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

Volume 699: debated on Tuesday 26 February 2008

rose to move, That the Grand Committee do report to the House that it has considered the Charities Act 2006 (Charitable Companies Audit and Group Accounts Provisions) Order 2008.

The noble Lord said: The order represents the culmination of a process that started during the passages of the Charities Bill and Companies Bill through your Lordships’ House during 2005 and 2006. It is a rather technical order—I make no apologies for that because it needs to be—and the process is also somewhat technical. I shall take us through the explanation as carefully as I can so that the Committee can understand the order better.

The object is to provide more a straightforward scrutiny regime for smaller charities. While saying that, I would like to record my thanks to the noble Lord, Lord Hodgson of Astley Abbotts, because during the passage of the Charities Bill through this House not once but twice—some 70 hours of scrutiny—he played a blinder and made an important contribution to ensuring that this order came about. During the passage of the Charities Bill and Companies Bill in 2005 the noble Lord proposed amendments to both Bills to bring about the alignment of the accounts scrutiny requirements for charities that are companies, which are currently scrutinised under company law, and those of non-company charities, which are currently scrutinised as a matter of charity law. We were receptive to the idea and sought the views of charity sector umbrella groups and relevant professional bodies, who also warmly welcomed the proposal, and amendments were made to both Bills.

The order sets out to achieve two main changes. The first change that the order will make is to amend the Charities Act 1993 to apply the charity law accounts scrutiny provisions in place of the existing company law reporting accountant and audit requirements that apply to small charitable companies. This will ensure that charities in company form that are below the company law audit threshold will become subject to the same accounts scrutiny requirements under charity law as non-company charities, creating the level playing field that has long been called for by the sector and its professional advisers.

Changes were made to the Companies Bill, in what are now Section 1175 of and Schedule 9 to the Companies Act 2006. They remove the current company law accounts scrutiny requirements that apply to charitable companies below the audit threshold. The Charities Bill was amended, in what is now Section 77 of the Charities Act 2006, to provide an order-making power to deal with the necessary changes required to be made to charity law following the removal of small charitable companies from the company law accounts scrutiny regime. The order we are examining today is made in the exercise of that power.

Instead of the reporting accountant scrutiny regime under company law, 14,000 or so charitable companies will instead be required to undergo independent examination under charity law. Independent examination is a low-cost alternative specifically designed for charities. It is a review engagement rather than audit and has proved popular with the sector. Of those charitable companies that will be affected by this change, most will see a slight cost saving under the independent examiner scrutiny regime under charity law. For charitable companies with an income between £10,000 and £90,000, it will be a new requirement. However, as the impact assessment to this order makes clear, the vast majority—85 per cent—of charitable companies in this income bracket already opt for independent scrutiny of their accounts. As part of our commitment to proportionate regulation, we are consulting separately on a package of deregulatory proposals for charity law thresholds. The noble Lord, Lord Hodgson of Astley Abbotts, encouraged us to look carefully at thresholds during the passage of the Bill. The package includes a recommendation to increase the threshold above which independent examination of charity accounts is required from £10,000 to £25,000.

The second change that this order makes relates to the preparation and scrutiny of group accounts by charities. It is already sector practice to prepare group accounts where a charity undertakes activities through subsidiaries. It is important to be able to understand the full range of activities and resources controlled by a charity not only directly, but indirectly through subsidiaries. Until new provisions were set out in the Charities Act 2006, there was no legal basis whatever for non-company charities to prepare such accounts.

This order applies the same group accounts provisions of the Charities Act 2006 to company charities where there is no requirement for small charitable company-headed groups to do so under the Companies Act. In 2007, we published for public consultation a draft of this order, along with draft Charities (Accounts and Reports) Regulations which will be required to support the implementation of the Charities Act 2006, and this order. The changes to be made by this order were well supported on consultation.

One of the concerns raised on consultation was about the complexity of the way in which the changes are being made to the legislation. Given that this order amends the Charities Act 1993, and that amendments to that Act will also be made by the commencement of provisions of the Charities Act 2006, the Office of the Third Sector will publish, on its website, an informal consolidation of Part 6 of, and Schedule 5A to, the Charities Act 1993, to show the changes that this order and the 2006 Act will make. We hope that this will be helpful to users of the legislation. We are also discussing consolidation of charity law with the Law Commission, with the aim of preparing a consolidation Bill. During the passage of the legislation, noble Lords made particular reference to that—and I think that noble Lords were right. In addition, the Charity Commission will issue updated guidance for charities and their professional advisers on the changes to the audit, accounting and reporting regime.

