• Voluntary Income

• Legacies

• Grant Incomes

• 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

Accounts and annual reports may need to include more consideration of the going concern basis. Greater explanation will be needed of fundraising  activities, and reference to these uncertainties included in risk statements. Costs incurred for future events may need writing off. Gift Aid may not be recoverable. 

Forecasts, underpinning the going concern assessment, will need to consider the impact of a potentially reduced or poorer donor base and the loss of corporate sponsors, future events and retail income.
Charities continue to be eligible for some Government support through various grant making schemes, but these are increasingly small scale and limited.

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 concession 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.

Despite concerns over legacies, Legacy Foresight’s research shows continuing strong growth in legacy income, which is likely to be sustained for some years, with early 2021 notifications the highest they had recorded. Anecdotal evidence also suggests that the delays in probate are beginning to reduce.

Although the Sorp committee continue to discuss the timing of legacy income recognition, it appears that cash flows from legacies are resilient. This should enable trustees to invest in future activities.

Grants receivable may need re-confirmation and longer term commitments may be different to recent experience.

Government support, such as the Job Retention Scheme, are reported as unrestricted grant income.

The Charity Sorp example accounts include an example of contingency grant funding as a contingent asset.

Charities Aid Foundation now list 17 organisations who have launched specific COVID-19 related support programmes, either on a national or regional basis. These include the  National Lottery Community Fund distributing grants on behalf of the UK government. As some programmes are now closing, or have closed, trustees should investigate these opportunities promptly.

Performance conditions may not be met, and/or customers may not be able to pay.

Some income may carry VAT at revised rates if the government introduces temporary schemes such as the retail and hospitality reduced rate.

Charities may be unable to deliver services or goods due to delays in supply chain or lack of staff or volunteers due to COVID or quarantine measures.

REPORTING IMPLICATIONS

Where a contract has ceased to be profitable due to increased costs ( arising from higher labour costs for instance) consideration should be given to providing for losses on an onerous contract.

For charities that are companies or CIOs insolvency law (Corporate Insolvency and Governance Act 2020) now 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. 

The Omicron Hospitality and Leisure Grant provided local councils with one-off grant funding to support hospitality, leisure and accommodation businesses, in recognition that the rise of the Omicron variant means that some businesses are likely to struggle.

Trading subsidiaries and, in some cases, charities are eligible. The aim of the Omicron Hospitality and Leisure Grant scheme is to support businesses:

• that offer in-person services
• where the main service and activity takes place in a fixed rate-paying premises
• in the hospitality, leisure and accommodation sectors

Applications are made through the local council’s website.

To provide continued support to the cultural sector, £30 million further funding has been made available through the Culture Recovery Fund to support organisations such as theatres, orchestras and museums through the winter to March 2022.

Grants form part of taxable income.

Consider implications for impairment, dilapidations, onerous contracts and discontinued business disclosures. A provision may be required for restructuring costs if there is a legal or constructive obligation at the reporting date.

The 2022/23 Retail, Hospitality and Leisure Business Rates Relief scheme provides eligible, occupied, retail, hospitality and leisure properties with a 50% relief, up to a cash cap limit of £110,000 per business. Charitable reliefs are applied first, but this still provides some help even against reduced rates or for costs incurred through trading subsidiaries.

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

Dividends may have been cancelled. Other income sources may be uncertain.

Ensure dividends are only recognised where they are not cancelled. 

If the charity receives rental income, amendments to FRS 102 require a lessor to recognise any change in lease income arising from Covid related rent concessions over the periods that the change in lease payments is intended to compensate. 

No specific disclosure requirement has been added for lessors, but FRS 102 already requires lessors to provide a general description of their significant leasing arrangements. The FRC expects information about rent concessions granted would be included within the ‘Basis of Conclusions’. 

