The
Committee consisted of the following
Members:
Blackman,
Liz
(Vice-Chamberlain of Her Majesty's
Household)
Borrow,
Mr. David S.
(South Ribble)
(Lab)
Clark,
Greg
(Tunbridge Wells)
(Con)
Duddridge,
James
(Rochford and Southend, East)
(Con)
Ennis,
Jeff
(Barnsley, East and Mexborough)
(Lab)
Hope,
Phil
(Parliamentary Secretary, Cabinet
Office)
Horwood,
Martin
(Cheltenham)
(LD)
Kidney,
Mr. David
(Stafford)
(Lab)
Kramer,
Susan
(Richmond Park)
(LD)
MacShane,
Mr. Denis
(Rotherham)
(Lab)
Meale,
Mr. Alan
(Mansfield)
(Lab)
Penrose,
John
(Weston-super-Mare)
(Con)
Raynsford,
Mr. Nick
(Greenwich and Woolwich)
(Lab)
Smith,
Ms Angela C.
(Sheffield, Hillsborough)
(Lab)
Snelgrove,
Anne
(South Swindon)
(Lab)
Walker,
Mr. Charles
(Broxbourne)
(Con)
Yeo,
Mr. Tim
(South Suffolk)
(Con)
Glenn McKee, Committee
Clerk
attended the
Committee
Second
Delegated Legislation
Committee
Monday
25 February
2008
[David
Taylor
in the
Chair]
Draft Charities Act 2006 (Charitable Companies Audit and Group Accounts Provisions) Order 2008
4.30
pm
The
Parliamentary Secretary, Cabinet Office (Phil Hope):
I beg
to move,
That the
Committee has considered the draft Charities Act 2006 (Charitable
Companies Audit and Group Accounts Provisions) Order
2008.
What a pleasure
it is to be under your tutelage and chairmanship for the first time,
Mr. Taylor. I have no doubt that it will be a co-operative
venture as we endeavour to work our way to a conclusion. I shall
briefly explain the purpose of the order, which I hope to persuade the
Committee to support, and set out the wider context of how the order is
intended to interact with the implementation of provisions of the
Companies Act 2006 and the Charities Act
2006.
The world of
charity accounts and their scrutiny can be quite technical, but I shall
endeavour to keep my explanations straightforward. Although the process
for making these changes is complex, the outcome will be a much simpler
regime that is very much in the interests of charities. The order
amends the Charities Act 1993 to achieve two main policy objectives.
First, it will extend the charity law accounts scrutiny provisions to
the accounts of charities that are companies where they are not
required to be scrutinised as a matter of company law. Secondly, it
will extend the requirement to prepare group accounts under charity law
to charitable companies that are not required to produce group accounts
under company law.
I
will go through that in more detail. First, under the current law,
there are different legal requirements for the scrutiny of the accounts
of those charities that are companies and those that are not. There is
a charity law accounts scrutiny regime for non-company charities, and a
company law accounts scrutiny regime for charities that are companies.
There are several differences between those two regimes, and there have
long been calls from the sector for them to be aligned.
The case for change was debated
and made during the passage of both the Companies Act 2006 and the
Charities Act 2006, and I would like to acknowledge the important part
played by Lord Hodgson of Astley Abbotts during those debates in
another place in advocating a unified accounts scrutiny regime for
those charitieswhether companies or notthat are not
required to have a full audit. We were receptive to the idea and sought
the views of charity sector umbrella groups and relevant professional
bodies, which also warmly welcomed the proposal.
Changes were
made to what is now section 1175 of and schedule 9 to the Companies Act
2006, the effect of which will be to remove the company law
accounts
scrutiny requirements that apply to charitable companies below the audit
threshold of £5.6 million. It was decided that an enabling power
provided in what is now section 77 of the Charities Act 2006
would deal with the appropriate changes required to charity law
following the removal of small charitable companies from the company
law accounts scrutiny regime. The draft order has been made in exercise
of that power.
An analysis by the Charity
Commission found that there are just over 14,000 registered charities
in company form that would be affected by that change. For the
majority, replacing the company law reporting accountant regime with
the more appropriate charity law independent examination regime will
result in a slight cost saving. For some charitable
companiesthose with an annual income between £10,000 and
£90,000it will be a new requirement. While that might
seem like a significant new burden on those charities, analysis of
submitted accounts by the charity commissioners found that 85 per cent.
of charitable companies in that income bracket already opt for
independent accounts scrutiny.
I should add that we are
consulting jointly with the Charity Commission on a
wider package of deregulatory changes to charity thresholds. One
recommended change is to raise the threshold above which independent
examination of accounts is required from £10,000 to
£25,000. I do not want to presuppose the responses that we
receive to that recommendation, but it demonstrates to the Committee
that we are serious about proportionate regulation and alive to the
concerns of small charities on cutting red tape, balanced against the
need for
accountability.
