Source: http://ogs.charitycommission.gov.uk/g015a004.aspx
Timestamp: 2018-08-21 17:54:42
Document Index: 473037793

Matched Legal Cases: ['art 16', 'art 8', 'art 8', 'art 8', 'art 8', 'art 8', 'art 16', 'art 16', 'art 8']

g015a004 Charity accounts and reports: Audit and independent examination dispensations under s154(1)(f) of the Charities Act
OG15 B3
OG15 B3 Charity accounts and reports: Audit and independent examination dispensations under s154(1)(f) of the Charities Act
OG15 B3 Audit and independent examination dispensations under s154(1)(f) of the Charities Act - 11 June 2013
3. Accounts audited by the Comptroller and Auditor General or the Auditor General Wales
4. NHS Charities and local authority charities
4.2 National Health Service charities
4.3 Charities connected with local government
5. Circumstances permitting dispensation
5.1 Accounts audited under a similar statutory provision
5.2 Accounts have been audited or examined under other similar arrangements or requirements
5.3 Exceptional circumstances
5.4 Exceptional circumstances – the initial transfer of assets on incorporation
5.5 Exceptional circumstances - the initial transfer of assets from an existing charity to a newly established CIO
5.6 Exceptional circumstances - other cases
6. Dispensations and charitable companies
7. Altering a charity’s financial year
7.1 Why change the financial year?
7.3 Non-company charities
7.4 Giving our consent
8. Levels of authority
9. How to record that a dispensation has been granted
This guidance sets out those situations where the Commission can use its powers to either allow an auditor, who is not a Companies Act auditor, to carry out an audit, or to allow an independent examination to take place instead of an audit. The audit thresholds under the Charities Act are not pro-rated where the length of the financial year is of greater or less than 12 months duration.
It is important to note that we have no power to give a dispensation to allowing the preparation of accounts on a receipt and payments basis where the threshold for their preparation is exceeded.
Charities which are Non-Departmental Public Bodies, or Central Government, NHS or Local Government related will find sections 3 and 4 of particular interest.
An explanation is provided in section 5 as to the bases on which we can grant dispensation. It's important to note that an audit dispensation will have no effect if the governing document includes a requirement for audit or if legislation, such as the Companies Act, requires an audit.
There are limitations on dispensations we can grant to charitable companies that is explained in section 6.
This guidance concludes by setting out the flexibility charities have in altering the length of their financial year and our powers to assist non-company charities to alter the length of their financial year section 7.
S.154(1)(f) of the Charities Act gives us power to dispense with the requirement of s.144(2) for accounts to be audited by a registered auditor, or of ss.145 or 152 for them to be independently examined.
The Charities (Accounts and Reports) Regulations 2008, Regulation 34 details the circumstances in which a dispensation can be given
The scrutiny regime of the Charities Act applies to small charitable companies. It took effect as a consequence of previous Regulations for accounting periods beginning on or after 1 April 2008. Audit dispensations in relation to the scrutiny requirements of the Act can be granted to eligible small charitable companies. This provision also took effect for eligible small charitable companies for accounting periods beginning on or after 1 April 2008. Medium and large charitable companies, as defined by the Companies Act 2006, remain subject to the Companies Act scrutiny regime and we have no power to grant these charitable companies audit dispensations in relation to the audit requirement imposed by Part 16 of the Companies Act 2006.
Excepted charities, for example, a number of Christian denominations, armed forces charities and scouts and guides charities, are subject to the scrutiny requirements of Part 8 of the Charities Act and so may request a dispensation for independent examination, however exempt charities do not fall within Part 8 of the Act and so we have no legal power to offer independent examination as a substitute for audit.
We can only grant dispensations using our powers under Regulation 34 from audit and independent examination, and not from other requirements of the Charities Act set by reference to financial thresholds.
We are able to grant a dispensation under Regulation 34(2)(b) if we are satisfied that the accounts have been audited by the Comptroller and Auditor General (C&AG) or the Auditor General for <?xml:namespace prefix = "st1" ns = "urn:schemas-microsoft-com:office:smarttags" />Wales. In cases where the charity has been audited by the C&AG or Auditor General for Wales the dispensation may be issued without the advice of a Commission accountant.
