During this Spring’s charity accounting and audit update courses we’re covering the new Charities Act in a bit of detail. Although many of the requirements aren’t directly related to financial statements, we are getting a number of queries. Here are five of the most common questions:

1. Why is there a need for the Act and when does it come in?

The Act has been quite a long time in the making. Recommendations from the Law Commission formed the basis for the provisions of the new legislation and the Act is designed to give trustees more flexibility to manage charities effectively. They will not have a big impact on charities’ daily operations but simplify certain areas of regulation. Some of the changes came in in Autumn 2022, some apply from Spring 2023; and others apply from Autumn 2023.

 2. What are the most important bits for accountants?

Probably the two most important changes for accountants took effect from Autumn 2022:

• If a fundraising appeal fails, a charity is able to spend small donations on another project. Sometimes charities raise too much or too little money for a fundraising appeal, which can mean that they aren’t able to use all (or any) of the money for the purpose it was raised for. Charities will be able to repurpose donations from donors who have given no more than £120 in a financial year, provided the funds are used for similar charitable purposes. Repurposing will also be possible where it would be unreasonable for the charity to return amounts or where a donor can’t be identified.
• Where its constitution does not prohibit it, a charity is allowed to remunerate trustees for providing either goods, services or goods and services. There is no longer a specific requirement for goods to be provided only in connection with services.

 3. I’ve heard the new rules unlock permanent endowment. Is that true?

To a point this is true. There are legal restrictions on how permanent endowment can be used and invested. These will mostly stay in place, but the new rules will give charities more flexibility in some areas. 

Charities will be able to borrow up to 25% of the value of their permanent endowment funds, without needing approval from the Charity Commission, as long as it is paid back within 20 years. This may be useful to charities which are struggling to maintain their reserves following a very difficult period for the sector.

The current rules state that permanent endowment funds can only be invested for a financial return. This will be relaxed, so charities can use permanent endowment funds to make ‘social investments’ that have a negative or uncertain financial return. The Charity Commission is expected to make regulations about how this will work, which will probably tie in with its proposed new guidance on responsible investment.

4. Where audit reports make specific reference to Charities Act 2011, will this change?

It’s true that audit reports do refer to the Charities Act 2011, this being the legislation under which auditors are sometimes appointed. This will not change though. Changes brought in by the 2022 Act will update but not replace the 2011 Act.

5. Does the new legislation amend or supersede the Charities Accounts and Reports Regulations 2008?

Alas no! Consequently, where an unincorporated charity prepares accounts under the Charity SORP, reference will still be needed in the notes to the accounts and in the Independent Examiner’s Report to the ‘true and fair override.’

We have a number of charities courses coming up covering introductory levels, updates and Independent Examination. Take a look at our CPD programme for more details.