Secondly,
the order provides for the preparation and scrutiny
of the group accounts of charities that are
companies, where there is no company law requirement for those to be
prepared. As you will know, Mr. Taylor, many charities
undertake activities to further their charitable objectives and to
raise funds through subsidiary undertakings. Such structures are often
adopted to mitigate risk or to enable charities to undertake trading
activities tax efficiently. The scale of those subsidiary activities
can be significant and in some cases exceed the scale of the parent
charity. Therefore, the accounts of the parent charity provide only a
partial picture of the scale and range of the activities and resources
controlled by a charity. They might not show the financial health of
the group as a
whole.
There is no
legal requirement for the preparation and scrutiny of group accounts by
the vast majority of charities. However, the preparation of group
accounts has long been recognised as best practice by charity-headed
groups. That is reflected in the charities statement of recommended
practiceSORPwhich recommends the preparation of group
accounts by auditable charities where that would present a
true and fair view of the group. Analysis by the Charity
Commission of a sample of 70 sets of submitted accounts, where group
accounts would be expected as a matter of best practice, found that in
all but one case group accounts were prepared, albeit on a
non-statutory
basis.
Mr.
Charles Walker (Broxbourne) (Con): To
contextualise the debate, will the Minister give examples of one or two
charities that will be covered by the group accounts
requirement?
Phil
Hope:
An example would be any large charity with a trading
body as a subsidiary that goes out into the market to raise money
through fundraising activities, because it would run an account under
the trading arm to raise money and pursue its charitable objectives.
Many large charities, such as Oxfam, which have trading arms, will
benefit from this
change.
From looking
at 70 sets of audited accounts, the Charity Commission found that in
all but one case group accounts, which pull together and publicly show
what is being done, were being prepared on a non-statutory basis
because of current law. It is reassuring to see that group accounts are
already being prepared as a matter of best practice and the Charities
Act 2006 will place that on a statutory footing. That has created a
legal requirement for the preparation and scrutiny of group accounts by
a non-company charity that heads a group structure over a certain
financial threshold. The order will extend those provisions to groups
headed by a charitable company, where there is no company law
requirement for the preparation and scrutiny of group
accounts.
The detail
of the requirements for the preparation and scrutiny of group accounts
will be set out in charities accounts and reports regulations that will
be made if Parliament approves the order. Last year, the Office of the
Third Sector carried out a public consultation on the order and the
proposed regulations. Fifteen of the respondents commented on the
proposals in the draft order, with none opposing the policy objective
of unifying the accounts scrutiny requirements for small non-company
and company charities. The placing of group accounts on a statutory
footing was also generally
welcomed.
If
Parliament approves the order, we will work closely with the Department
for Business, Enterprise and Regulatory Reform with the aim of
commencing the relevant provisions of the Companies Act 2006 and the
Charities Act 2006 to take effect for charities in the financial year
beginning on or after 1 April 2008. That will allow charities to
benefit from the changes as soon as
possible.
I commend
the changes to the Committee and hope that it will approve the order,
which will simplify the sometimes complex, technical landscape of
accounts preparation and scrutiny for charities. The order is well
supported by the sector and its professional
advisers.
4.39
pm
Greg
Clark (Tunbridge Wells) (Con): It is a pleasure for me,
too, to serve under your chairmanship for the first time,
Mr.
Taylor.
I start by
declaring an interest, in that my wife is a chartered accountant and,
therefore, could be affected by some of the provisions, although she
does not practice in the area of charities. I am a great believer in
simplifying the tax regime. My wife tends to wince when I talk of
simplifying it, as her income, at least partly, depends on
it.
It is also a
pleasure to debate with the Minister in Committee for the first time.
As we were both appointed after the passage of the Charities Act 2006,
we have not had the chance to spend much time in the Committee. I do
not know whether he has more statutory instruments in the pipeline,
but
Greg
Clark:
The Minister hopes not. That puts an end to the
matter.
The sector has
broadly welcomed the provisions, as the Minister said. Indeed, he was
generous in paying tribute to my noble Friend Lord Hodgson of Astley
Abbotts, who drove the thinking on the matter when the Charities Bill
was advancing through its various stages of consideration in the House
of Lords.
As the
Minister also pointed out, the proposed legislation has a number of
sensible aspects, of which there are two in relation to the audit
requirements: charitable companies with a turnover between
£90,000 and £500,000 will need independent examination
rather than the report of a reporting accountant. One of my questions
relates to the fact that there is in the explanatory notes a suggestion
that that method will be less costly than the current regime. I have
received briefing from people in the sector suggesting that the
independent examination route might be between 20 and 25 per cent. more
costly than the report of a reporting accountant, so the Minister might
want to comment on the source of that
suggestion.
The second
major aspect of the debate is to bring into scrutiny the charities
whose turnover is between £10,000 and £90,000 that
currently are not obliged to have external scrutiny of their accounts.
They will need independent examiners reports. Therefore, there
will be more costs for the charities
concerned.