See OG15 L1 and OG15 L2 for model wording in relation to dispensation requests.
A dispensation under Regulation 34(2) (b) relates to a particular charity. It is our practice to give a dispensation for all relevant financial years in which the audit is to be undertaken by the C&AG or Auditor General for Wales although the validity of the dispensation arises once the audit has in fact been undertaken.
For the dispensation to be effective, the C&AG’s or the Auditor General Wales’ audit report must be attached to the annual report and accounts sent to us in accordance with s.164.
In practice, the staff of the National Audit Office (NAO), or the Welsh Audit Office (WAO) undertake such audits. A number of charities which are substantially financed from public funds have their accounts audited by the NAO or WAO. This may be because the legislation under which the charity was created requires this, or because the charity has entered into an agreement with the Treasury that its accounts will be audited by the C&AG or the Auditor General Wales.
Some, but not all, of these charities are exempt. Where they are not, it is likely that the dispensation will be negotiated centrally although the dispensation must still be given for each particular charity.
There are a number of issues in relation to scrutiny that may arise in the context of charities associated with the National Health Service or Local Authorities. The sections that follow look at the external scrutiny requirements of the Charities Act as they apply to such charities and the particular circumstances in which such charities may seek dispensation from audit or independent examination requirements. It also explains the circumstances in which a dispensation is unnecessary because the audit arrangements will take place under the Act. See OG15 L1 and OG15 L2 for model wording in relation to dispensation requests.
Provision for the Audit Commission appointees and for the Auditor General for Wales to act as auditors of NHS Charities (without the need for an audit dispensation from the Charity Commission) is made in ss.149-150 of the Charities Act. Where these provisions apply there is no need for a dispensation to be obtained.
An English National Health Service charity, for these purposes, means a charitable trust, the trustees of which are:
(a) a Strategic Health Authority;
(b) a Primary Care Trust;
(c) a National Health Service trust all or most of whose hospitals, establishments and facilities are situated in England;
(d) trustees appointed in pursuance of paragraph 10 of Schedule 4 to the National Health Service Act 2006 for a National Health Service trust falling within paragraph (c).
(e) special trustees appointed in pursuance of section 29(1) of the National Health Service Reorganisation Act 1973, section 95(1) of the National Health Service Act 1977 and section 212(1) of the National Health Service Act 2006 for such a National Health Service trust, or
(f) trustees for a Primary Care Trust appointed in pursuance of paragraph 12 of Schedule 3 to the National Health Service Act 2006.
A Welsh National Health Service charity, for these purposes, means a charitable trust, the trustees of which are:
(b) a National Health Service trust all or most of whose hospitals, establishments and facilities are situated in Wales;
(c) trustees appointed in pursuance of paragraph 10 of Schedule 3 to the National Health Service (Wales) Act 2006 for a National Health Service trust falling within paragraph (b); or
(d) special trustees appointed in pursuance of section 29(1) of the National Health Service Reorganisation Act 1973, section 95(1) of the National Health Service Act 1977 and section 160(1) of the National Health Service (Wales) Act 2006 for such a National Health Service trust.
Where the trustees of an NHS charity wish to elect for an independent examination, the threshold criteria having been met, an election must also be made under ss.149-150 of the Charities Act by the Audit Commission or in the case of Welsh NHS charities by the Auditor General for Wales. In such circumstances there will be no requirement for us to give a dispensation.
The accounts of some other charities connected with the health service may also be audited by the Audit Commission by virtue of arrangements made under s.29 (1) of the Audit Commission Act 1998. If the charity does not fall within the definition of an English National Health Charity then the audit will be carried out under s.144(2) of the Charities Act and the Audit Commission will not be eligible for appointment without dispensation.
If the charity trustees wish for the Audit Commission to act as auditor and they so agree then we will consider making a dispensation where we are satisfied the alternative arrangements are sufficiently similar to the relevant requirements of s.144(2) of the Charities Act. The dispensation is therefore granted under Regulation 34(3) (a) based on the terms of the audit engagement being sufficiently similar to the requirement of s.144(2) of the Act.
