Managing the impact of COVID-19 on your charity’s reporting

• Voluntary Income

• Legacies

• Grants

• Contract and Trading Income

• Charity Retail

• Investment Income

• Fundraising costs

• Staff costs

• Pension Schemes

• Trading Subsidiaries

• Functional Fixed Assets

• Social Investments

• Debtors

• Liabilities

• Financial Instruments

• Funds

• Accounting policies and going concern

• Judgements and estimates

• Taxation

• Annual Report

Gift Aid may not be recoverable. Costs incurred for future events may need writing off.

Forecasts will need to consider the impact of a poorer donor base and the loss of corporate sponsors, future events and retail income.

Charities are eligible for some Government support but, at the time of writing, only a limited sector specific package of support has been announced.

Currently, Gift Aid on cancelled (not postponed) events or under the conservation concession will continue to be recoverable by charities, subject to the usual rules. By concession, HMRC accepts that, provided the donor agrees to donate the refund, the cash does not have to be repaid and then donated, as would ordinarily be the case. 

This also applies to registration fees for fundraising events, subject to the correct process being followed.

HMRC accept that GASDS can still be operated where cash donations are grouped because a donor is catching up, as long as there is proper evidence that this is the case.

With a potentially long recession, forecast legacies are unlikely to rise in value. Lower estates also make the 10% tax break less attractive. Legacy Foresight's forecasts from June 2020 indicate a fall in cash legacies of up to 23%, and residual bequests up to 7% this year.

Charities are likely to see delays in estate finalisation and the granting of probate, and more difficulty selling properties.

Grants receivable may need re-confirmation.

Charities Aid Foundation now list over 25 organisations who have launched specific COVID-19 related support programmes, either on a national or regional basis.

For charities that are companies or CIOs new insolvency law extends the ‘utilities supply’ rules, so suppliers may have to continue providing services even if not being paid during a moratorium.

Contracting authorities have been encouraged by the Government to support suppliers, including charities. This should assist cash flow but may be more complex in payment by result arrangements and will require greater transparency by the contractor charity.

Where charities charge for admission to a charity garden or property, any attempts to limit this to members-only under staggered opening plans could invalidate any Gift Aid claims on membership subscriptions. This is due to the need for properties to be accessible by all members of the public to be eligible to claim.

From 15 July 2020 to 12 January 2021, a reduced (5%) rate of VAT applies to certain supplies of food and non-alcoholic drinks from restaurants, pubs, bars, cafés and similar premises across the UK, as well as for accommodation and attractions. This change applies to charities, although where an admission fee is exempt, this will continue to take precedence.

Consider implications for impairment, dilapidations, onerous contracts and discontinued business disclosures.

Retail, Hospitality and Leisure (RHL) Grants were paid in March in respect of eligible properties (inter alia, those with a rateable value of less than £51,000). Charities which would otherwise meet these criteria, but whose bill for 11 March had been reduced to nil by a local discretionary award, should still be considered to be eligible for the RHL grant. The RHL grant forms part of a charity’s taxable income, subject to the exemptions.

Charities operating the Retail Gift Aid Standard Method can use HMRC agreed concessions relating to returned mail and oral declarations.

Charities were also eligible under the Eat Out to Help Out Scheme. 

Income and capital return is likely to have fallen. Dividends may have been cancelled.

Negative interest rates may mean trustees should rethink investment and treasury policies. 

Review any costs and consider accounting for insurance recoveries. Onerous contracts may require recognition.

Staff and volunteers are working differently to previous work patterns, including working from home. Redundancies and furloughing may have occurred.

Basis of cost allocation will need reconsidering in view of any change in activity. 

Redundancy costs may need recognising when announced – these should be included in the salary disclosures.

Foregone remuneration will need consideration depending on contractual arrangements.

Following on from the end of the flexible furlough scheme on 31 October, the Job Support Scheme (JSS) is open from 1 November 2020 to the end of April 2021. 
 
The Government will pay a third of hours not worked up to a cap, with the employer also contributing a third. 

SMEs can access the JSS automatically, while larger organisations need to demonstrate that they have been impacted by the pandemic. An SME is assumed to have two of the following three criteria: 
1.    turnover of less than £25m 
2.    fewer than 250 employees 
3.    gross assets of less than £12.5m.

Employers will be able to make a claim online through Gov.uk from December
2020, and will be paid in arrears on a monthly basis.

See our website for more detailed information and the latest FAQs relating to this scheme. 

As a temporary measure for 2020/21, employers can reimburse employees for the purchase of home office equipment required as a result of the COVID-19 outbreak without tax consequences, provided that it would have been exempt if provided by the employer directly.

Consider the reliability of asset valuations and the other estimates and judgements. 

Consider the implications for inter-entity finance. Consider tax implications of payments not made within nine months of the year end.
 

This is an area where the charity will need to take special care of managing conflicts of interest in accordance with regulatory guidance.

This will especially apply if the charity considers investing further in the subsidiary.

