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LATE FILING OF CHARITY ACCOUNTS, REPORTS AND RETURNS

Updated 4/8/14. This information updates ss.54.2.9 & 54.2.10 in The Russell-Cooke Voluntary Sector Legal Handbook (VSLH3).
Prior to 2008, the Charity Commission did little about registered charities which failed to submit their annual accounts, reports and returns within the required 10 months from the end of the charity's financial year. In 2008 it started to indicate late filing in red on the charity's entry in the online register of charities, with a daily increasing tally of how many days late a document was.

In 2013 the Commission started getting tougher on "double defaulting" charities which had failed to file their annual documents for two or more of the previous five years. This started on 26 September 2013 with a class inquiry into 12 charities with a last known income over £500,000, which had failed to reply to written and telephone contact from the Commission. Within a week of being named in the Commission's publicity about the inquiry, four of the 12 charities had filed their overdue documents. Magic! By 18 November five more had complied, and the Commission announced that it was starting enforcement action against the remaining three.

On 11 November 2013, 12 double defaulting unincorporated charities with a last known income between £250,000 and £500,000 were added to the inquiry; within a week, three of these had filed their documents. By 27 June 2014, 10 of the original tranche and seven of the second tranche had been removed from the inquiry. leaving seven still in the inquiry, However, one of the charities which had been removed from the class inquiry in the autumn became, in February 2014, the subject of a separate statutory inquiry, after it failed to file its documents for 2012-13 by the due date of 31 January 2014.

In April 2014 the Commission sent final warnings to a further 72 charities with annual income over £250,000; 39 submitted their documents, and the 33 which didn't were added to the class inquiry in April and May. Of these, 17 had filed the missing documents by mid-June and were removed from the inquiry.

By 4 August 2014, of the 57 charities in the inquiry (12+12+33), 20 were still under inquiry.

The Commission emphasises that trustees who do not ensure accounts, reports and returns are filed on time are in default of their legal obligations to file accounting information with the Commission, and this constitutes mismanagement and misconduct in administering the charity. Even if reporting responsibilities are delegated to accountants, the treasurer, a staff member or anyone else, it remains the collective legal duty of all the trustees to ensure the documents are submitted on time.

Sanctions for late filing: England and Wales
The Commission announced in February 2014 that of the nearly 61,000 charities with annual income over £25,000 which must file accounts with the Commission, nearly 9% were late. This is better than in previous years, but is still nowhere near the 99% compliance rate for companies filing their accounts with Companies House.

Companies, including charitable companies, face company law penalties if accounts reach Companies House even one day late. For private companies (those which are not plc's) the penalties range from £150 if the accounts are up to one month late, to £1,500 if they are more than six months late. If the accounts are also late the following year, the penalties for that year are doubled. As well as penalties for the company, the company directors can be fined and get a criminal record for late filing of company annual returns or accounts. In a Charity Commission study in 2011-12, 39% of charitable companies which had not filed their accounts on time with the Charity Commission, had filed them on time with Companies House — even though the Companies House filing deadline is nine months from the end of the financial year, and the Charity Commission deadline is 10 months.

The Commission has said it is hampered in dealing with late filers because it can legally use only a small number of sanctions, and these are linked to a statutory framework and are too heavy-handed. Ultimately it is a criminal offence not to file charity accounts on time, but the Commission cannot prosecute; it has to persuade the director of public prosecutions to do so. According to Third Sector magazine (8 October 2013), there has not been a single prosecution since late filing became an offence in 1993.

In his review of the Charities Act in July 2012, Lord Hodgson recommended sanctions for late filing of accounts and annual returns should include the withdrawal of gift aid, and said the government and Charity Commission should consider the costs, benefits and logistics of introducing late filing fines. The Public Administration Select Committee inquiry into the Charities Act and the regulation of charities in June 2013 supported fines for late filing. In its response to these reports in September 2013, the government said it would explore with the Charity Commission the possibility of fines for late filers, "giving due consideration to the practical difficulties of such a system for the Commission and charities concerned". It also said the primary motive would be to improve compliance, rather than generate funds.