We need to
consider the balance between two powerful forces. On the one hand, the
income of charities is destined for good causes and it is important
that as much as possible of that income goes to them. Whatever we think
of the virtues of chartered accountantsparticularly with my
family interestsI do not believe that they represent the good
causes that people choose to give money to charities
for.
On the other
hand, the money that charities take from the public is taken in trust
and their reputation as good stewards of that money is extremely
important. Also, increasing sums of public money go to charities, so it
is important that there is adequate scrutiny in relation to that public
money. We must strike the balance between avoiding bureaucratic costs
and burdens on charities and guaranteeing public
trust.
The proposed
regulations make clear the consensus throughout the sector that the
level of materiality in charities is lower than that in the commercial
world, and should be so. Indeed, although the order quite rightly
states that the materiality test is subject to individual
circumstances, it has been put to me that £60,000 of expenditure
in the commercial world has a broad materiality equivalent of about
£10,000 in the charities fielda 1:6 ratio. We need to
reflect the increased and special importance of trust in the charities
world. The legislation seeks to strike a balance consistent with
that.
I have some
specific questions for the Minister on how the order has been brought
forward. First, the Minister mentioned the ongoing joint consultation
on thresholds between the Office of the Third Sector and the Charity
Commission, including those for external examination of charities
accounts. The consultation closes on 31 March. It is a great shame that
it could
not have begun and finished earlier, so that its provisions could have
dovetailed more neatly with this clarification and
development.
As it is,
there will be several step changes in the external
assessment arrangements affecting charities in successive years, which
seems undesirable. For example, if the order is agreed, a charitable
company with a turnover of £20,000 a year with a year-end of
31 December will not be subject to required scrutiny of its
accounts in the year ending 31 December 2008, although it will be
subject to independent examination in the financial year ending 31
December 2009. However, if the recommendation of the threshold
consultationto increase the threshold to
£25,000is adopted, the charitys accounts will
not be subject to scrutiny the following year. To go from no scrutiny
to an independent examiners report and back to no scrutiny in
successive years will clearly involve the charity in learning and
unlearning, which seems rather unnecessary. If only the further
consultation had been done
earlier.
Some of the
confusion that occurred when the audit threshold was increased and
implementation of the different requirements together was delayed is
being repeated. A charitable company with a turnover of £300,000
and a year end of 31 December would have been subject to a full audit
requirement last year. Assuming that this provision is agreed, in two
years it will be subject to an independent examiners report,
and in the intervening year to a reporting accountants
report.
Will the
Minister say why the consultation on the thresholds could not have
begun and ended earlier, so that the provisions might be made at the
same time? Is it true that this reflects difficulties in implementing
various aspects of the Charities Act 2006? I have been told by a number
of people in the sector that things seem to be running between three
and six months late. It would be useful to know whether that is the
case.
The
regulatory impact assessment, sadly, was not attached
to the order and the explanatory memorandum, but had to be obtained
separately. It makes the case, as the Minister said, that charities
being brought into external examination for the first time will incur a
cost for that. It also estimates the average cost of each independent
examination at £213. According to the RIA, there are 6,234
companies with an income within that band, which implies a total cost
of £1.3 million. However, the RIA puts the total at much
lessat £199,155because a business as
usual adjustment is made, on the assumption that, as the
Minister pointed out, 85 per cent. of the affected charitable companies
have a form of independent accounts scrutiny
anyway.
I
put it to the Minister that the current scrutiny
might not be up to the standard required under the order. Is there
strict comparability between the current and the proposed scrutiny? Can
the Minister be certain that what is, in effect, an 85 per cent.
disregard is
rigorous?
In that
context, the assumed cost of the independent examination, at
£213, seems very low, according to the
Association of Charity Independent Examiners, which, going by its
experience of conducting such examinations, puts the typical cost at
between £600 and £1,000. Is the assessment in the RIA
strictly accurate?
Comparing the assessment of the
orders regulatory impact with the prospective impact of the
consultation on thresholds, there is a strange lack of read-across. An
85 per cent. discount is applied to todays orderin
other words, it is assumed that 85 per cent. of the cost will be
avoidedbut the impact assessment for the financial threshold,
specifically on the proposed threshold increase for the external
scrutiny of accounts to £25,000,
says:
The
savings are based on each charity saving the cost of an Independent
Examination.
There is no
direct equivalent of the statement that 85 per cent. will,
in this case, avoid the increase in costs, or, in that case, save
it.
It is important to
be joined up and consistent. If 85 per cent. of charitable
companies obtain such an independent assessment anyway, and so the
regulatory impact is reduced, surely it should be explicit in the RIA
for the proposed change to the threshold that any savings claimed for
thissavings of £1.2 million are claimedare on
the same basis. It could be that that assumption is made, but not made
explicit; it is important that such assumptions are made
explicit.
I would like
the Minister to respond to two further brief points.