It should be noted that whilst s.29(1) of the Audit Commission Act 1998 permits the Audit Commission to undertake such audits, it does not provide a statutory framework for such audits and therefore the dispensation is not given under Regulation 34(2)(a).
Whilst a dispensation under Regulation 34(3)(a), given on the basis of arrangements or requirements that are sufficiently similar, are given for a particular financial year, our practice in relation to Audit Commission appointments is for the dispensation to cover those particular years that they act as auditor and is effectively an on-going dispensation unless the terms of their engagement as auditor change significantly.
Where the charity trustees can identify cost or other administrative saving resulting from the appointment of the Audit Commission and we are satisfied that the audit will meet the requirements and report on those matters required by s.144(2) then a dispensation may be granted without accountancy advice.
Where these criteria are not met accountancy advice should be sought.
Foundation NHS Trusts and s51 trustee bodies (NHS Act 2006) are permitted to appoint their own auditors. Under the Charities Act, however, charitable funds held by a Foundation Trust or s.51 trustee body do not constitute "NHS charities". Consequently if a Foundation Trust or s51 trustee body wishes to appoint the Audit Commission (or the Auditor General for Wales) to audit its charitable funds a dispensation will be required from the Charity Commission. A standard short procedure and model letter have been agreed between the Charity Commission and the Audit Commission to ensure that the alternative arrangements are sufficiently similar to the relevant requirements of s.144(2) of the Charities Act. In the case of The Auditor General for Wales acting as auditor then dispensation may be granted under Regulation 34(2) (b) - see section 3 above.
Again, dispensations can be granted without accountancy with the minimum of process. Accountancy advice need only be sought where concerns arise that the arrangement entered into is not in the best interests of the charity.
Whilst ss.149-150 of the Charities Act will reduce the need for dispensations to be granted to enable the Audit Commission and Auditor General for Wales to undertake audits of most NHS charities accounts, a dispensation will still be needed when trustees wish the Audit Commission to act for charities connected with local authorities. The Audit Commission may undertake such audits under section 29 of the Audit Commission Act 1998 but a dispensation from us is required.
Under s.29(1) of the Audit Commission Act 1998 (which replaced s.29(1) of the Local Government Finance Act 1982), the Audit Commission (District Audit) may:
with the consent of the Secretary of State, and
with the agreement of the body concerned,
audit the accounts of certain bodies connected with local government or the National Health Service.
The Secretary of State has given approval under s.29(3) of the Audit Commission Act 1998 for the Audit Commission to act in all cases where a charity has a local authority as managing or custodian trustee and wishes to appoint the Audit Commission as auditor.
We are satisfied that the standard form of agreement (engagement letter) produced by the Audit Commission provides for an assurance about the financial affairs of the charity which is comparable to that contemplated in the Charities Act.
A dispensation from us will enable charities connected with local authorities which exceed the audit threshold from the obligation to appoint a registered auditor.
Dispensation is not automatic. The trustee must make an application to us. However, we do not envisage withholding a dispensation except in exceptional circumstances.
Charities with a local authority either as managing trustee or custodian trustee are covered by the arrangements but unless the managing trustee:
makes the decision to appoint the Audit Commission as auditor;
enters into the audit agreement with the Audit Commission; and
applies for the dispensation,
dispensation should be refused. The application must be made by the charity trustee.
It should be noted that whilst s.29(1) of the Audit Commission Act 1998 permits the Audit Commission to undertake such audits, it does not provided a statutory framework for such audits and therefore the dispensation is not given under Regulation 34(2)(a).
In cases where the local authority is the managing or custodian trustee, the dispensation may be issued without the advice of a Commission accountant. In all other cases the advice of a Commission accountant should be obtained before either granting or rescinding a dispensation. In considering the application the accountant will consider the relationship between the applicant charity and the Local Authority and consider if the nature of that relationship justifies the request to appoint a non-companies act auditor.