Investment portfolios may be changed in response to new market conditions, such as supply chain issues, staff availability and rising inflation. These need reflecting in the notes to the accounts, explaining in the annual report, and ensuring that any changed profile makes sense in the context of the charity’s risk management.

Review any costs and consider accounting for insurance recoveries. Onerous contracts may require recognition. In the absence of volunteers, more staff costs may be incurred affecting returns and fundraising ratios.

The Fundraising Regulator (E & W) has issued specific guidance on activities during the current pandemic: “Supporting safe and responsible fundraising - planning, preparation, and good decision-making”. This includes the following 5 steps:

1. Keep up to date with and follow Government guidance and any continuing or new restrictions (including regional or local ones) that are in place in England, Scotland, Wales and Northern Ireland. 

2. Carry out a thorough risk assessment to identify the risks associated with your fundraising activity.

4. Consider the public mood and likely feelings and preferences of supporters

5. Ensure decisions made to carry out a fundraising activity are thoroughly considered, carefully evaluated, and regularly reviewed.

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

Where staff costs have been met out of government support schemes ( furlough), the Sorp committee’s example accounts provide guidance:

“The income from the retention scheme is accounted for gross under charitable activity income as a separate line and is not netted against expenditure. It is not included as restricted funds as the funds are not received with restriction as to the charitable purposes for which they can be spent. The charity’s staff can be paid to perform any role for the charity. The SORP is clear that of itself a condition cannot create a restriction as to charitable purpose (SORP module 5 paragraphs 5.6 and 5.7). As the scheme is designed to compensate for staff costs, the amounts received are recognised in the SOFA over the same period as the costs to which they relate.” The example annual reports also provide example wording describing the decision to pay 100% of salaries when not obliged to under the furlough scheme as “expedient”.

The basis of staff cost allocation will need reconsidering in view of any change in activity. A further example on the Sorp microsite refers to increased IT spend incurred as a result of homeworking.

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

Foregone remuneration will need consideration depending on contractual arrangements. 

The Coronavirus Job Retention Scheme ended on 30 September 2021. See our website for more detailed information and the latest FAQs relating to this scheme. 

As increasing numbers of Covid-19 cases means more workers taking time off work, the government is also reintroducing the Statutory Sick Pay Rebate Scheme (SSPRS).

Employers are eligible for the scheme if:

1. 1. They are UK-based.
2. They employed fewer than 250 employees as of 30 November 2021.
3. They had a PAYE payroll system as off 30 November 2021.
4. They have already paid their employees’ COVID-related SSP.

Employers can claim the costs for up to two weeks of SSP per employee that has to take time off because of COVID.

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.

The use of properties may have changed, and values will be affected, possibly leading to impairment.

Third party valuations for fixed assets (held at valuation rather than cost) may be caveated.

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

As use of properties has changed, they may need to be recategorized on the balance sheet, or mixed use considerations may apply. These could affect whether a property is shown at cost or valuation.

FRS 102 has been revised to allow COVID-19 rent concessions to be recognised more quickly – read more here. 

Some grants may be available if the charity or subsidiary pays rates: see income sections above. Changes in use as a result of the pandemic may affect eligibility for rate relief, or VAT.

The VAT status of the supply of accommodation may change due to circumstances: for instance a recent case considered the implications of “exclusive possession” and “licence to occupy” and the interaction of the welfare exemption with providing hostel accommodation.

Charities with social housing assets may also find our Social Housing Barometer and related articles useful.

Investment values should be reviewed.
Reclassification as a commercial investment may be required.

Consider provisions and discounting, where appropriate. Legacies receivable are considered in the income section above.

Customers may be experiencing financial difficulty, impacting on their ability to pay, and, thus, the charity’s cash flow. Corporate customers may  make use of  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.

In addition, Crown Preference, where HMRC have preferential status in insolvencies was restored from 1 December 2020. This includes all amounts collected on behalf of HMRC but unpaid before that date. Where charities are owed money, trustees should be aware that this will erode further their chances of recovery, adding an extra layer of risk for all suppliers.