First, what plans are in place to communicate and promulgate the new
requirements to charities? Does that task fall to the Office of the
Third Sector or the Charity Commission? I assume that there has to be
some communication, because, after all, we are dealing with charitable
companies that have not had to have independent examination of their
accounts to date. Therefore, they will need not only to be told that
they have to do it, but some guidance on how to do it. It will not be
sufficient simply to publish the new requirement, because I am certain
that they will have questions on how they may engage satisfactorily
with
it.
Whatever
arrangements the Minister has in mind, a resource needs to be included
for charities to ask questions and have them answered intelligently. I
would be interested to know whether that resource will be found in the
Charity Commission or in his office, and how much money has been
allocated to pay for that communication
exercise.
Finally, in
response to the consultation, the Office of the Third Sector promises
to make available, prior to the commencement of the order, a
consolidated version of part 6 of the Charities Act 1993 to show the
effects of the changes. As the Minister implied, the proposed
regulations are very technical, not to say tortuous. We are wading
through them today, but it would be of great benefit to everyone in the
sector if that consolidated version were
available.
If the
order is passed today, it will take effect quite soon, so I would be
grateful if the Minister told me exactly when and how that consolidated
measure will be published. Subject to that, I reflect the broad
interest in and support for the measure that the sector has
shown.
4.53
pm
Susan
Kramer (Richmond Park) (LD): I suppose that I am the
newest of the newcomers to this brief. I have had the privilege,
Mr. Taylor, of serving under your chairmanship in different
Committees when
wearing other hats, and I thank you for the opportunity to speak
today.
I shall try to
be brief. In general, the order makes sense. It seems only appropriate
that there should be a level playing field for charities in relation to
audit and scrutiny, no matter what their organisational structure, and
overall we support all the various measures in the
order.
Like the hon.
Member for Tunbridge Wells, we have been somewhat concerned about the
mismatch in dates and the different instructions that will essentially
be going to the same charities. Is there a way to achieve some
streamlining of the thought processes when dealing with charities and
their housekeeping? Charities are under a fair amount of pressure
anyway, trying to cope with their various responsibilities. We all want
their attention to be on their work, rather than on trying to deal with
different types of paperwork.
I am pleased that there is now
some formal mechanism for dealing with those charitieseven
though they are not great in numberthat fall within the
£10,000 to £90,000 benchmark and have a company structure
that requires them to have independent scrutiny of some sort. We are
all aware that within our own constituencies, from time to time,
although most charities large and small are extremely well run by
dedicated people, it is often among the small charities that the
trustees and people who participate have the least expertise, with few
opportunities arising for training. That is where fraud or
mismanagement can occur, so some sort of independent scrutiny almost
seems more important for some of the smaller groups than for the larger
ones, which have more of a natural scrutiny team to undertake oversight
of their activities and
accounts.
We are glad
that this group has been brought under the umbrella. The 85 per cent.
that have already chosen voluntarily to have independent scrutiny will
typically be the best and most professional of that set, so bringing in
the remaining 15 per cent. is probably useful. I fully recognise that
work is going on that may raise the threshold to £25,000, but we
are concerned that if that happens there should be ongoing monitoring.
As I say, it is often in the smallest groups that mismanagement and
fraud can take place, often to great distress within the
community.
To echo the
hon. Member for Tunbridge Wells on communication, when these small
company charities get information, can it please be in plain English?
The language that most charities have to deal with is often so complex
that they cannot quite work out what was meant to happen and what is
different from last time. This seems an excellent opportunity to get
into some good habits for such communication in future. Will the
Minister say what the sanction is for charities that miss their
deadlines or fail to take the appropriate steps, and give us some
further insight into that regime? Other than that, we are pleased to
support the
order.
4.57
pm
Mr.
Charles Walker (Broxbourne) (Con): I shall be brief as I
know that people want to get on. It is always nice to see the Minister;
he came to speak to the Public Administration Committee and gave a
sterling performance, and we are always happy to see him
there.
On the £10,000 to
£90,000 bracket of charities that will fall into the ambit of
the order, I am in favour of minimising the regulatory burden
on small organisations. The Minister said that the reporting threshold
will be looked at and he mentioned the figure of £25,000. I am
not sure whether that is an indicative figure that is being considered
or whether it might end up being more than £25,000. I would like
it to be above £25,000. I take comfort from the fact that some
of the smallest charities may be relieved of the reporting burden,
although, as the Minister rightly pointed out, manyup to 85 per
cent.will want a voluntary report anyway, and they are to be
congratulated on choosing that path.
I am concerned that the
charitable landscape is changing. Some large third-sector
organisations, many of which are charities, are gaining more and more
of their money from central Government and local government. Indeed, as
the Minister knows, I am concerned about the fact that many large
charities, despite the excellent work that they do, can gain upwards of
90 or 95 per cent. of their income from central Government and local
government. In some cases, that puts smaller charities at a
disadvantage, particularly when competing for localised contracts. As
the hon. Member for Richmond Park said, not all small local charities
are shining examples of good practice, but I know that many in my
constituency and many in Hertfordshire are outstanding. On occasion,
however, they have been squeezed out by some larger
organisations.