The Commission's consultation from May to July 2012 on whether there should be fines for late filing had suggested that fines could be on a sliding scale based on the charity's income. Consultation responses were inconclusive, with concerns about fines where there might be legitimate reasons why accounts are late, especially for small charities which do not have access to or cannot afford support from auditors. There were also concerns about whether fines would in fact be effective, and about who the fines would be paid to and how they would be used.

Consultation responses were also inconclusive on whether late filers should be suspended from being able to claim gift aid. This would require new legislation, and a high level of communication between the Charity Commission and HM Revenue & Customs. The Commission supports denying gift aid to late filers, but the Charity Finance Group has said it would be inequitable because only about 20% of charities claim gift aid, and different charities claim different amounts.

The Commission has said it would like to have power to disqualify trustees of charities which are persistent late filers. The Commission has power under the Charities Act to remove trustees, and a removed trustee is then disqualified from being a trustee of or for any charity. But the Commission has to give notice to a trustee that s/he is going to be removed, and if the trustee then resigns, the Commission then has no power to disqualify.

Scotland
The Office of the Scottish Charity Regulator (OSCR) said in its annual report for 2012-13, published on 18 September 2013, that fewer than 10% of charity accounts are filed late, and about 10% of charities are asked to resubmit accounts which did not include all the required information. Earlier in September, it said in an email bulletin that rather than asking charities to resubmit accounts with errors or omissions, it would in most cases advise on how the accounts should be prepared for the next year.

The 2013 annual report also asked Scottish ministers to consider changing charity law so OSCR has power to remove charities that consistently fail to file annual reports, accounts and returns. It has power to remove charities that are not carrying out any charitable activity — but if charities don't file the required documents, OSCR can't know what they are doing.

The annual report can be accessed via at tinyurl.com/oq2sxzl.

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FILING JOINTLY WITH CHARITY COMMISSION AND COMPANIES HOUSE

Updated 17/11/14. This information updates ss.54.2.9, 54.2.10, 54.3.8 & 54.3.11 in The Russell-Cooke Voluntary Sector Legal Handbook (VSLH3).
In his review of the Charities Act in July 2012, Lord Hodgson recommended that work by Companies House and the Charity Commission to create a single reporting system for charitable companies should continue as a matter of urgency, and the potential for joint accounting requirements should also be investigated.

The Public Administration Select Committee, in its inquiry into the regulation of charities in May 2013, did not go this far, but recommended that Companies House and the Charity Commission work towards a single filing of annual returns for charities registered with both Companies House and the Commission.

At its public meeting on 3 July 2013, the Commission said the "next evolution" in the filing of accounts would probably be provision for such joint submission. But in its annual report in July 2014, the Commission said its initial work on this had raised real doubts about the affordability of joint electronic submission. However, it is continuing to look at ways of reducing the costs or spreading them over a longer period, and is also looking for other affordable ways to tackle the issue. The Commission 2013-14 annual report can be accessed via tinyurl.com/qa6zy7m.

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LATE FILING OF CHARITY ACCOUNTS

Added 15/12/13. This information updates s.54.2.9 in The Russell-Cooke Voluntary Sector Legal Handbook (VSLH3).
Registered charities with annual income over £25,000 are required to send their audited or independently examined annual accounts and trustees' annual report to the Charity Commission within 10 months from the end of their financial year, and charities with income over £10,000 must submit an annual return. Until 2008 the Commission did little about charities which failed to do this, but in 2008 it started to indicate late filing in red on the charity's entry in the online register of charities. But it is now getting tougher.

In his review of charity law in 2012, Lord Hodgson recommended sanctions for late filing of accounts and annual returns should include the withdrawal of gift aid, and said the government and Charity Commission should consider introducing late filing fines.

