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Public Bill Committee Debates

Draft Charities Act 2006 (Charitable Companies Audit and Group Accounts Provisions) Order 2008

The Committee consisted of the following Members:

Chairman: David Taylor
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 charities—whether companies or not—that 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.
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 companies—those with an annual income between £10,000 and £90,000—it 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 practice—SORP—which 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—
Phil Hope: I hope not.
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 accountants—particularly with my family interests—I 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 field—a 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 consultation—to increase the threshold to £25,000—is adopted, the charity’s accounts will not be subject to scrutiny the following year. To go from no scrutiny to an independent examiner’s 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 examiner’s report, and in the intervening year to a reporting accountant’s 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 less—at £199,155—because 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 order’s 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 today’s order—in other words, it is assumed that 85 per cent. of the cost will be avoided—but 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 this—savings of £1.2 million are claimed—are 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 charities—even though they are not great in number—that 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, many—up 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 wants—the hon. Gentleman agrees with me—beyond 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 affected—those 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 them—85 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 5,300—already 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 recommending—although we do not want to pre-empt the consultation—some 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 measures—the threshold review and today’s order—arise 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 consultations—those to try to unify the accounting system, which have support across the sector—took 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 consultation—it represents a relatively small although technical point—until the larger, more comprehensive consultation following the Act, which we will complete this March.
We rightly decided—charities wanted us to do this—to 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 2008—that 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 world—far 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.
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 charity’s accounts, particularly if it was a charity with many thousands of members. However, can he envisage a member of a charity being excluded—in any way, shape, size or form—from 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 accountant’s 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.
Mr. Walker rose—
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, 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 charity—it could be a tiny charity with an income of £20,000 and probably no staff—might 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 Minster’s 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 Department’s 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.
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 o’clock.

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