That
brings me to the point that I want to make: it is important that people
in this country, who have a fantastically generous track record of
giving to charities, are empowered to make informed decisions on where
their money goes. As I have said, many large charities derive a
significant proportion of their turnover from central Government and
local government. It is important for people to be able to look at a
source of information that enables them to give in an informed way and
to ensure that smaller charities, perhaps those struggling for funding,
are at the forefront, particularly where small donations are
given by private individuals. They can definitely put the money
to better use than can some of the larger charities that get
significant sums from the Government.
It is important for us to
consider how individuals can access both consolidated charitable
accounts and the individual group accounts of the large organisations.
If we are to gather the information, it would be helpful for us to make
it available as widely as possible, or at least make it accessible to
those who are minded to seek it out.
Finally, I would be interested
to know what organisations are eligible or qualified to audit the
accounts of small charities. I am not an accountant, but I do not
imagine that large auditing firms will want to get involved in such
matters. Therefore, I shall be interested to know what types of
individual or organisation will be involved in auditing the accounts of
small charities, bearing it in mind that a cost is attached to
auditing. While we want that to be done professionally, we must not
create a situation in which significant professional charges
are levied on organisations with small
turnovers.
5.1
pm
Phil
Hope:
A number of detailed and technical questions have
been asked, and I shall endeavour to address them all. Clearly, the
pillow talk in the household of the hon. Member for Tunbridge Wells has
been very productive, which is why he has been able to raise those
issues. I shall try to deal with each in
turn.
The hon.
Gentleman mentioned the impact of further changes, which will involve
raising the threshold for charities that need to have their accounts
examined. Why are we doing that now and what is the relationship
between these changes and those that might be coming down the line? The
need for the changes was argued comprehensively during the passage of
the Charities Bill and the Companies Bill. The purpose of the order is
to create a level playing field for the external scrutiny of charities,
however they were constituted.
Most
charities have a financial year-end of 31 March. If we introduce the
changes on 1 April this year, we will enable the maximum number of
charities to benefit at an early stage. It would be wrong to delay the
introduction of these important provisions, which the sector clearly
wantsthe hon. Gentleman agrees with mebeyond
1 April, because that would mean many charities having to
wait for a further year, until 31 March 2010. That is not
acceptable.
I have in
front of me a copy of the document relating to the threshold review. It
is important and it fulfils a promise to look at all the thresholds in
the legislation. The public consultation runs until 31 March. I am
mindful of the fact that some charities will fall within the scope of
the order for one year and then fall out of it if the further
consultation takes place and recommends raising the threshold from
£10,000 to £25,000. It comes down to a balance of
judgment; we want charities that would benefit a lot from the new
regulations to do so. We are aware that if the consultation shows that
it would be wise to raise the threshold to £25,000, that might
have an effect. However, we should remember that 85 per cent. of the
charities that would be affected by the raised threshold already
produce independent accounts. Therefore, of the charities that would be
affectedthose in the bracket between £10,000 and
£25,000 that would be required under the regulations to produce
accounts for examination and then, potentially, out of the need to
produce them85 per cent. would continue to produce independent
accounts simply because that is the good practice in which a charity
might be expected to engage. Therefore, relatively few would be
affected.
Susan
Kramer:
I find that slightly curious. Perhaps I have
misread the documents, but I took the figure of 85 per cent.
to be a percentage of the whole sector, assuming that most of the 15
per cent. that do not use independent scrutiny probably fall into the
small end. Am I wrong? Is the figure evenly
spread?
Phil
Hope:
I will give the figures to the Committee. There are
6,234 company charities with an income of between £10,000 and
£90,000. Of those, figures suggest that 85 per cent.some
5,300already undergo some form of independent accounts scrutiny
as a matter of
best practice. The new requirement for those with an income of
£10,000 to £90,000 will apply to some 934 company
charities, out of the thousands that exist.
Greg
Clark:
Will the Minister give
way?
Phil
Hope:
I want to address the point about those that
might be affected subsequently if we raise the
threshold from £10,000 to £25,000. Some 1,800 company
charities have an income of between £10,000 and £25,000.
If the independent examination threshold is raised to £25,000 as
we are recommendingalthough we do not want to pre-empt the
consultationsome 4,434 charities will be affected. Of those,
3,769 are already likely to have voluntary scrutiny arrangements in
place.
The sum total
of new small charities with an income of between £10,000 and
£25,000 that would be affected by the change of thresholds were
we to introduce it would be 665. The data apply to those with incomes
of between £10,000 and £90,000. We do not have data with
regard to the 85 per cent. being evenly spread across the
£10,000 to the £90,000 threshold and what proportion of
that sits within the £10,000 to £25,000 bracket. However,
I can give that information to the hon. Lady, which, I think, clarifies
the numbers that might be affected.