Our aim is for the provisions of this order to come into force for charities’ financial years beginning on or after 1 April 2008. This is to bring these changes in at the earliest opportunity so that charities can benefit from them, as many charities financial years begin on or shortly after 1 April. However, it does give charities and their professional advisers significant time to prepare, as in effect most of the provisions will not bite until charities are preparing accounts and arranging for their scrutiny towards the end of their accounting year, which will not be until April 2009.

The order will bring about changes that were initially approved by Parliament during the passage of the Charities and Companies Acts. The changes will be welcomed by the sector and the majority of its professional advisers, and will support what charities are already doing as a matter of best practice. So we shall reap the benefits of those things. I commend the order to the House. I beg to move.

Moved, That the Grand Committee do report to the House that it has considered the Charities Act 2006 (Charitable Companies Audit and Group Accounts Provisions) Order 2008. 9th Report from the Joint Committee on Statutory Instruments.—(Lord Bassam of Brighton.)

I thank the Minister for explaining the order. I echo his gratitude for the very thorough work done by my noble friend Lord Hodgson on the legislation when it passed through the House. I think that the noble Lord, Lord Davies of Oldham, was down to speak on this order today. We all know how busy he has been and I am grateful to the Minister for taking this on.

Can the Minister kindly confirm in simple terms that the order’s effect is, first, that charities that are companies will in future be treated the same as charities that are not so incorporated, and, secondly, that charity companies that own subsidiary companies will be required to prepare consolidated accounts? Assuming that that is correct, and while I am aware that the sector has broadly welcomed the provisions—and I agree that those who donate to charities deserve, of course, to know that their donations are properly dealt with—my prime concern is that of cost, particularly at the smaller end. Charities that are companies with turnovers of as little as £10,001 are now to be subject to audit. As a matter of detail—and the Minister may have referred to this—that is a more stringent procedure than that being applied to charities that are not companies.

Somewhere in the documentation, I see that the Government think that the average cost per charity will be the princely sum of £213. I practised once as an accountant and declare an interest as a member of the Institute of Chartered Accountants in England and Wales. I have to say that even I have never met an accountant who has charged as little as £213 for anything. Yet, having made this rather odd assumption, the Government go on in their analysis to say that they discount 85 per cent of the total cost to charities across the country on the grounds that many charities already have an audit. It is unclear what their justification for 85 per cent is. It may be that some percentage can fairly be applied, but I am worried about those conclusions in respect of smaller charities, which are surely less likely to have had an audit up to now. Perhaps the Minister can convince me.

Is the preparation of consolidated accounts strictly necessary, again at the very low end? Accounting practice means that the balance sheets of companies that own other companies already include them in their accounts, but as a single line item rather than with each line item being consolidated, and then with notes expanding on the detail. Consolidation is a procedure that adds complication, time and therefore money. Can the Minister convince me that it is absolutely necessary, especially at the smaller end?

The big cost arises from the work in the first year to set up the consolidation. If some charities then, as I will mention in a moment, fall out of the requirement as a result of the threshold being raised, it really will have been a huge waste of their time and money.

Therefore, I ask the Minister whether the Government are not being a little hasty in implementing this order when the lower threshold stands a good chance of being raised as a result of the joint consultation on thresholds between the Office of the Third Sector and the Charity Commission. I think I am right in saying that this is likely to result in some charities becoming subject to the new, stricter rules in one year and then not so subject in the subsequent year. Is that not a complete nonsense? Perhaps the Minister can explain why this cannot be dovetailed properly? Is not the Office of the Third Sector charged with making things easier?

The Charities Act 2006 introduced the requirement for the preparation of group accounts by parent charities. It was to achieve that by inserting Schedule 5A into the 1993 Act. Can the Minister explain, therefore, why neither Part 6 nor Schedule 5A applied to charitable companies?

Lastly, respondents to the consultation on the draft order commented on the complexity of the legislation surrounding this whole area. I am aware that the Office of the Third Sector has stated its intention to prepare a consolidated version of Part 6 of the Charities Act 1993 prior to commencement, but does the Minister understand the importance of the vast majority of donations to charities, many of them small, going directly to the good causes they support rather than into advice from expensive lawyers—in addition to accountants, as we earlier discussed—on how to comply with complicated rules, and that hasty legislation followed by correction does nothing to help them? The Army has a phrase, “Order, counter order, disorder”, which I suggest rather aptly summarises the Government’s actions.

I can be brief due to the clear exposition that the Committee has had of the order and the fact that we on these Benches give it a broad welcome. We endorse the underlying objective trailed in the passage of the primary legislation, which seeks to unify the account scrutiny requirements for small charitable companies. That must be beneficial.