OG 15 L1 sets out the form an application for dispensation should take. This model letter forms part of a technical release from the Audit Commission and we would expect any charity making an application on these grounds to have been made aware of it by their professional adviser. OG 15 L2 sets out the wording we should use in granting the application.
This will include charities, other than those referred to in sections 4.2 and 4.3 above, whose accounts are audited under a statutory provision other than the Charities Act.
You will need to confirm that the charity is required to have an audit and that this is a statutory requirement (or a requirement contemplated by statute). “Legislation” in this context includes delegated legislation. (An audit arranged under s.29(1) of the Audit Commission Act 1998 does not fall within this definition as the legislation does not impose any specific requirement for the audit or specify duties). Regulation 34(2) (a) permits a dispensation to be issued where the accounts of a charity are to be audited in accordance with any statutory provision contained in or having an effect under an Act of Parliament which imposes requirements which are sufficiently similar to those of s.144(2).
To grant a dispensation we need to be satisfied that:
the auditor qualification is comparable to that envisaged in the Charities Act; and
the audit process gives an assurance about the charity’s financial activities and state of affairs which is comparable to the assurance provided by the audit process contemplated in the Act and the Regulations; and
the trustees understand that it will be a term of the dispensation that the audit report is sent to us, with the annual report and accounts.
Where applications for dispensation are received, advice should be sought from a Commission accountant. In considering the application the accountant will consider the relationship between the applicant charity and the public body and consider if the nature of that relationship justifies the request to appoint a non-companies act auditor.
We are able to grant a dispensation under Regulation 34(2) (a) of the Charities (Accounts and Reports) Regulations 2008 if the accounts are subject to a statutory audit requirement other than that of Part 8 which, in our opinion, provide sufficiently similar requirements to s.144(2) of the Charities Act.
The dispensation is given to a particular charity.
We must make it a condition of any dispensation that the trustees provide us with a copy of the audit report on the accounts for the relevant year audited under the alternative provisions if requested by us to do so.
Regulation 34(2)(a) enables us to give a dispensation where the impact of any statutory provision would effectively create a dual requirement for the charity to be audited to a similar standard that would effectively meet the scrutiny and reporting objectives of the Charities Act.
For a dispensation to be granted under this provision we need to be satisfied that the requirements imposed are sufficiently similar to those required by s.144(2) of the Charities Act. In particular, we would need to consider who is enabled by the alternative statutory regime to undertake the audit and the auditing standards the appointee is required to follow by law or as a matter of professional standards, the matters on which the auditor reports and the concurrence with the key requirements for a charity audit report. The alternative regime need not be identical but we should be satisfied that the audit provides similar assurance to that of an audit under the Act.
The dispensation can be granted in advance of the audit taking place based on our consideration of the provisions of the alternative audit regime and the assurance it is likely to provide.
In all cases we should ensure that the dispensation is granted on the condition that the trustees provide us with a copy of the audit report on the accounts for the relevant year audited under the alternative provisions.
Where a dispensation is sought by a charity connected with an NHS charity or a local authority you should refer to section 4 of this OG to check whether a dispensation is required. Where the audit is carried out by the Comptroller and Auditor General or the Auditor General Wales the dispensation should be considered under Regulation 34(2)(b) – see section 3.
Instances of dispensations on the basis of sufficiently similar statutory requirements are uncommon and in all cases accountancy advice should be obtained as part of the consideration of the application.
We are able to grant a dispensation under Regulation 34(3)(a) of the Charities (Accounts and Reports) Regulations 2008 if the accounts have been, or will be, audited or examined (as appropriate) to a standard, under other requirements or arrangements, comparable to that provided by Part 8 of the Charities Act .
As the arrangements to be made in place of an audit and examination under the Charities Act relate to a particular financial year the dispensation is made in respect of a particular financial year and not generally on a recurring basis.
The Commission must make it a condition of a dispensation granted under this regulation that the trustees provide a copy of any report made to the trustees to us on request (this request should be made in all cases). Where this condition is not met the Commission may revoke the dispensation granted.
