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PART TWO - SIGNIFICANT POLICY ISSUES: PUBLIC BENEFIT REPORTING, THRESHOLDS AND EXEMPTIONS

68. This section considers changes to the fundamental framework that sets the requirements for charities to prepare, have externally scrutinised and submit accounts and annual reports to the Office of the Scottish Charity Regulator ( OSCR). Although there are a number of detailed points at stake here, we believe these issues are best considered in the round. All the consultation questions relating to this section can therefore be found together following paragraph 89.

Public Benefit Reporting

69. The statutory requirements for charities in Scotland are that the body's purposes consist only of the charitable purposes set out in legislation, and that it provides public benefit in Scotland or elsewhere. There is therefore a public interest in easily accessible information about the public benefit a particular charity provides. Most charities already provide this information in the Annual Report which they must provide to the Regulator as part of their accounts, and which must be made available to others on request. Arguably they are already required to do so. Charities preparing fully accrued accounts are required to follow the Charity SORP, which requires the annual report to include (inter alia) as a minimum "a summary of the objects of the charity as set out in its governing document…together with a summary of the main activities undertaken in relation to those objects." Charities preparing Receipts and Payments accounts are required by Schedule 2, paragraph 9 of the current regulations to include in their annual report, "a summary of the main activities of the charity undertaken and achievements in the financial year." However, neither of these requirements explicitly refer to public benefit in the terms of the Act.

70. We do not believe making this requirement explicit would place a significant additional burden on charities. It would give each charity an opportunity to demonstrate to the wider public the benefit it delivers and that shows how it meets the charity test. It may also reduce the amount of information OSCR subsequently require charities to submit as part of the "rolling review" process (by which they check that bodies on the Scottish Charity Register continue to meet the requirements for charitable status).

We therefore see merit in amending the regulations to make explicit the requirement for the annual report to identify the public benefit provided by the charity in the relevant year, by inserting:

in Schedule 1, after paragraph 9, "10. The report on activities prepared under section 44(1)(b) of the 2005 Act must set out the main activities undertaken by the charity to further its charitable purposes and a description of how these provide public benefit, within the meaning of the requirement made by section 7(1)(b) of that Act." and

in Schedule 2, after paragraph 12, "13. The main activities undertaken by the charity to further its charitable purposes and a description of how these provide public benefit, within the meaning of the requirement made by section 7(1)(b) of the 2005 Act."

Thresholds

71. The current regulations - specifically regulations 6, 8 and 9 - provide different thresholds which determine the accounting requirements for individual charities. In summary:

• all charities must submit accounts and an annual report to OSCR;
• these should be fully accrued accounts if the charity's annual income equals or exceeds £100,000; and
• these must be audited by an eligible auditor if gross income equals or exceeds £500,000, or the value of assets exceeds £2.8 million.

These thresholds were set following consultation on the draft Charity Accounting (Scotland) Regulations in 2005. They aim to balance the goals of increasing public confidence in charities through effective regulation, increasing transparency and public accountability of charities for the use of their funds, and minimising the regulatory burden on charities as far as is consistent with these objectives. It is entirely appropriate therefore that charities with higher incomes or more assets should be subject to more stringent requirements. The cut-off point is however a matter of judgement, and is worth regular review.

72. The table below summarises information drawn from the data behind the OSCR publication "Scottish Charities 2008" on the number and scale of Scottish Charities. It shows that the sector is dominated (in terms of absolute numbers) by very small charities. This information is central to any consideration of changes to the thresholds set in the current accounting regulations.

Reasons for change

73. There are three main reasons for considering now may be the time to look again at the current thresholds:

i. inflation and the passage of time;

ii. the impact of the new Charity Regulation Framework; and

iii. parallel developments in England and Wales.

These are considered in turn below.

i. Inflation and the passage of time

74. Thresholds set in absolute terms will inevitably slowly lose their real value over time due to the impact of inflation. For example, to retain its value in real terms, the £100,000 threshold set in 2006 would need to be increased to £112,000 in 2010. Without regularly increasing the threshold, more and more charities will therefore be caught by it. This is not the Government's intention.