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.

The Recovery Loan Scheme is to help businesses of any size access loans and other kinds of finance so they can recover after the pandemic and transition period. The government guarantees 80% ( 70% from I January 2022) of the finance to the lender, but the borrower is still responsible for the debt..

The scheme is only open to small and medium-sized businesses, with a  maximum amount of finance available of £2 million per business. The scheme ends on 30 June 2022

You can apply for a loan if your business:

• is trading in the UK

You need to show that your business:

• would be viable were it not for the pandemic
• has been adversely impacted by the pandemic
• is not in collective insolvency proceedings (unless your business is in scope of the Northern Ireland Protocol in which case different eligibility rules may apply)

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

At the start of the coronavirus pandemic, temporary provisions were put in place under the Corporate Insolvency and Governance Act 2020 ("CIGA") to allow businesses impacted by the COVID-19 pandemic breathing space from the threat of winding up action. Most of those provisions expired on 30 September 2021. However some new temporary provisions were introduced by the UK government by way of the Corporate Insolvency and Governance Act 2020 (Coronavirus) (Amendment of Schedule 10) Regulations 2021 (the "CIGA Schedule 10 Regulations") which were effective between 1 October 2021 and 31 March 2022.

For more information on how CIGA can help charities in financial distress, view our latest article.

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 or be more uncertain.  This may be due to falls in income, lack of resources to deliver services or fundraise, or drops in asset values. Some policies may need altering in view of changes e.g. to asset lives.

The Charity Commission reported in October 2021on the impact of Covid-19 on charities. A significant minority (34%) expect to generate less revenue from fundraising and donations in 2022; over half (62%) anticipate a threat to their charity’s financial viability in the next 12 months.

Charities should reassess the going concern basis and policies. Robust cash flow projections will be required, involving scenarios and focussing on unrestricted cash. The FRC expect such scenarios to be more than simply “best case” and “realistic worst case”.

Organisations should focus on issues like resilience, liquidity and cash, and risk statements to reflect the impact of COVID-19, especially on the workforce (or volunteers). Risk and reserves statements in the annual report should be complementary

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. Reports should 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 may be anticipating modifications or qualifications to audit opinions more frequently. 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.

Irrecoverable VAT apportioned to functional cost categories may cause distortions requiring explanation.

Government grants form part of taxable income.

As we exit strict Covid measures, certain VAT reliefs are withdrawn. January 2022 marks the end of the interest free deferral of VAT payments, and  any outstanding payments from then on are subject to interest. As of 1 April 2022 the temporary reduced rate of 12.5% VAT for Leisure and Hospitality reverts to 20%. At the same time a new penalty regime for late filing and or payment of VAT applies. 

VAT relief on e-publications: supplies of some e-publications were 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. 

Headline rates of relief for Theatre Tax Relief (“TTR”) and Museums and Galleries Exhibition Tax Relief (“MGETR”) have been extended: from 27 October 2021 the rates increased to 45% for non-touring productions and 50% for touring productions; from 1 April 2023, the rates will be reduced to 30% and 35%, and from 1 April 2024 the rates will return to 20% and 25%. 

MGETR will be extended for a further two years until 31 March 2024. Expenditure after this date will not be eligible for relief. The rates of Orchestra Tax Relief (“OTR”) have also changed: from 27 October 2021 from 25% to 50%,reducing to 35% from 1 April 2023, and returning to 25% on 1 April 2024. Changes will also be made from 1 April 2022 to better target MGETR, TTR and OTR and ensure that they continue to be safeguarded from abuse. 

Charities should disclose and communicate in the annual report how COVID-19 has impacted the organisation. 

Approval of financial accounts and report may 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 of the Annual Report by virtual meeting.

The FRC has commented that risk reporting should go further than simply state COVID-19 as a risk, but should relate the impact to specific risks.

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

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.