This dispensation under Regulation 34(3) (a) is given in respect of a particular financial year on the basis of our assessment of the nature of the audit or examination carried out or to be carried out. Granting a dispensation will involve consideration of the qualifications / suitability of the person who carries out the examination or audit and the nature of the procedures and report to be provided.
Charities administered by bank trust corporations, which may have internal audit arrangements for the trusts under their administration, are examples of charities which may seek this type of dispensation. Internal audit arrangement however tend to focus on the control environment generally rather than the activities and affairs of a specific charity. We would therefore need to be assured the procedures undertaken focused specifically on the charity seeking the dispensation. It is unlikely that internal audit could be regarded as sufficiently similar to an independent audit under the Charities Act.
In practice, obtaining information to satisfy ourselves that the audit or examination processes, and the degree of independence, are comparable to Part 8 will be difficult. The nature of the audit work and matters to be reported on may be established through a review of the engagement letter setting out the terms of the appointment.
Applications for dispensations under Regulation 34(3)(a) are uncommon.
Accountancy advice must be sought in all cases where the granting of a dispensation is likely to be approved. In making our assessment regard will be paid to the independence of the arrangements, the skills and abilities of those undertaking the scrutiny, and the comparability of the examination or audit arrangements with either our Directions for Independent Examination or in the case of an audit with international standards of audit and guidance issued by the Auditing Practices Board, in particular, Practice Note 11: The Audit of Charities in the United Kingdom.
Regulation 34(3)(b) of the Charities (Accounts and Reports) Regulations 2008 recognise that there may be exceptional circumstances which justify the examination of the accounts by an independent examiner instead of an audit.
The Commission has no power under the Charities (Accounts and Reports) Regulations 2008 to grant a dispensation from independent examination on the basis of exceptional circumstances.
The Commission must make it a condition of a dispensation grant under this regulation that the trustees provide a copy of the examination report to us on request (this request should be made in all cases) and require the trustees to comply with the requirements of s.145(1) of the Charities Act as though an election had been made for an independent examination. Where these conditions are not met the Commission may revoke the dispensation granted.
As the dispensation is given due to exceptional circumstances it may only be given in respect of a particular financial year and not on a recurring basis.
Trustees should be informed that the independent examiner’s report must state that an independent examination has taken place instead of an audit. The report must also specify the date that the Commission dispensed with the requirements for an audit under s.144(2) of the Act (Regulation 31(f)).
Circumstances which can properly be regarded as exceptional are hard to define but generally relate to circumstances that are unlikely to reoccur and would result in an audit for one period only. Where a charity regularly undertakes a particular income generating activity then an increase in the amount receivable in respect of that activity in a particular year would not generally be regarded as an exceptional circumstance. The sections that follow look at particular circumstances that we will generally accept as exceptional.
The initial transfer of assets on incorporation: dispensation for the new Company
Where the trustees of a non-company charity wish to have the protection of limited liability the option of transferring the assets and activities from the existing non-company charity to a new charitable company is the preferred method for obtaining limited liability. Where unrestricted income funds are transferred from an unincorporated charity to the successor charitable company these count as income and form part of the charity’s gross income for threshold purposes. However the transfer of special trusts (restricted income funds) and endowment does not count towards gross income.
The unrestricted income recognised as a result of the transfer from the unincorporated charity may result in the gross income of the new charitable company exceeding the audit threshold in its first financial year. In these circumstances, provided the criteria listed below are met, we will grant a dispensation for an independent examination in place of an audit where the trustees request it.
Existing small companies (for financial years starting after 1 April 2008)
For accounting periods commencing on or after 1 April 2008 we can give an audit dispensation for a charitable company provided it certifies that it meets the definition of a small company in the year for which a dispensation is requested and that it is not required to have an audit under its Memorandum and Articles of Association. It is important to note that where an audit is required under the Companies Act then we have no power to grant a dispensation from audit.