In a study of 400 charities which filed their annual accounts late in 2011, the Charity Commission found that:

• 35% of the accounts had been signed before the filing deadline, so could easily have been filed on time;
• 27% of late filers with annual income over £250,000, and 23% if those with income under £250,000, had previously defaulted at least once;
• 23% of late filers with income over £250,000 had filed accounts late in all of the previous five years;
• the accounts of 24% of late filers over £250,000 and 52% of those under £250,000 were classed as poor, meaning they did not comply with SORP, were missing important sections such as the trustees' annual report, or were simple receipts and payments accounts where the charity was above the threshold for having to prepare accrual accounts;
• 28% of late filers with income over £250,000 were faith/religious groups.

CHANGES TO CHARITY ANNUAL RETURNS AND ONLINE REGISTER OF CHARITIES

Updated 17/11/14. This information updates s.54.2.10 in The Russell-Cooke Voluntary Sector Legal Handbook (VSLH3).
All charities registered with the Charity Commission with annual income of £10,000 or above, and all charitable incorporated organisations (CIOs) regardless of income, must submit an online annual return within 10 months from the end of the financial year.

Changes to the 2015 return
Following a consultation from 17 June to 12 August 2014, the Charity Commission announced changes to the 2015 annual return on 23 October 2014. The changes will take effect for financial years ending on or after 1 January 2015.

Three new questions, to be answered by all charities which complete the return, will be:

• In the reporting period, how much income did you receive from contracts from central or local government to deliver services, and grants from central or local government?
  This information will be displayed on the online register of charities as a proportion of the charity's total income.
• Does your charity have a policy on paying its staff?
  This replaces the proposed question on whether the charity has a written policy on remuneration of executive staff.
• Has your charity reviewed its financial controls during the reporting period?
  The proposed question asked whether the charity "had carried out a review". (I'm not sure what the difference is between "reviewed" and "carried out a review"...)

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NEW REPORTING STANDARDS FOR COMPANIES

Updated 3/8/14. This information updates s.54.3.2 in The Russell-Cooke Voluntary Sector Legal Handbook (VSLH3).
A new financial reporting standard for companies (FRS 102) will come into effect for accounting periods starting on or after 1 January 2015, along with a revised statement of recommended practice for charities (SORP) based on the new FRS [see Two new charities SORPs, above].

Large global companies will have to continue to comply with international financial reporting standards (IFRS) for large companies. But for other UK companies, most current accounting standards for the UK and Republic of Ireland will be replaced with the single FRS 102. FRS 102 is based on the IFRS for small and medium-sized entities.

The financial reporting standard for smaller entities (FRSSE) will be retained for companies which qualify as smaller: meeting any two of annual income not exceeding £6.5 million, balance sheet total not exceeding £3.26 million, and average number of employees not exceeding 50. Non-charitable smaller companies will have a choice whether to use FRS 102 or FRSSE, and charitable companies which meet the current criteria for FRSSE will be able to choose whether to use the new charities SORP based on FRSSE or the one based on FRS 102 [see SORP article above].

FRS 102, as approved by the Financial Reporting Council in March 2013, can be accessed via tinyurl.com/bn6n4c8. There are many summaries listed on Google but I don't know enough to assess them. Finance specialists will have received many analyses and summaries of FRS 102; non-specialists should take advice from their company's accountant or auditor about how their company will be affected.

Although FRS 102 will come into effect only for financial years ending on or after 1 January 2015, comparative figures for the previous financial year (ending on or after 1 January 2014) will need to be prepared in the same format. So it is important to be aware of relevant changes during the 2014 or 2014-15 financial year.

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SIMPLER FINANCIAL REPORTING FOR MICRO-ENTITIES

Updated 3/8/14. This information updates 54.3.2 in The Russell-Cooke Voluntary Sector Legal Handbook (VSLH3).
For financial years ending on or after 30 September 2013, micro-entities which are not charities can choose to submit simplified micro-entity accounts to Companies House. A micro-entity is a registered company which meets any two of the following three criteria: turnover not more than £632,000, balance sheet total not more than £316,000, and employing no more than 10 people on average during the financial year. The statutory definition explicitly excludes companies which are charities.

A micro-entity must submit a balance sheet to Companies House each year, and may (but does not have to) also submit the profit and loss account for that year, directors’ report, auditor’s report (unless the company is claiming exemption from audit as a small company), and any notes to the accounts.

