meeting the organisation’s objectives and are there controls to ensure this? For example:

  • Are fully budgeted projects approved by management and trustees before activities are carried out?
  • Is all expenditure approved by management to ensure in line with objectives, strategy, and the approved projects?

In other words, making sure that resources are spent as planned and not on an ad-hoc basis.

3. Systems, Procedures, and Controls

Fully documented systems, procedures, and controls should be in place. These should be communicated to all staff, and subject to regular review.

Ensure that they are meaningful and relevant to the charity – if all income is received under contract, is there a need for systems and controls over cash donations?

It is also worth considering whether annual external audit review of controls is sufficient – or whether an internal audit would provide wider ranging coverage and more immediate feedback of the charity’s activities.

The above suggestions are by no means exhaustive and not necessarily the best approach for each charity. Making sure the processes are specific to your own organisation and reflective of its specific needs and circumstances are essential. In my next blog, I will look at more financial specific matters including budgeting, reserves levels, and cash management.

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This week saw the Conservative Party Conference take place in Manchester. During his speech, George Osborne announced that local councils will keep all proceeds raised from business rates (and the local government grant back to councils will be phased out), calling it the “biggest transfer of power to our local government in living memory”.

Now politicians usually make the news with what they say – but when reading about the plan for business rates proceeds, I was struck by something that the Chancellor didn’t say.

Charities currently enjoy 80% mandatory relief on business rates – granted by central government. Relief on the remaining 20% is granted at the discretion of the local council. George Osborne made no mention in his speech as to whether the 80% mandatory relief will remain. This could be taken to mean that the relief is staying – no news being good news.

But is this good news? If councils are able to retain all proceeds from business rates, then they may be less incentivised to grant the additional 20% discretionary relief. This could potentially give rise to additional liabilities on charities and put additional strains on their resources in having to fund rates previously waived.

If councils are to enjoy the benefits of the proceeds from business rates, then they are also effectively suffering the cost of providing the relief. Since 2013 councils have been able to keep 50% of the proceeds from business rates and there are tales of councils seemingly becoming more interested in reviewing property tenants and whether a charity occupies the premises or a trading subsidiary. This may suggest that they are looking to maximise rates proceeds, and minimise the amount of relief given.

At this stage, perhaps it’s not so much ‘’no news is good news’’ as it is ‘‘no news is not bad news’’. However, with rates relief worth an estimated £1.69billion to charities, this is a relief to the sector that is worth fighting for, and that the sector will fight for. Something to keep an eye on….

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Creative industry reliefs are not new to the UK – the film, animation, video games, and high-end television industries are all potentially able to benefit from existing tax reliefs.

Now the live performing arts industry can also benefit following the introduction of Theatre Tax Relief (“TTR”) in the Finance Bill 2014. Claims can be made for qualifying expenditure incurred after 1 September 2014. So who can claim and how does the relief work?

Who can claim theatre tax relief?

TTR is available to production companies that are responsible for the production, running, and closing of a theatrical production. The production company can be a commercial company – be it can also be another organisation such as a charity or a charity’s trading subsidiary.

To qualify, the production company must:

• be actively engaged in the decision making at all stages of the production;
• make an “effective” creative, technical, and artistic contribution to the production; and
• directly negotiate for, contract for, and pay for rights/goods/services in relation to the production.

What is meant by ‘theatrical production’?

A theatrical production is defined as being as a dramatic production or a ballet where:

• the performers (including actors, singers, dancers etc) give their performances wholly or mainly through playing a role;
• each performance in the proposed run is live; and
• the presentation of live performances is the main object, or one of the main objects, of the company’s activities in relation to the production.

This means that the production of plays, operas, musicals, and potentially even circuses can all qualify for TTR.

There are also certain criteria that prevent a production from qualifying for TTR – productions that involve wild animals, include a contest or competition, are of a sexual nature, or where the main purpose is to advertise goods/services do not qualify.

Are there any other conditions for theatre tax relief?

Yes – there are two further main conditions that must be met in order to be eligible for the relief:

  1. Commercial purpose condition – only professional theatrical productions qualify, i.e. it is the intention that all or a high proportion of performances are to paying members of the public or provided for educational purposes
  2. EEA expenditure condition – at least 25% of the core expenditure on the production must incurred within the European Economic Area (EEA).

Interestingly, there is no cultural test to pass to qualify for and claim TTR.

What is the rate of theatre tax relief?

Relief is obtained on 80% of the lower of qualifying expenditure and overall available loss on the theatrical production trade, and there are two rates of relief:

• 20% – non-touring productions
• 25% – touring productions (subject to certain criteria to qualify as touring)

What expenditure qualifies for theatre tax relief?

Expenditure qualifies if it is incurred in relation to the producing and closing of the production. Expenditure incurred in the ordinary running of the production does not qualify – but a substantial recasting or set redesign mid-performance run may qualify.

Non-direct costs such as financing, marketing, legal services, or storage do not qualify.

Is there a separate tax return?

No there is no separate return. The relevant tax is corporation tax and the relief is claimed via the CT600 corporation tax return. This raises a couple of practical points.

An organisation can still claim the relief even if it has does not have a corporation tax liability against which to offset the relief (for example due to no taxable profits for the period) or if it does not pay corporation tax (for example if the organisation is a charity and it has been approved by HMRC as exempt from tax) – in such circumstances, the relief is obtained by means of a cash payment from HMRC.

There are also a couple of further practical considerations for charities. The first is that charities are unlikely to be preparing and submitting annual corporation tax returns. Therefore, these will now be required each year in order to claim the relief.

The second consideration is that charities may require a trading subsidiary in order to claim the relief, for example if the charity is unincorporated (which may give rise to further practical issues such as VAT impact and group reporting requirements).

An example

Let’s take a simplified example of a non-touring opera production. Total income on the production is £1.5million, and total expenditure is £2.5million. Let’s assume that qualifying expenditure is £2million.

In the above example, relief is obtained on 80% of qualifying expenditure – meaning relief at 20% of £320,000 (£2million x 80% x 20%). As noted above, this may be a cash payment from HMRC as it doesn’t have to offset a tax liability.

Conclusion

This is a new relief and, given the detailed guidance from HMRC is not expected until Spring 2015, there may be devil in the detail – conditions and criteria mentioned above are certainly not exhaustive. However, the relief is available now for qualifying organisation and well worth investigating. To find out if your organisation has a valid claim or for further information, please do get in touch.

 

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Following a recent consultation process, the Cabinet Office has confirmed that it is proceeding with its plans to increase the charity audit income threshold in England and Wales. The consultation was held following a recommendation by Lord Hodgson in his review of the Charities Act 2006 that the audit threshold be increased.

The outcome of the consultation process is that the income threshold is being increased from £500,000 to £1million – meaning that any charity with income in excess of £1million will be subject to audit in accordance with the Charities Act 2011.

This new threshold of £1million will also be the threshold at which parent charities have to prepare consolidated accounts.

It is worth noting that the asset threshold for an audit remains unchanged – so for a charity with assets in excess of £3.26million and income in excess of £500,000, an audit will be required.

The thresholds for independent examinations have also been kept the same. However, it is interesting that several of the consultation responses expressed concerns at the rigour of the independent examination process and questioned the level of assurance that an independent examination provides. This is, perhaps, a discussion for the sector to have in the future – but the Government is to share the consultation feedback with the Charity Commission with a view to the guidance on independent examinations, and audits, being improved.

Subject to parliamentary approval, the new thresholds will take effect for accounting periods ending on or after 31 March 2015.

If you have any questions over the impact on these changes for your charity, then please do get in touch.

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