Digging the trenches in the charity sector

As an accountant, you may think it is hard working in the business environment – especially since the chancellor’s Budget announcements.

Things may also be difficult for partners in practice with the seemingly constant threat of mergers over their heads.

But, in terms of the volume and seriousness of the range of measures they face right now, the award for the toughest job in the profession must go to charity finance directors. On all fronts – accounting standards, tax and even survival as voluntary organisations – charities are under real pressure.

The first of these many problems has been a review of the statement of recommended practice undertaken by the Charity Commission.

The Statement of Recommended Practice, which has been in existence since 1995, has been criticised for being laced with inconsistency and contradictory guidance.

The current review is the commission’s attempt to knock the SORP into shape and answer calls from the sector to iron out its many anomalies.

A dedicated committee has been set up to handle the review.

‘Charities have found the SORP useful, but there are a few points which could be clearer – mainly technical issues such as when legacies should be included and how the SORP fits in with Accounting Standards Board rules and Companies Acts requirements,’ Charity Finance Directors Group chairman, and Imperial Cancer Research Fund FD, David King explains.

Despite responses to the SORP consultation exercise erring on the side of caution – FDs in particular called for clarification rather than wholesale rewriting – some respondents are aggrieved by the way the review has been undertaken.

Their main bone of contention is that the commission, which wrote the original SORP guidance, is the same body that is conducting the review.

As many of the same people are involved in the rewrite, some accountants have asked if it is fair that they constitute both judge and jury.

Another problem is that charities are all governed by standard accounting practice, and incorporated charities are also governed by the Companies Act. This isn’t always taken into account by the SORP, some respondents say.

The second big issue for the voluntary sector is the government’s review of charity taxation. Despite widespread calls for radical reform, the long-awaited review consultation document has failed to meet expectations and give charities what they wanted.

Almost an afterthought in chancellor Gordon Brown’s Budget day announcement, the review has left charities feeling they have been stabbed in the back.

The government had promised to compensate them for the abolition of Advanced Corporation Tax – estimated to cost charities about #400m a year – but it has offered nothing of the sort.

On top of that, charities continue to suffer from the increasingly heavy burden of irrecoverable VAT, also estimated at around #400m a year.

When the review was launched after charity ACT relief was abolished in July 1997, the government promised to focus on VAT and simplify the way charities had to deal with the tax. It was expected to address concerns by coming up with an alternative method of tax relief.

Now the consultation has been published, almost two years later, charities feel the government has failed to live up to its promise.

Ian Macgregor, chief investment officer of the Wellcome Trust, says he regrets that the government ‘appears to have closed the door on any fundamental reforms in the tax treatment of charities’.

As a result, the Charity Tax Reform Group and its partner organisation, the European Charities Committee on VAT, has launched a Europe-wide campaign against the burden.

‘We look to Europe for a solution to a problem that the public doesn’t know exists – that charities pay VAT,’ says Macgregor, who also chairs the CTRG. ‘VAT means that charities have less money to spend on the things they do best like providing support for the homeless and disabled.’

On top of all this, voluntary bodies face a wide-ranging review by the Charity Commission which could put an end to their voluntary status.

This review of the charity register, however placatory the commission intends it, has worried FDs that they could lose their charitable status, in turn stripping them of their tax concessions and associated advantages.

Chief Charity Commissioner Richard Fries this week launched the next phase of the review. The register is the bible for charitable status and contains the criteria which determine what constitutes a charity. The question on many charities’ lips is how this will affect them.

Although the commission denies any existing charities will be stripped of their status, tax breaks or other advantages, the commission is setting out the principles it will use should it wish to remove one from the register.

During November to January last year, 1,276 organisations were removed: a worrying precedent.

With all the bureaucracy and administrative hassle currently in place, charity FDs are finding it increasingly difficult to concentrate on accounting issues while having to sift through red tape. It is time to simplify the burden on charities.

In such an important sector – one worth #18.3bn and numbering 187,000 organisations among its members – times have never been so hard.