If the impact assessment is to be believed, it seems that the costs are minimal. In the light of what the noble Lord, Lord De Mauley, said, it is right to say that it is most distressing to those who support small charities if there is mismanagement and any kind of fraud. So I suppose that the balance of argument is in favour of scrutiny, and the simpler that external scrutiny is, the better.

The Office of the Third Sector is to be congratulated on the clarity of its impact assessment statement. Admittedly, the facts are not supported by footnotes indicating precisely how they have been accumulated, but the facts are rather compelling. It is interesting that there has been a 10 per cent response to the proposed changes from the consultees and that that response has been entirely positive. I would also, however, like to hear from the Minister why it is that the timing of the order is as it is, in view of the consultation that is in train on raising the financial thresholds. It seems odd that the order should take effect the very day after the consultation is concluded. There has been no attempt to align the order with the outcome of the consultation, on the basis that the Government have put it forward. Broadly, however, the provisions are welcome.

The second part of the change—the proposal for group accounting—seems enormously sensible. However, it also conforms largely to existing practice, and it is, in a sense, ratifying a procedure that is almost universal. When one is talking about small charities, it is important to recognise that the clarity with which the rules are set out is of great importance. What the Minister said about the consolidation appearing on the website is welcome, but, when there is a consolidating Act—I understand that there may be—it will be worth asking parliamentary counsel to look closely at the simplification of language. I know that that is a difficult thing for Ministers to pursue, because they are dealing with legal draftsmen who are not only self-proclaimed but recognised experts. Speaking as someone who was, a long time ago, a consumer protection Minister, I think that we have not succeeded in making our consumer protection legislation and this kind of legislation as accessible to the lay reader as possible. The more accessible it is, the more the rubrics will be observed. The rubrics are not usually broken because of intent but because of lack of awareness. That fortifies the case for a simplification of the language when consolidation takes place. I welcome the order.

The noble Lord, Lord Bassam of Brighton, was kind enough to refer to my participation in the debates on the Charities Bill and the Companies Bill. It was a Kafkaesque experience. The Minister, reading from his brief, told us that we could not deal with accounting matters because we were dealing with company legislation. His colleague, the noble Lord, Lord Sainsbury of Turville, said, when we were dealing with the Companies Bill, that it was all to do with Home Office charity regulations. We were stuck in a situation where everybody was denying the possibility of cutting the Gordian knot. I was pleased that the Government saw the value of doing that and am even more pleased that they have put forward this order to give effect to the work that we did then.

The Minister had some good news for the sector. It is terrific to hear that the thresholds will be raised. The Committee may not be aware that the Government did not accept their own report about the basic threshold level. The original Cabinet Office report that set the whole thing going suggested a basic threshold level of a minimum of £10,000. The Government then stuck in £5,000, which meant that 50,000 charities that otherwise would not have fallen under the regulatory regime fell under it. It is terrific that the Government are now going back to what they proposed about five or six years ago.

As these are complex matters, I applaud the proposal to make the website understandable and accessible. Is there a timetable for the consolidation plans? The Committee may not be aware that large chunks of the 1993 Act have never been brought into effect. The whole section on fundraising is still waiting for Godot. It would be kind if we made sure that Godot finally arrived and that the 1992, 1993 and 2006 Acts were put together.

I congratulate the Government on lightening the regulatory burden, which is increasingly needed in the light of the ever increasing length of the accounting SORP. We heard various Members of the Committee say that a couple of pages are added every year.

I have just three questions for the Minister. First, has consultation on the legislation taken place with the ACIE, the Association of Charity Independent Examiners, which is greatly affected by it? Is it happy with the way in which it is being brought into force? Does it think that it is being done in the most effective and practical way?

The second question deals with a matter of charity law which increasingly concerns me; that is, its applicability across the United Kingdom. As the Minister will recall, we had lengthy discussions about how Scotland would fit into it. Paragraph 2 of the Explanatory Note states that the order will not apply in Scotland because it is a devolved matter. Are conversations with OSCR, the Scottish charity regulator, taking place to ensure that companies of charities that operate on a cross-border basis are able to take advantage of the simplifications? It is frightfully important that proper attention is given to that, because we will not otherwise make the progress that we should in lightening the regulatory burden, which is the Government’s objective.

There is talk about a new charity law for Northern Ireland. It would be helpful, since the Explanatory Notes refer to Northern Ireland, if the Minister updated us with any information that he may have about progress there, and say whether efforts will be made to correlate the provisions in this legislation with what is proposed for the Province.