The criteria for determining where a company may be eligible for an audit dispensation are:
The charitable company is eligible for audit exemption under the Companies Act 2006. To be eligible it should fulfil two of the three criteria for being a small company, income is less than £6.5m or less, fewer than 50 employees, assets are less than £3.26m. (Note that section 477 of the Companies act provides for the income and asset thresholds to be proportionately adjusted if the financial year is greater or less than 12 months.)
There is no requirement for audit in the Memorandum and Articles of Association.
The trustees have opted for audit exemption under the Companies Act and the members of the company have not required an audit.
Where the Company is newly established to take over the work and assets of a non company charity, that previously was not subject to an audit, the following additional criteria apply:
The trustees can demonstrate that the underlying income of the non-company charity that is gifting the assets was below £500,000 in its last year of operation which precedes the first year of the charitable company.
The charitable company that is receiving the assets is newly registered and the income for its first accounting year, excluding that element of its income that is made up of the gifted unrestricted funds transferred, is less than £500,000.
Provided all of the applicable criteria set out above are met then a dispensation can be given without accountancy advice. In all other instances seek advice from a Commission Accountant
In addition there may be regulatory or other consideration that would make a dispensation contrary to the interests of the charity. Accountancy advice will be required prior to a dispensation being granted in any of the following circumstances:
a) the non-company charity that is gifting/ transferring the assets is subject to a s.46 statutory inquiry or was subject to such a statutory inquiry in the year preceding the financial year;
b) the non-company charity that is gifting/ transferring the assets is in default with its filing obligations;
c) the new charitable company is also registered with the Office of the Scottish Charity Regulator (OSCR) and an audit will be required under Scottish charity law; or
d) there has been a significant fraud, loss or breakdown of internal financial controls that has, or could have, led to a loss of charitable funds in the financial year.
e) Where a dispensation is granted trustees should appoint an examiner who is a member of a body listed in section 145(4) of the Charities Act as qualified to undertake the examination of charities with income over £250,000 as this will reduce the risk inherent in the dispensation.
Trustees should also be informed that the independent examiner when making their report must disclose (Regulation 31(f)) that the examination has taken place instead of an audit, and state the date when the Commission dispensed with the requirements for audit under s.144(2) of the Act. Trustees should be reminded that they must also provide a statement on the balance sheet as required by section 475 of the Companies Act 2006.
Also see section 6 for further information on dispensations and charitable companies.
The initial transfer of assets to a CIO: dispensation for the new CIO
A CIO is an incorporated form of charity which is not a company and only has to register with the Charity Commission not Companies House. A CIO can enter into contracts in its own right and its trustees will normally have limited or no liability for the debts of the CIO.
Conversion of an unincorporated charity to a CIO
Where the trustees of an existing non-company charity wish to convert to a CIO, the assets of the existing charity will need to be transferred to the CIO. Where unrestricted income funds are transferred from an unincorporated to the successor CIO, these count as income and form part of the charity's gross income for threshold purposes. However, the transfer of special trusts (restricted income funds) and endowment does not count towards gross income. This is because we consider this to be a transfer of trusteeship rather than a gift from the non-company to the CIO.
The unrestricted income recognised as a result of the transfer of assets may result in the gross income of the new CIO exceeding the audit threshold in its first financial year. In these circumstances, provided the criteria listed below are met, we will grant a dispensation for an independent examination in place of an audit where the trustees request it.
Where the CIO is newly established to take over the work and assets of a non-company charity that previously was not subject to an audit, the following criteria apply:
There is no requirement for audit in the governing document of the CIO
The trustees can demonstrate that the underlying income of the non-company charity that is gifting the assets was below £1,000,000 in its last year of operation which preceded the first year of the CIO
The CIO that is receiving the assets is newly registered and the income for its first accounting year, excluding that element of its income that is made up of the gifted unrestricted funds transferred, is less than £1,000,000
Provided all of the applicable criteria set out above are met then a dispensation can be given without accountancy advice.