Where a subsidiary expects to mitigate corporation tax through donations, it will need to consider whether it has distributable reserves and cash at the date the donation is paid. In a period of downturn, this may affect the ability to mitigate tax for both the current and prior period, if donations are generally paid after the year end.  

While there is an interaction with the loss relief and potentially group relief rules, the position is complex and we suggest that groups should model the likely implications to consider both the availability and timing of payments, along with the option of other relief, where these are available.

Consider carrying values, depreciation rates, and the availability and reliability of valuations.

Consider implications of rate relief.

FRED 76 addresses accounting for rent concessions – read more here. 

For retail, hospitality and leisure businesses with rateable properties, a grant of £25,000 may have been available under the Retail, Hospitality and Leisure Grant Fund.

In addition, most organisations in the hospitality, leisure and retail sectors – irrespective of their rateable value - should be eligible for full business rate exemption for the year to 31 March 2021. Use the Government website to check eligibility. 

Local Authority Discretionary Fund
This additional fund is aimed at small businesses with ongoing fixed property-related costs, for up to £25,000 each. 

This only applies to those with fewer than 50 employees and which can demonstrate a significant drop of income due to COVID-19 restriction measures.

Review investment value.
Reclassification as a commercial investment may be required.

Consider provisions and discounting, where appropriate.

Customers may be experiencing financial difficulty, impacting on their ability to pay, and, thus, the charity’s cash flow. Corporate customers may in future make use of the new arrangements under the Corporate Insolvency and Governance Act 2020. This has introduced the concept of a moratorium, a ban on termination provisions (or so called ipso facto clauses) and the introduction of a new pre-insolvency rescue and reorganisation. 

Read our article for more information. 

Consider the effect of asset values on any loan covenants. There is potential for more leases to become onerous, requiring recognition of the related liability.
Provision may be needed for enhanced dilapidation costs (and impairment) when reducing property occupation.

Charities that are concerned about their ability to meet their liabilities should also refer to the Corporate Insolvency and Governance Act 2020.

There are also some temporary measures, such as the suspension of the wrongful trading regime and the suspension of statutory demands, and winding-up petitions where financial difficulties are attributable to the COVID-19 pandemic.

Consider implications of movements in foreign exchange and bond rates.

The implications of any negative reserves will require explanation in the notes or annual report.

The going concern basis of preparation may no longer be appropriate and in more uncertain. Some policies may need altering in view of changes e.g. to asset lives..

Assess the going concern basis and policies. This assessment will also need to take into account the new requirements being introduced by ISA 570. 

Robust cash flow projections will be required, involving scenarios and focussing on unrestricted cash. 

The FRC expect you to focus on issues like resilience, liquidity and cash. They expect risk statements to reflect the impact of COVID-19, especially on the workforce (or volunteers). They also expect you to factor the implications of Government support into your forecasts. 

The regulators continue to expect this to be reported as a matter of material significance by auditors if it results in a modified audit report.

Transparency in disclosures is key. Include detail of the impact on the charity’s financial position and clearly articulate why the Trustees are comfortable with the going concern assumption. Material uncertainty should be considered. Users of the accounts are anticipating modifications or qualifications to audit opinions. Read the five key questions trustees and supporters might ask.

It is accepted by many regulators that it is likely charities will be disclosing more uncertainty, impacting on going concern.

Changes in activity will impact on tax thresholds and partial exemption calculations.

PAYE and NI could be affected by new working arrangements.

With more people using e-publications as remote working is the new norm, the overall VAT bill may be increased.

The increased purchase of PPE for those using it to protect their people while continuing to provide support may increase the overall VAT bill.

Gift Aid recoverable may require review, if the donor base has been substantially impacted. 

It is also conceivable that too much tax may have already been recovered.

If you buy in or issue e-publications, or are purchasing PPE, speak with suppliers and review your existing VAT position in light of new reliefs.

Business and individual taxpayers can seek time to pay from HMRC if they cannot afford to pay their tax debts in full and on time. However with effect from 30 June 2020, HMRC has reverted back to its ‘pre-lockdown’ position of expecting financial information to support a TTPA request.

Small Business Grant Fund
The Government states this forms part of taxable income.

VAT deferral 
The VAT payments deferral scheme ended on 30 June.

VAT relief on e-publications
Supplies of some e-publications are zero-rated with effect from May 2020. HMRC have also issued an updated, more generous, policy on the charity VAT relief for digital advertising.

Theatre, Orchestra and Museums & Galleries Tax Relief is still available if a production is abandoned because of COVID-19.

Disclose and communicate in the annual report how COVID-19 has impacted your organisation 

Approval of financial accounts and report will likely be done by virtual meeting.

Consider the impact of COVID-19 in your annual report, in terms of both past performance, and future events, risk, reserves and going concern, and the impact on your workforce.

Trustees should check their constitution allows the approval by virtual meeting.

The Charities SORP committee has issued advisory guidance, principally aimed at the Annual Report. Read more here. 

Companies House has issued formal guidance on when filing may be delayed. The charity Regulators request that, wherever possible, annual reports are submitted on time. Where the situation impacts on the completion of annual returns and accounts, charities with an imminent filing date can email them across.