My third question relates to the final paragraph but two of the Explanatory Notes, which begins:

“Article 8(2) substitutes a new paragraph”.

It states that,

“the duty to prepare group accounts will apply to a parent charity which is a company if the charity is not required to prepare consolidated accounts … The duty will continue to apply even if the charity chooses to prepare consolidated accounts”.

I am not quite clear about which duty is being applied, if the company is already preparing the consolidated accounts in line with the duty referred to earlier in the paragraph. It may be difficult for the Minister to answer that even more technical and detailed question immediately, but if he cannot, perhaps he could write to Members of the Committee to explain what is being applied there, so that my worries at least could be dispelled.

The Government are to be congratulated on bringing the order forward. It is helpful legislation. I congratulate the Minister on fulfilling the commitments that he made at the Committee stage of the Bill so many months ago.

I am grateful to all three noble Lords who have joined in this deliberation. I congratulate them as ever on their attention to detail, in particular the noble Lord, Lord Hodgson of Astley Abbotts. It was very kind of the noble Lord, Lord De Mauley, to thank me for stepping in—it is part of the brief; one has to be generic. I was greatly amused by the Kafkaesque description from the noble Lord, Lord Hodgson of Astley Abbotts. He had a good point. I try not to be in denial in those moments, but sometimes it is a parliamentary convenience.

This order is welcomed in general terms across the charitable sector because it goes a long way to help simplify things and make life easier for some charities. That is an enormous benefit. Like the noble Lord, Lord De Mauley, I like to see the money that is given get to where it should to do the job that it should do. The thing that irritates me most on a personal level is when I find out that so much money that has been given gets absorbed and soaked up by unnecessary regulation and unnecessary bureaucracy. That is a common irritation.

The noble Lord, Lord De Mauley, asked a number of questions that I shall try to work through. One was whether charities that are companies will be treated the same as non-company charities. Charities that are companies will be required to have their accounts scrutinised as a matter of charity law if they are not required to do so as a matter of company law. He also asked about group accounts. Charities already have to prepare group accounts. It is already sector practice for group accounts to be prepared. The commission looked at a sample of 70 sets of accounts where group accounts are now expected as good practice and in all but one case they had been prepared. Therefore, in our view and in the view of the sector, these changes do not create any significant new costs. Separate regulations will provide for content and scrutiny requirements and will also consider any additional regulatory costs that separate provisions might create.

The noble Lord also asked whether company charities that have subsidiaries will be required to prepare consolidated accounts under the Charities Act 1993. The answer is yes, if they are not required to prepare them as a matter of company law. Another question related to who will have to prepare consolidated accounts. All charities will have to prepare consolidated accounts, but only above a certain threshold. Consultation suggested that a threshold of an income of £500,000 was generally supported.

The noble Lord made a point about charities ending up paying more given the lower threshold for independent examination. Charity Commission information indicates that something like 85 per cent of charitable companies affected that have incomes of between £10,000 and £90,000 already have formal scrutiny, which is why we argue that only a small minority will face additional expense. It is already there.

The cost of examination was another issue. The impact assessment indicates that independent examination costs only about £213. The noble Lord thought that was rather low and asked where we got the figure from. In essence, the figure of £213 for the cost of independent examination was derived from the administrative burdens reduction programme, which used a robust and consistent methodology to measure the cost of all government regulation of businesses and charities. The figure is relatively low because it takes account of volunteer independent examiners as well as professionally qualified examiners undertaking such work on fully commercial terms. Volunteers would have been costed, but at a lower rate than professional fees. I am sure we all know charities that use such volunteer labour, which is of tremendous benefit to them.

Below an income of £250,000—

My assumption would be that under the new rules an audit ought to be carried out by someone who holds a practising certificate. That is not normally held by someone who may be a chartered accountant or another form of accountant and audits charities on a voluntary basis.

I am not sure that that is necessarily the case. I shall reflect on the point, but a lot of the auditors that get involved get involved precisely because they have some expertise. At any event, no qualification is required below the £250,000 threshold. That has a beneficial effect because it reduces costs. When a qualified person undertakes an examination on a commercial basis, anecdotal evidence strongly suggests that the costs could rise to between £400 and £500 for charities in the income range of £10,000 to £90,000.

The noble Lord made some other points about changes in thresholds. There are 6,234 company charities with an income of between £10,000 and £90,000, of which data suggest that 85 per cent—some 5,300—undergo some form of independent scrutiny as a matter of best practice. We justify the figure by saying that somewhat less than 1,000—934 company charities—will probably have to go through a process that they have not previously undertaken but, as a matter of best practice, probably should have done.