The balance sheet must contain a statement in a prominent position above the director’s signature and printed name that the accounts have been prepared in accordance with the micro-entity provisions. This statement should appear in the original accounts as well as the copy sent to Companies House.

If the company has opted not to file a directors’ report and/or a profit and loss account, a statement should also appear on the balance sheet sent to Companies House that the accounts have been delivered in accordance with the provisions applicable to companies subject to the small companies regime.

The rules for micro-entity accounts are explained on the Companies House website at www.companieshouse.gov.uk/about/gbhtml/gp2.shtml#ch6.

Implementation of these provisions follows a consultation by the Department for Business, Innovation and Skills and the Financial Reporting Council from August to October 2011 on Simpler reporting for the smallest businesses, and a BIS consultation on specific proposals in March 2013.

The Small Companies (Micro-Entities' Accounts) Regulations 2013 are at www.legislation.gov.uk/uksi/2013/3008/made.

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FINANCIAL REPORTING FOR MICRO-COMPANIES AND MICRO-BUSINESSES

Added 1/4/12. This information updates 54.3.2 in The Russell-Cooke Voluntary Sector Legal Handbook (VSLH3).
In February 2012, the European Council agreed proposals for a significant simplification of accounts and reporting for micro-entities. As part of this it agreed a revised definition of a micro-entity as a company (a micro-company) or unincorporated business (a micro-business) which meets any two of the following three criteria: turnover less than €700,000 (approximately £600,000), net assets less than €350,000 (approximately £300,000), and employing no more than 10 people on average.

This paves the way for future implementation in the UK of proposals outlined in the Simpler reporting for the smallest businesses discussion paper issued by the Department for Business, Innovation and Skills and the Financial Reporting Council on 25 August and consulted on until 30 October 2011. The key proposal is that micro-entities will be able to produce a single set of accounts meeting the requirements of both company law and tax law, instead of two separate sets as many micro-entities have to prepare at present. The government said on 23 March 2012 that responses to the discussion paper will be used to further develop its proposals.

The discussion paper suggests that micro-entities that are now required under company law to prepare a profit and loss account on an accruals basis could prepare a trading statement on the receipts and payments basis; would not have to account for stock, changes in working capital, and changes in the value of fixed assets; could prepare a simplified statement of position rather than a balance sheet; and could prepare a simplified annual return. The financial information prepared in this simplified form could then be used as the basis for their annual tax return to HMRC.

Para.2.2 in the discussion paper says the new provisions would apply only to entities that trade for profit. They would therefore not include charities and other organisations that do not trade for profit. This could create an anomaly where a charity's trading subsidiary meeting the micro-entity criteria would be entitled to prepare simplified accounts, while a much tinier parent body, as a charitable company not trading for profit, would still have to prepare its accounts and reports under the provisions for small or smaller companies. This will be something to watch out for when the consultation on future proposals is issued.

The BIS/FRC discussion paper can be accessed on the BIS website via tinyurl.com/bvymy44.

COMPANY ANNUAL REPORTS

Updated 4/8/14. This information updates 54.3.6 in The Russell-Cooke Voluntary Sector Legal Handbook (VSLH3).
For financial years ending on or after 30 September 2013, the annual reports of large and medium companies — including charitable companies — must include both a strategic report and the directors' report. Medium and large companies are generally those with a turnover of at least £6.5 million.

The strategic report must cover the company's strategy, business model, principal risks and challenges, and must include certain specified information. It replaces the previous business review.

The Charity Commission and the Office of the Scottish Charity Regulator (OSCR), as the joint SORP making body, issued guidance on 28 January 2014 for charitable companies which must comply with the new rules. The guidance says that for a charity which is a company, the strategic report should provide context for the related financial statements, provide an analysis of the charity's past performance, and provide insight into the charity's main objectives and strategies, and the principal risks it faces and how they might affect future prospects. Affected charities should incorporate the strategic report (as required under company law) into the trustees' annual report and accounts (as required under charity law). In approving the trustees' annual report, the trustees must also explicitly approve the strategic report.

