Financial thresholds in charity law

The Institute of Chartered Accountants in England and Wales ('ICAEW') has issued its response to the Financial Thresholds in Charity Law consultation, as published by the Department of Culture Media and Sport in April this year.

These thresholds aim to ensure that charities continue to be transparent and accountable. The ICAEW's response follows consultation with its Charity Committee, which included members of accountancy firms providing charity audit and examination services, and members working or volunteering at charities of all sizes.

In summary, ICAEW:

• Recognises the government's policy to reduce regulatory burdens and increase economic growth.
• Supports the government's proposal to increase various financial thresholds. In particular, it supports an increased threshold for audit, which is causing significant challenges for smaller charities in terms of cost and availability.
• Agrees that the thresholds should be periodically adjusted to account for inflation, so that their impact remains consistent over time. It suggests that every 10 years would be reasonable, provided that this could be reviewed sooner if inflation exceeds a specified amount.
• Recommends that the thresholds should have additional tests built in to reduce the burden on charities which happen to fall within the threshold one year due to specific and possibly unusual circumstances. ICAEW felt this was particularly important for the audit/independent financial examination thresholds, which are currently determined by reference to a single financial period. This is inconsistent with the tests for statutory audit under the Companies Act, where the thresholds need to be met in 2 out of 3 consecutive years. The following examples were given to show the practical problems for charities:
  • Where a charity receives an unusually large legacy one year which pushes it over the threshold when it is unlikely to meet the threshold again in the following year;
  • Where a charity receives a multi-year grant and believes it can defer this to subsequent years but should actually recognise this up front, but only realises this at the point of audit/independent examination when it receives professional advice; and
  • Where a charity receives gifts in kind and has to report the actual value on the Statement of Financial Activities (even if donated for less than market value).
• Considers it a priority that thresholds are easy to understand and apply. For example, by using round figures for adjusted thresholds.
• Recommends increasing the gross annual return income threshold for registered charities being required to prepare an annual return. ICAEW acknowledges that many charities struggle to submit the return. In particular, to understand the questions and how to respond to them.

The  ICAEW considers that the government's proposals are too limited and that an extensive review of thresholds impacting the charity sector is required. The current regime is overly complex, with many charities struggling to understand how the thresholds apply. This particularly impacts smaller charities.