The noble Lord, Lord Maclennan, rightly asked about the current thresholds review and suggested that we might want to wait for it. We think that it would be wrong to delay the important provisions contained in this order; the sector wants the changes, and if we delayed it beyond 1 April many charities would effectively have to wait a further year for them and lose the benefit of their introduction. They would effectively be waiting until 31 March 2010, which I do not think is acceptable, and which I do not think that the charity sector thinks is acceptable.

The thresholds review, published in December 2007, is important. It fulfils a promise that we made to look at thresholds at the time of the Bill being passed. The public consultation on the recommendations runs until the end of March. The thresholds for group accounts were consulted on last year as part of the consultation on separate regulations and, as I said earlier, an income threshold of £500,000 for audit and preparation of group accounts received considerable support. The other scrutiny thresholds that apply to charities are the product of extensive consultation undertaken during production of the 2002 Cabinet Office review, to which the noble Lord, Lord Hodgson of Astley Abbotts, made reference.

The noble Lord, Lord Maclennan, raised the issue of consolidation and whether it would be a better approach to group accounts. Single-line consolidation has some disadvantages. We need to be able to see the variety of activities that charity and its subsidiaries undertake. The noble Lord made a reasonable point about simplifying legislation and making it more accessible. It is a sad story that we try to encourage a broad range of giving from people from all walks of life and ranges of income, but understanding how charities work is something that comes largely through and is mediated by professionals. Perhaps that is unavoidable, but we do our best to try to make these things as accessible as possible. The Office of the Third Sector and the Charity Commission have done valuable work in trying to ensure that that is the case and last year published a plain language guide to the Charities Act 2006 that was aimed at trustees, who have found it very useful. It has become a very popular publication.

The point was also made about SORP being too complex and lengthy for charities. It is fair to say that it does not apply to all small charities—those with an income under £100,000 that choose to produce simple receipts and payments accounts, which would be the majority of charities. The SORP has the difficult job of interpreting and applying the complex financial reporting standards to charities. Standards are developed independently of government by the Accounting Standards Board and in future by the international financing reporting board. While this gives independence in the development of standards, it creates an onus for the SORP to address and interpret all relevant standards for the sector. That said, last year saw the formation of a new SORP committee, and early indications from that group are that the needs of small charities and the relevant information required by the SORP will be very much at the top of the agenda.

I think that I was also asked whether we had properly consulted the ACIE—the examiners. It was very supportive of the approach that we have adopted. It responded to the consultation and the Charity Commission is in regular contact with it.

The noble Lord, Lord Hodgson, made a point about the variations between the devolved Administrations. The position, certainly for Northern Ireland, is that the existing reporting accountant regime will be preserved by the Companies Act commencement order that BERR is preparing. The order will result in the partial commencement of Section 1175 for Great Britain only, the saving for Northern Ireland and the special rules for the audit of small charitable companies, including the provisions on reporting accountants.

As to cross-border regulation, it is fair to say that there have been some difficulties for some English and Welsh charities that operate in Scotland, particularly in registering with the charity regulator. As charity law and regulations are devolved, responsibility must rest with the OSCR and the Scottish Government. However, we have consistently stressed the importance of minimising regulatory burdens arising from the different regulatory regimes that charities operate in across the UK. These issues have been raised by both the Charity Commission and the Office of the Third Sector with their Scottish counterparts, and I think that that dialogue is proving to be very useful. Of course, there is the UK regulators’ forum, which I know came up as part of the discussion during the passage of the Bill.

The noble Lord, Lord Hodgson, asked about a couple of other points relating to the timetable for the consolidation of charity law. I cannot give a straight answer, although I should like to, or provide the noble Lord with a timetable. It is a matter outwith our control and is very much in the hands of the Law Commission. I would not wish to damn the Law Commission with faint praise, but it believes in doing a thorough job and that means that things inevitably take their time. However, we are in what are described as “positive discussions” with the Law Commission about consolidation and those have been very helpful.

I think that the noble Lord asked one other question about Article 8.2. I cannot remember exactly what it was but I shall write to him on that point.

I hope that I have covered most of the issues that were raised. If I have not, I shall check carefully in Hansard—and I am sure that the officials will check even more carefully—and we will respond in writing. Again, I thank the three noble Lords who have participated in this debate. The charity sector is well served by their diligence, and I hope that the order brings about the beneficial changes that we all anticipate and expect from it.

On Question, Motion agreed to.

That concludes the business before the Grand Committee this evening. The Committee stands adjourned.

The Committee adjourned at 7.29 pm.