Lucy Hammond FCA DChA
- Partner in Audit & Assurance
- +44 (0)330 124 1399
- Email Lucy[email protected]
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COVID-19 has resulted in Trustees having to deal with serious financial challenges over the last 8 months, many of which will have already had a major impact on their charities and their beneficiaries. Income diversification has therefore come to the forefront once again as the virus continues to impact charities and with the thought of a bleak winter to come, this is again high on Trustees’ meeting agendas. But what do you need to think about? Here are some of our thoughts and questions you should be considering
Every decision a Trustee makes, has to be in the best interests of the charity. Will any decisions to diversify income impact the charity’s beneficiaries now or in the future? Will the charity be able to safeguard them, as the charity goes through what may well be significant changes?
Following on from this, is that all decisions a Trustee makes, also have to be in line with the charity’s purpose and any restrictions within the Charity’s governing document. Will any decisions to diversify income, not be in line with the charity’s purpose? Do you need to obtain approval from the Charity Commission to sell an asset for example to generate income or to use an asset as security on a loan? Do the Trustees need to consider updating their governing document to facilitate this?
A Charity does not pay tax on profits on primary purpose trading, that is the trading to achieve its aims and objectives, but it must pay tax on any other profit which is over and above the small trading tax exemption limit. This limit is currently £80,000 of non-primary purpose trading income for charities with a gross annual income of above £320,000. If the income diversification plan demonstrates that income over this amount will be generated, Trustees might want to consider setting up a trading subsidiary for these activities. This subsidiary would then be able to make a tax allowable donation of its profits to the parent charity to use for its main charitable purpose, on which there would also be no corporation tax charge arising in the charity. This however adds an additional layer of costs and administrative tasks to a charity’s structure by having another entity to prepare and file accounts for, as well as a corporation tax return for the trading subsidiary. It is also necessary to carefully consider the gift aid rules and the charity’s relationship with a non-charitable entity.
Whilst a charity is not exempt from paying VAT when trading, it is eligible for some VAT reliefs. However, if trading income is above the VAT registration threshold, it must register for VAT. The cost implications together with the impact on finance teams of a VAT registration will therefore need to be considered.
Trustees might want to consider whether it is possible to use some restricted funds for wider purposes or bring designated funds back into general use. The latter being the easier option. Restricted funds may have been provided for projects which just cannot be run at present, due to Government guidelines, but could be used effectively on more urgent projects that can run. To change a restriction the donor has to give permission or, in the case of the donor not being able to be contacted, a charity can apply to the Charity Commission to have a restriction lifted or changed.
Have you considered accessing any assets held within a permanent endowment? Whilst Charity Commission approval will be required, this may result in additional funds being available for general use, without changing the activities of the charity significantly.
Income diversification doesn’t always have to mean extending into new areas. It may just be thinking about how existing operations can evolve and potentially move online. For example, charity shops could sell their goods through an online store, which might work particularly well for Christmas cards or e-cards. Whilst existing volunteers may not have the skills to set this up, are there some new volunteers out there, possibly on furlough, whose time could be utilised? Can donations to charity shops continue to be made in a Covid secure way by post or courier and sold online?
What about virtual fundraising? Schools have educated virtually, projects have run virtually and we are now seeing ways fundraising events can also be run virtually through quizzes and online murder mystery packages. The London Marathon fundraising provided a great example of income generation from existing sources, around the theme of 26. Can your charity use this as an example to still safely run ‘events’ and generate income, but in a different way?
Developing relationships with new corporate funders and large donors takes time and often starts from real-life contact, these opportunities have been almost eradicated in 2020. So, do existing corporate funders offer the best solutions for additional funds and are they interested in funding new or different projects? Is there an opportunity to change the funding structure on your current grants so that cash is received earlier?
Linked with this is the possibility of refreshing the value of your income from existing donors and income streams. Often monthly donors keep their standing orders and direct debits at the same value as they have for years, but is there an opportunity to increase these? Would a well-targeted communication explaining the current pressures on services and the potential threats to the charity’s operations help existing donors understand why their funds are so important and how an additional donation could really make a difference?
Remember that as well as trying new things, keeping up to date both operationally and financially continues to be crucial at the present time. We recognise that this is increasingly difficult as your already stretched resources are being pulled in even more directions than normal. Reading and implementing the government guidelines can sometimes feel like a full-time job in itself, especially when added to ever-increasing workloads. Cashflow management and forecasting must also be kept up to date and be regularly reviewed. What are the anticipated cashflow timings? Will the organisation run out of cash?
Our webinar earlier this year covered COVID-19 and the going concern assumption, addressing not only the implications for charities, but also the information charities should be preparing and what their auditors or independent examiners will need to see.
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