75. We are also aware that - although in theory the Government can bring forward amendments to the regulations at any point - if we do not take the opportunity presented by the current proposed amendment regulations, it may be some time before another opportunity presents itself. In this context, increasing the thresholds to both "undo" the effects of inflation since the regulations were initially laid, and allowing for effects of inflation for a few years to come, might mean:

• the threshold for fully accrued accounts would be increased from £100,000 to £120,000; and
• the thresholds for audit by an eligible auditor for gross income would increase to £600,000, or the value of assets exceeds £3.26 million (matching the equivalent threshold in company law).

Although this would initially affect only a few hundred charities, this would be more about preventing future regulatory creep as the real values of the thresholds are gradually eroded.

ii. The Impact of the new Charity Regulation Framework

76. The Government's wider approach to improving scrutiny across the public sector includes moves towards an overall approach whereby delivery bodies 'earn' a reduction in scrutiny by demonstrating that their self evaluation is leading to continuous improvement - and it seems appropriate to apply this approach to charity regulation.

77. Of course, the new framework of charity regulation was only put in place in 2006. The new regulatory framework was widely welcomed given the need to bolster public confidence. As outlined above, part of the rationale for that framework is to ensure good management practice is embedded across the charity sector. There are early indications that there has been some progress here, with OSCR reporting an improvement in the submission of accounts. Another full reporting year will have passed before the proposed amended regulations come into force.

iii. Developments in England and Wales

78. In August 2008 the UK Government published "Financial Thresholds in the Charities Act - Proposals for Change: Government Response" (copies are available from the Charity Commission or at www.charity-commission.gov.uk/Library/common/thresholdsresponse.pdf). The document sets out the UK Government's intentions to change the thresholds for charity regulation in England and Wales so that for the 2009-10 financial year:

- charities with an annual income of less than £25,000 will no longer have to submit annual accounts or a trustees' annual report to the Charity Commission (the Regulator equivalent to OSCR for England and Wales), and such charities will no longer have to have their accounts externally scrutinised (though they will need to prepare accounts and make them available on request);

• the threshold for preparing accrual accounts will rise from annual income of £100,000 to £250,000; and

• the asset threshold for full audit of accounts will increase from £2.8 million to £3.26 million.

There seems a case to consider in the longer term as to whether there is objective justification for the regulatory framework in Scotland being more burdensome than that in England and Wales - though it is clearly not appropriate to make changes simply to keep the two regulatory regimes in step.

Reasons against change

i. the costs of disruption

79. Any change carries with it some degree of disruption, particularly for charities which might find themselves on a different side of a particular threshold. All other things being equal, most sectors would prefer certain and constant regulation as opposed to regular amendment to make small incremental improvements. Change implies cost - so the benefits of change need to outweigh these costs to be worthwhile. We are not aware that the current thresholds are perceived as imposing an undue burden, nor of any groundswell of opinion that there is a need for urgent change.

ii. the need for the new framework to become more fully embedded

80. As outlined above, the new framework for charity regulation was only introduced by the 2005 Act, and the accounts regulations did not come into force until May 2006. Given the new regime was introduced in part as a response to significant public concern, it may be too early to consider what might be perceived as a relaxation in the level of regulation. Similarly, since one of the key drivers behind the new framework is to instil good management practice throughout the sector, this may best be achieved by allowing the new framework to run for a lengthy period without significant change.

81. It is worth noting that in 2005 the then Scottish Executive proposed setting the threshold for fully accrued accounts at £250,000. Although there was much support for this in the consultation response, there was also a strong view that the move to £250,000 was "a step too far" (at that time, the equivalent threshold under the Charities Accounts (Scotland) Regulations 1992 was £25,000). The threshold was set at £100,000 in part to meet these concerns and in part because arguments in favour of setting it at the same level as in England and Wales were, then, considered persuasive.

82. Views were also sought in that consultation exercise on exempting charities with an annual income of less than £10,000 from the requirement to have their accounts externally scrutinised. At that time some 74% of those who commented on this issue in the consultation were against any exemption. (Copies of a summary of that consultation are available from the Scottish Government or at www.scotland.gov.uk/Publications/2005/10/21155850.)

Discussion

83. The Scottish Government believes it would be right to reduce the regulatory burden, in particular on the smallest charities, provided this could be done without either reducing public confidence in the sector or undermining progress in enabling the spread of good governance and financial management. We know that many charities find the greater complexity of the fully accrued accounts required from those above the accounts threshold means they need to seek additional professional advice or support, and that this can cost several thousand pounds (a significant call on charities with income just above the £100,000 threshold).