Greg
Clark:
The point of my remarks was not to suggest that we
delay the recommendations further. I am merely asking this question: as
both measuresthe threshold review and todays
orderarise from the Charities Act 2006, why was it not possible
for them to emerge simultaneously through consultation, so that we
might address the new thresholds together? It is sadly ironic that an
exercise that was supposed to clear away confusion and undergrowth has,
due to being staggered, created the potential for a certain amount of
confusion. Why was it not possible to implement both measures
together?
Phil
Hope:
We undertake consultations very seriously. The first
set of consultationsthose to try to unify the accounting
system, which have support across the sectortook place as a
matter of urgency because we recognised the real benefits that would
accrue to many organisations and charities. The wider consultation on
financial thresholds affects not only this set of thresholds; it is a
broader and more comprehensive consultation on financial thresholds
generally and covers a range of other issues. It would have been wrong
to delay this consultationit represents a relatively small
although technical pointuntil the larger, more comprehensive
consultation following the Act, which we will complete this
March.
We rightly
decidedcharities wanted us to do thisto get on with
achieving the benefits and bringing them into effect this financial
year, which means by 1 April 2008, so that those charities
could benefit from the changes that we are making. As the hon. Member
for Tunbridge Wells has rightly pointed out, that has created one
moment in which it is possible that organisations might have to
introduce independent examination of accounts under the order, and then
perhaps be lifted out of the requirement to do that. However, only 665
of the 190,000 charities are affected
in that way, and many of those will, through good accounting, want to
see the benefits of independent scrutiny of their accounts in the first
place. I hope that this will raise the standards and quality of
accounting in a proportionate and balanced way. The hon. Member for
Richmond Park is right to say that we must be proportionate and
balanced, and that is what we are trying to
achieve.
Greg
Clark:
It is still a matter of concern that the Charities
Act 2006 received Royal Assent in November 2006. It is now February
2008that is a long time to get two consultation documents. This
one is the more technical; the threshold consultation is pretty
straightforward in the choices that it
operates.
It is not as
if the consultations were produced in great haste within a couple of
months of the end of consideration of the Charities Act. Given the time
that it took to consider that legislation, surely it should have been
possible for a Department whose very purpose is to minimise overlap and
confusion in government to present a simpler face to charities, rather
than offering this staggered consultation with costs for charities.
That
seems
The
Chairman:
Order. The intervention is getting too long.
Speeches should not usually be made towards the end of the
sitting.
Phil
Hope:
The hon. Gentleman makes the same point that he has
made before. I have answered him and have explained the outcome and the
impact. I disagree with him about whether the order will cause
difficulties out there in the charity worldfar from it. It will
provide significant financial benefits and a lot of simplicity and
clarity. It will unify what is currently covered by two Acts: the
Charities Act 2006 and the Companies Act 2006. Because we have
consulted, I know that the sector is eagerly awaiting the passing of
the order so that it can get the
benefits.
I have
agreed with the hon. Gentleman that he has made a fair point that the
measure will have the impact he described, although on a very small
group of charities. However, I disagree that that is such a big event
that we need to make the point repeatedly in Committee. We will have to
agree to disagree. I disagree with him on the basis that it is better
to get on with this measure and get the benefits of it into the
charitable world because that is what the charitable world
wants.
The hon.
Gentleman raised a number of points that I would like to address. The
figure of £213 is the estimated saving for some organisations
and the cost for others of this change to how accounts are examined.
That was derived as the cost of independent examination by the
administrative burdens reduction programme, which uses a robust and
consistent methodology to measure the cost of all Government regulation
on businesses and
charities.
The hon.
Gentleman is right to suggest that the figure of £213 seems low.
I am sure that any of us who has used an accountant would like a piece
of that action. The figure can be explained because it takes into
account volunteer independent examiners as well as
professionally qualified examiners. Volunteer independent examiners
have been costed, but at a lower
rate than professional. He is right that the cost would rise to between
£400 and £500 were a qualified person to undertake an
examination on a commercial basis. We can argue about the difference
using anecdotal evidence. However, the point is that, in the charitable
world, on many occasions accounts are handled and audited by people on
the committee or by an outsider pro bono as part of their
organisations contribution to the charity. Hence, the
reasonable figure of £213 arrived at through
the administrative burdens reduction
programme.
Mr.
Walker:
I am not meaning to be awkward, but the
Minister said that someone on the committee might have audited the
accounts. Would it not be a conflict of interest if someone on the
committee of a charity audited its own
accounts?
Phil
Hope:
Yes, the hon. Gentleman is right. That was a slip. I
wanted to say afterwards that I meant an external auditor. Many lawyers
or auditors who work for banks and building societies sit as treasurer
on one small organisation in their area and audit the accounts of
another. That is fairly common practice in my constituency, where local
accountants provide that service pro bono and do many other good
works.
I shall move on
to the question of
communication.
Mr.
Walker:
I am really sorry, Minister, but this is an
interesting point. If a charity is having its accounts audited, how
close can the relationship be between the person auditing the accounts
and the charity? For example, I think that it would be perfectly
reasonable for a member of or subscriber to a charity to audit the
charitys accounts, particularly if it was a charity with many
thousands of members. However, can he envisage a member of a charity
being excludedin any way, shape, size or formfrom
auditing the accounts pro
bono?