In all other instances seek advice from a Commission Accountant.
the non-company charity that is gifting/ transferring the assets is subject to a s.46 statutory inquiry or was subject to such a statutory inquiry in the year preceding the final year:
the non-company charity that is gifting/ transferring the assets is in default with its filing obligations: or
there has been a significant fraud, loss or breakdown of internal financial controls that has, or could have, led to a loss of charitable funds in the financial year.
where a dispensation is granted trustees should appoint an examiner who is a member of a body listed in section 145(4) of the Charities Act as qualified to undertake the examination of charities with income over £250,00 as this will reduce the risk inherent in the dispensation.
Trustees should also be informed that the independent examiner when making their report must disclose (Regulation 31(f)) that the examination has taken place instead of an audit, and state the date when the Commission dispensed with the requirement for audit under s.144(2) of the Act.
Conversion of a charitable company to a CIO
Until the Office for Civil Society makes regulations (see The Charitable Incorporated Organisations (Conversion) Regulations 2016: draft) for the direct conversion of a company to a CIO, you can only convert a charitable company to a CIO by registering a new CIO and transferring assets to it. You can then either close the original charitable company or keep it as a 'shell'.
Where unrestricted income funds are transferred from a charitable company to the successor CIO, these count as income and form part of the CIO's gross income for threshold purposes. However, the transfer of special trusts (restricted income funds) does not count towards gross income. This is because we consider this to be a transfer of trusteeship rather than a gift from the non-company charity to the CIO.
Where the CIO is newly established to take over the work and assets of a company that previously was not subject to an audit, the following criteria apply:
The trustees can demonstrate that the underlying income of the company that is gifting the assets was below £1,000,000 in its last year of operation which precedes the first year of the CIO
the company charity that is gifting/ transferring the assets is subject to a s.46 statutory inquiry or was subject to such a statutory inquiry in the year preceding the financial year;
the company charity that is gifting/ transferring the assets is in default with its filing obligations with the Charity Commission or Companies House. This applies whether or not the period for filing the accounts or reports has expired;
the company, or any of its directors, are in default of any requirement to send any other documents or information to the Charity Commission or Companies House; or
where a dispensation is granted, trustees should appoint an examiner who is a member of a body listed in section 145(4) of the Charities Act as qualified to undertake the examination of charities with income over £250,000 as this will reduce the risk inherent in the dispensation.
When considering whether to offer dispensation, consideration will be given to the exceptional circumstances outlined by the applicant. It should be noted that the receipt of a large grant or similar funding is of itself an insufficient reason to grant a dispensation for an independent examination to take place because we consider that the risks associated with the increased resources merit the higher degree of assurance provided by an audit.
Neither could the dispensation be given year after year to the same charity, simply because the trustees felt that their independent examination arrangements gave an assurance which was comparable to an audit.
Although it is difficult to lay down any hard and fast rules, the general principles to apply are based on demonstration by the charity that the circumstances are exceptional and not recurring and consideration by us and the trustees of the risks involved. Our approach is that the increase in audit thresholds has resulted in a more focussed targeting of the audit regime. We will not therefore agree dispensations which fall outside the situations described above unless there are truly exceptional circumstances. These are likely to be on a “one off” basis and we must be satisfied that the exceptional circumstances and the nature of the funds otherwise subject to audit are such that there is a reduced risk to the charity to justify a lower standard of external scrutiny.
Should applications for a dispensation arise due to external scrutiny requirements in the governing document then this would not be interpreted as creating exceptional circumstances but the trustees should instead be advised to consider removing the requirement for an audit from their governing document.
If uncertain as to whether the reason given by trustees demonstrates an exceptional circumstance, then advice should be taken from a Commission Accountant.
For financial years commencing on or after 1 April 2008 small charitable companies whose accounts for a financial year are not required to be audited in accordance with Part 16 of the Companies Act 2006 may still be subject to audit or independent examination under the provisions of the Charities Act.
We may provide dispensations under Regulation 34 of the Charities (Accounts and Reports) Regulations 2008 in relation to scrutiny requirements of s.144 of the Charities Act to small charitable companies on the same bases as set out in {section 5~#a5} above. However, we may not grant a dispensation for accounting periods commencing before 1 April 2008 or in relation to any audit duty imposed by the Companies Act 2006.