The Commission/OSCR guidance can be accessed via tinyurl.com/ptf45ux.

On 9 June 2014, the Financial Reporting Council published non-mandatory guidance on preparing company strategic reports. This is aimed at quoted companies, but is intended to serve as best practice for all companies preparing strategic reports. The FRC guidance can be accessed via tinyurl.com/nd98xd8.

The Companies Act 2006 (Strategic Report and Directors' Report) Regulations 2013 are at www.legislation.gov.uk/uksi/2013/1970/made.

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COMPANY ANNUAL REPORTS

Added 1/4/12. This information updates 54.3.6 in The Russell-Cooke Voluntary Sector Legal Handbook (VSLH3).
The Department for Business, Innovation and Skills announced on 28 February 2012 that proposals to simplify company annual reports and improve transparency, originally intended to come into effect for accounting years beginning on or after 1 October 2012, will not come into force until 1 April 2013. The delay is to give companies more time to adjust.

The consultation on narrative reporting, which took place from 19 September to 25 November 2011, proposed dividing the annual report into two separate documents: a strategic report setting out financial results, the company’s business model and strategy, risks, remuneration, and environmental and social issues; and an online annual directors' statement which would provide more detailed information. The government's response to the consultation, published on 27 March 2012, says that the proposals were widely supported, and it will work with shareholders and others to develop the proposals.

The consultation documents and government response are on the BIS website via tinyurl.com/d2vt6fa.

COMMUNITY INTEREST COMPANY ANNUAL REPORTS

Added 16/10/12. This information updates 54.3.6 in The Russell-Cooke Voluntary Sector Legal Handbook (VSLH3).
From 1 October 2012, the Community Interest Company(Amendment) Regulations 2012 make clear that directors of community interest companies (CICs) must deliver a directors' annual report to the CIC regulator, regardless of any exemption which might apply to accounts and reports by directors of non-CIC companies.

The regulations are at www.legislation.gov.uk/uksi/2012/2335/made.

COMPANY AUDIT REQUIREMENTS AND ACCOUNTING FRAMEWORK

Updated 16/10/12. This information updates s.54.3.7 in The Russell-Cooke Voluntary Sector Legal Handbook (VSLH3).
For accounting years ending on or after 1 October 2012, more small companies (but not charitable companies) are eligible for exemption from audit, and many companies are able to change their accounting framework.

A company is classed as small for accounting purposes if it meets any two of the following criteria: average number of employees during the year no more than 50, balance sheet total no more than £3.2 million, and turnover no more than £6.5 million. But for the purpose of audit exemption, prior to 1 October it was classed as small only if it met both the balance sheet and turnover requirements. Now the audit criteria are aligned with those for accounting, i.e. any two of the three criteria.

The new audit thresholds will apply to non-charitable companies, including community interest companies and charities' trading subsidiaries, but will not apply to charitable companies.

The new legislation also exempts many subsidiary companies from mandatory statutory audit and dormant subsidiary companies from statutory audit, if specified criteria are met including that the parent company guarantees the debts of the subsidiary.

Companies which have been preparing accounts under international financial reporting standards (IFRS) may, in many cases, change their accounting framework to UK generally accepted accounting principles (GAAP).

The Companies and Limited Liability Partnerships (Accounts and Audit Exemptions and Change of Accounting Framework) Regulations 2012 are at www.legislation.gov.uk/uksi/2012/2301/made.

CHANGES TO COMPANY FORMS AND FILING

Updated 16/10/12. This information updates ss.18.5, 54.3.8 & 54.3.11 in The Russell-Cooke Voluntary Sector Legal Handbook (VSLH3).
In November 2010, Companies House announced that it expected all incorporations and filings of annual returns, accounts and the main company changes for most types of company to be done electronically by March 2013. However, it announced in September 2011 that because of the government's commitment not to increase the regulatory burden on small businesses, mandatory electronic filing would not go ahead at present. Instead, Companies House will encourage electronic filing, particularly for annual accounts, and will reconsider mandatory electronic filing when the moratorium on new regulation for small businesses ends in 2014.