Phil
Hope:
No, I cannot envisage such
circumstances. Under the order, people empowered to undertake such
independent examinations must be members of certain recognised
organisations. Article 2(4)(a) to (j) lists professional bodies that an
accountant conducting an independent examination has to be a member of.
I draw the attention of hon. Members to that provision: assuming that
the accountants are suitably qualified members of those organisations,
they can conduct an examination. Inspiration arrives so I can also say
that any accountants judgment on the accounts will, of course,
be completely independent because they will be covered by professional
standards as members of those organisations. All accountants will be
free of any financial interest in the charity concerned. I am sure that
that will be the case in all
circumstances.
Turning
to other points raised by hon. Members, I shall first address
communicating the changes to charities and to a wider audience. We will
ensure that the legislation is widely communicated. Unsurprisingly, the
order will mainly be of interest to some technical experts, charity
finance directors, professional advisers and umbrella bodies. We have a
positive expectation that those bodies are ready to go, as it were,
with describing the changes, and we expect to see articles
in various charity sector magazines and journals. Professional bodies
will also be
briefed.
Most of that
activity will not be required until later in the year, because accounts
are done one year behind, up to 31 March. We and the Charity Commission
believe that we will have plenty of time to bring the sector and its
advisers, such as the accountancy bodies, fully up to speed on the
requirements in the new
measures.
I confirm to
the hon. Member for Richmond Park that the guidance will be in plain
English. There is a good example of that in our plain language guide to
the Charities Act for trustees. We have been there and we know the
need. We will ensure that it is
met.
Greg
Clark:
The Minister has reassured us that there will be
adequate plain English briefing available, but will there be
plain-speaking people able to answer the charities questions?
Will those people be part of his Department or the Charity
Commission?
Phil
Hope:
I have every confidence that the Charity Commission,
my Department and, no doubt, the hon. Gentleman, in whatever personal
relations he has with people in the accountancy profession, can provide
a clear and eloquent description in plain English. The specialist
press, which most organisations will turn to, will carry articles and
explanations spelling things out. I hope that that deals with the
matter.
The hon.
Gentleman mentioned the need for a consolidating version of part 6 of
the Charities Act 1993. An informal consolidation will be going on to
the Office of the Third Sector website in the next week, so look out
for that exciting opportunity. If people are still concerned, thinking,
I do not understand this: I have read the article, but what
does it all mean?, they will be able to phone the Charity
Commission. There will be a direct helpline for charities and
accountants to answer such
questions.
Phil
Hope:
Even those from the hon.
Gentleman.
Mr.
Walker:
I am running out of questions. Has that phone line
been costed by the Charity Commission? Will it create additional
expense, and, if so, how will that be
met?
Phil
Hope:
The Charity Commission receives a regular and
sufficient grant from the Government to carry out its duties in
implementing the Charities Act, and we have made it clear that it will
be able to do that over the next three
years.
The Government
have made it clear that they are funding many organisations to develop
a thriving third sector, and part of that environment is an effective
and efficient Charity Commission. I am delighted to say that that is
exactly what we have and that we will be pressing the organisation to
remain effective and efficient. There will not be additional costs. The
commission provides such services as a matter of
course. If anyone wishes to phone it on a range of matters, an effective
helpline is already in
place.
The hon. Member
for Richmond Park asked me a specific question about sanctions for
failure to submit. Unsurprisingly, we would regard prosecution for
failure to submit as a last resort. The Charity Commission will try to
encourage early submission of accounts and there will be activity to
press the trustees of the charity to comply as part of their statutory
duty. The Charity Commission has named and shamed charities that have
failed to do this. These various thresholds of sanction, if I can call
them that, must come into play first, but prosecution is there as a
last resort.
The hon.
Member for Broxbourne raised one or two other detailed issues; I hope
that I have dealt with all his questions about thresholds. He is right
to say that there is more public sector resource going into the
charitable world. Indeed, in 1997, when his party was last in office,
public sector finances to support the third sector were around
£5 billion. I am delighted to tell the Committee that that
figure is now double that: £10 billion of public money in a
variety of forms, grants, contracts and so on is now supporting the
work of the third
sector.
That is not
something to be ashamed of. It is something we celebrate, because we
strongly support the role of the third sector in being a champion for
the people on the margins, being a voice for the voiceless and rightly
campaigning rigorously for the needs of those who are most
marginalised. We also strongly support the role that it can play, if it
chooses to do so, in helping to deliver public services. It has the
ability to reach out to particular groups that might otherwise not have
their needs met.
I
hope that, like me, the hon. Gentleman celebrates the fact that there
is more resource going through. He mentioned in particular the
worry about small organisations being squeezed out by large. It is good
that more large third-sector organisations are competing for and
winning contracts to deliver services, but what about those small,
front-line community groups that I dare say he and I regularly meet on
constituency Fridays? I am delighted to tell him that the Government
have announced a new funding programme called grassroots
grants.