Where a dispensation request is received from a charitable company accountancy advice should be obtained to ensure no requirements arise for audit under Part 16 of the Companies Act 2006.
A charity may wish to alter its financial (accounting) year for many reasons, for example to coincide with the financial year of its parent charity, where two or more charities prepare combined accounts under a linking direction or to coincide with a subsidiary's financial year or to coincide with that of major public sector funders in order to economise on reporting costs.
Charitable companies are subject to company law and are therefore bound by the provisions of the Companies Act and we have no power to give consent to alter a financial year end. Non-company registered with us and excepted charities are permitted to alter their financial years in accordance with the Charities (Accounts and Reports) Regulations 2008 but in certain circumstances they are required to obtain our consent when altering their financial year.
A new financial year begins immediately after the old financial year has ended without a gap so ensuring that no transactions are missed and that all transactions are reported in a financial year. All charities can vary a new financial year by up to 7 days either side of the end date of the previous financial year without it counting as an alteration.
Charitable companies prepare their first accounts for a period of not less than 6 months and not more than 18 months to their accounting reference date. Normally each subsequent financial year is of 12 months duration (Companies Act 2006 section 391(5) and 391(6)). Thereafter charitable companies can shorten their financial years as often as they wish but can normally only extend their financial year to a maximum of 18 months once in any 5 year period (Companies Act 2006 section 392(3)). When considering whether gross income exceeds the Companies Act audit threshold, the income is pro rated to a 12 month period and then compared with the applicable threshold (section 477(3) Companies Act 2006).
Any change in the accounting reference date must be reported to Companies House and for further information Companies House guidance can be accessed via their website.
Non-company charities are governed by charity law. Part 8 of the Charities Act requires accounting records to be kept and for trustees to prepare a statement of accounts for each financial year in accordance with the Regulations.
Exempt charities are required to keep proper accounting records and prepare consecutive statements of accounts (s.136) but are not subject to the Regulations but an exempt charity's financial year is limited to a maximum length of 15 months.
Registered and excepted charities are subject to the Regulations and the Regulations require the first financial year to be of no less than 6 months to a maximum of 18 months (see Regulation 3 of The Charities (Accounts and Reports) Regulations 2008). Any subsequent financial year is normally of 12 months duration but where there are exceptional reasons the trustees may elect to shorten it to a minimum of 6 months or extend it to a maximum of 18 months.
Trustees require our consent if they seek to alter their financial year more than once in any 3 year period i.e. if the year is changed, the year following and the subsequent financial year must be of 12 months duration unless we consent to any further change. The trustees will need to make a case giving reasons the change is justified. When considering whether gross income exceeds the audit threshold, the income is that which is reported in the period however long or short it may be.
A charity may only alter its accounting reference date (shortening or lengthening the financial year) where the trustees are satisfied there are exceptional reasons. Where our consent is required we should normally be advised in advance and before the accounts have been signed off by the trustees and where applicable submitted for external scrutiny. Where consent is given ensure that First Contact are advised so that the timing of the issuing of the Annual Return can be adjusted. See OG15 L1 and OG15 L2 for model wording in relation to a request to change the financial year end.
Whilst a request will normally be approved, the advice of a Commission accountant should be taken when considering each request to identify if any risk factors are present which would lead us to refuse to approve the request. Risk factors which may give grounds for refusing the request include:
a) the charity is subject to a s.46 statutory inquiry;
b) the charity has previously shortened its financial year, and the history of the filed accounts are such that it is likely that the motive for the repeated shortening of the financial year is to avoid audit or external scrutiny;
c) no exceptional reasons have been provided; and
d) the exceptional reasons given are not considered persuasive.
Audit dispensations may be granted in accordance with our Authorised Officer policy by letter/email. (See OG 702.) However in those few cases where accountancy advice is required this advice should be recorded as a file note.
There is no legal requirement for us to log centrally the granting of an audit dispensation. The responsibility for complying with the audit requirements for their charity lies with the trustees. For the purposes of our records, it will be sufficient to record the granting of a dispensation as an action item on the case file recorded in CRM.