84. Our initial conclusions are that to copy the approach announced by the Cabinet Office for England and Wales - which includes a broader relaxation of thresholds beyond those covered in our accounts regulations - is not yet warranted. To copy the English proposals in full in Scotland would:

• take over 40% of charities out of charity regulation altogether (by removing the need for charities with annual income of less than £5k to register); and
• take two thirds (66.4%) of charities out of the full regulatory framework by removing the need for those with annual income of less than £25,000 to submit more than a simple annual return.

The Government's view is that one of the benefits of the current framework is the regular and predictable contact between charities and the regulator. This provides the regulator with both a clear view of how regulations affect the whole sector, and a key opportunity for the regulator to proactively encourage the spread of good practice. OSCR is likely to be able to bring most value to its enabling role in dealing with smaller charities.

85. There is however a strong case for considering aligning the accounts thresholds. Although there are only a limited number of cross-border charities who would be subject to both regimes, there would clearly be a strong advantage for them in keeping the thresholds identical. The Government is also firmly of the view that the simpler Receipts and Payments accounts are sufficient to provide the necessary degree of public transparency and accountability for charities with lower incomes, though we would very much welcome comments on this point.

86. The Government's initial view is that the costs of disruption would outweigh the benefits of making minor changes, and we are therefore not attracted to increasing the thresholds merely to take account of inflation. The arguments between leaving the thresholds unchanged, or increasing them in line with the changes proposed in England and Wales, seem finely balanced. We would particularly welcome the views of those charities currently above the £100,000 threshold as to if, and how far, increasing the threshold to £250,000 would be a significant benefit to them.

An exemption for charities who breach the threshold in one financial year?

87. It has been suggested to us that some charities choose not to make use of the simpler receipts and payments accounts option available to charities currently below the £100,000 income threshold because they know they are close to that threshold, and are unsure whether or not it will be broken in any given financial year. There may also be charities whose income is taken over the threshold by a significant one-off donation - and that once they have moved to fully accrued accounts for one year, it may not be sensible to revert. This is because the requirement to provide prior year figures on the same basis could otherwise require a charity in this position to prepare accounts on both bases for three years in a row. Charities would have to weigh such costs against the lower on-going costs of the simpler receipts and payments approach.

88. There seems a good theoretical case to protect a charity whose regular annual income was, for example, £90,000 but which one year received £102,000. To achieve this, it would be possible to change the regulations so that fully accrued accounts would only be required from charities with gross income of more than £100,000 in two consecutive years. On the other hand, there are many reasons why a charity's income might be significantly higher in any one given year, and it is not clear that the public would not expect the same requirements to apply to such a charity as to one with a more regular income. One way of addressing such cases would be to raise the threshold for all charities as suggested above, rather than attempting to provide for special cases.

An exemption for charities with no transactions in a given financial year?

89. There are a significant number of charities with no financial transactions within a financial year and without assets or funds carried over into or out of the year. The current requirements on charities in this position are unlikely to be particularly burdensome. It would, however, be possible to formally relieve such charities from the requirements of some of the accounting regulations without reducing the information they currently provide. For example, OSCR have suggested that such bodies should be excused from all but the requirement to submit an annual report as set out in the schedules to the 2006 Regulations, to provide assurance that the body's governance arrangements are still in place.

Questions on which we would welcome views:

Question 10 Do you agree introducing a requirement for reporting on public benefit increases transparency without placing a significant additional burden on charities?

Question 11 Should the accounting thresholds be increased? If so, should they be increased to match the proposed thresholds in England and Wales?

Question 12 Do you consider there is a case for a less burdensome treatment for charities who breach the accounting threshold for one year only?

Question 13 Are there any advantages to reducing the formal requirements on charities with no income, expenditure or assets from the accounting regulations? Is it right to do so?

Question 14 Do you consider there is a case for changing any of the other requirements for charities - or any subset of charities - to prepare, have scrutinised and submit annual accounts to OSCR?

Question 15 What would the impact on public confidence in the charity sector be of any potential changes?

Question 16 Do you have any views on how far changes would genuinely benefit charities, and whether these benefits would outweigh the disruptive effects of change?

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