This fund is
worth £130 million. It is divided between flow-through funding
and endowment funding. Locally, it will be handled by the Community
Development Foundation, which will appoint local funding bodies in each
of our areas. Those bodies will give out grants to local organisations,
based on some flow-through money that they will be given, but will also
create an endowment in each area. An endowment is money that is not
spent, but the interest is spent to provide a regular, sustainable
income stream.
We
have seen this work in some areas and we would like to see it work in
every area, so that endowment funds provide those relatively small
amounts of money that small, front-line organisations need to pay for
running costs or core costs to deliver what they are trying to achieve.
That will roll out this year. We expect that the body that will provide
those funds in each area will be named in the summer. I would like
those grants
to be issued in the autumn, all around the country. This is a major
contribution to front-line community groups, which will strongly
benefit.
Mr.
Walker:
I welcome what the Minister says. Perhaps my
language was a little clumsy when I said that small charities perhaps
put private donations to better use than larger ones that derive most
of their funding from central Government and local government. I should
have said that for small local charities, personal donations have a
greater impact on their operations, because they mean more to
them.
On grassroots
grants, local charities such as the Rape Crisis Network, which serves
my constituency and county, are struggling for money from the local
authorities, both Hertfordshire and Broxbourne. Is this the type of
money
The
Chairman:
Order. Grassroots grants lie outside the
order.
Phil
Hope:
I shall abide by your stricture, Mr.
Taylor, and not be drawn into a wider debate on funding of the
voluntary third
sector.
In broad
terms, the hon. Gentleman is right to suggest that encouraging more
people to give personal donations to local community groups and
voluntary organisations is something that people might want to do.
Individual Members can even put on their website something called
everyclick.com, which gives money to a charity of their choice with
every click. Everybody can find new and innovative ways to ensure that
individual donations to charities go
on.
The
Chairman:
Order. The stricture in relation to the hon.
Member for applies equally to the
Minister.
Phil
Hope:
I apologise, Mr. Taylor, for being drawn
into a wider debate on funding for the third sector, but I have tried
to deal with all the points that hon. Members raised. Although the
measures in the order are technically complex, they are designed to
provide simplicity for charities and financial benefit to
many of them. I hope that, following those words, the Committee
will approve the order.
5.25
pm
Greg
Clark:
I shall not detain the Committee for too much
longer, but it might be useful to probe some of the issues further. The
order has contributed to the perception that the implementation of the
Charities Act 2006 is a little ragged around the edges. We could have
had greater consistency of purpose and better joined-up thinking within
the Office of the Third Sector and beyond. The fact we have not got
that is regrettable, because the 2006 Act had all-party support,
and we and charities have a great interest in its smooth implementation.
The question of the timing is illustrative of that.
We all want to reduce the
administrative burden on charities, but given that we hope that the
threshold limits will be increased, we will have a situation in which
the smallest charityit could be a tiny charity with an income
of £20,000 and probably no staffmight well have to hire
someone in, at least a consultant, to advise on how to prepare external
accounts. Such charities have never had to do that before, and we
expect that they will never have to do so again. The Minister might
reflect on whether he could have made any powers available to himself
when drafting the order that would have allowed a temporary derogation
from the effect of the order for charities that will be exempt under
the proposed consultation, if and when that takes
place.
The Minister
did not adequately address the discussion that we had about the 85 per
cent. of small companies that currently engage voluntarily in the
external assessment of their accounts. Although 85 per cent. of
charitable companied do so, it is not clear whether the style of that
external scrutiny is to the standard that the order will require. It
might not be possible with the statistics available to know that, but
the order will require a strict set of examinations conducted by an
independent examiner, and that might go further than the type of
external scrutiny currently entered into voluntarily.
Finally, with regard to the
RIA, it is important that the Cabinet Office takes a lead, as it is
there not only to provide an example to the rest of Government, but
specifically to help reduce the confusion and burden on voluntary
organisations. The fact that we have inconsistency between two almost
identical provisions seems rather disappointing. The figure of 85 per
cent. is quoted in one case as the effect on the administrative burden
of charitable companies in respect of the changes to the thresholds,
but a figure is completely absent in the other. Of all the Departments
and offices that we might have looked to for a lead on that, the Office
of the Third Sector is the best placed. The Minsters Department
is there to help charities by simplifying how they work, and to promote
joined-up thinking across Government. I do not think that this is the
best start to implementing the provisions of the Charities Act 2006.
Various other orders will be coming forward, and I hope that the
Departments game will be raised in the orders that it drafts.
We have some reservations, but I do not want to divide the Committee
this
afternoon.
Question
put and agreed
to.
Resolved,
That
the Committee has considered the draft Charities Act 2006 (Charitable
Companies Audit and Group Accounts Provisions) Order
2008.
Committee
rose at twenty-nine minutes past Five
oclock.