On Thursday 19th February 2015, the Cabinet Office published the Government's response in relation to charity audit limits and independent examinations following a 7 week consultation period.
The consultation stemmed from Lord Hodgson's report on the Charities Act 2006 which was published back in July 2012. Along with many recommendations, this review suggested that charities with income under £1,000,000 should be audit exempt.
At present the Charities Act 2011 has the following audit exemption rules for charities in England and Wales:
• Audit exemption 'income test' threshold of £500,000; or
• Audit exemption 'asset test' with an asset limit of £3,260,000 and an income limit of £250,000.
Remembering that if the charity is a company then they must also qualify as a small company under Company law to claim audit exemption.
The Government's consultation not only looked at increasing the 'income test' charity audit exemption limits but also wanted feedback on:
• Changes to the limits in the 'asset test';
• Increasing the group audit exemption limit and group accounts preparation limit to £1,000,000 (previously aligned with the audit exemption 'income test' limit of £500,000); and
• Extending the list of professional accountancy membership bodies able to carry out independent examinations of charities with income more than £250,000.
Key headlines in the Government response:
• Audit exemption 'income test' threshold is set to increase from £500,000 to £1,000,000;
• Income limits for group audit exemption and for the preparation of consolidated accounts to increase to £1,000,000;
• 'Asset test' to remain the same for the time being
o The Government have noted that the income element of the 'asset test' is linked to the accruals accounts preparation threshold in the Charities Act 2011 (£250,000) and thus cannot be increased without changes to primary legislation.
o The asset part of the 'asset test' is the same as the balance sheet threshold used in the Companies Act 2006 and is not to be updated at present. It was suggested by the Government that the asset element of the test could be linked explicitly to the Companies Act 2006 in the future. At present the Department of Business, Innovation and Skills (BIS) are in consultation on auditor regulations in the context of the EU and wider reforms and until the outcome of this consultation is known, no changes will be made to the asset element of this test;
• Two new bodies to be added to the list of professional accountancy membership bodies able to carry out independent examinations of charities with income more than £250,000 named as the Institute of Financial Accountants (IFA) and the Certified Public Accountants Association (CPAA) so long as CPAA are available to show sufficient evidence that their members are suitably qualified.
It is expected that the changes are to be available for charities with accounting periods ending on or after 31 March 2015. This is earlier than expected as the consultation had previously stated 6 April 2015.
A statutory instrument is to be drafted and laid in Parliament. The Government have stated that this will be performed with sufficient time before dissolution on 30 March 2015 - we therefore wait with baited breath for the statutory instrument in the forthcoming weeks!
It needs to be remembered that these changes are to charity law in England and Wales. If a charity is deemed to be cross border which perhaps operates in Scotland and is registered not only with the Charity Commission but also the Office of the Scottish Charity Regulator, then the charity will need to consider both Scottish and English and Welsh charity law. The audit exemption limits for charities in Scotland is not expected to change in the near future and broadly speaking use the same limits as the soon to be old English and Welsh legislation.
The full Government response can be downloaded here.
Update (2nd March)!
We can now confirm that two statutory instruments have been laid before Parliament bringing the expected changes into force for financial years ending on or after 31 March 2015:
- SI 2015/321 - The Charities Act 2011 (Accounts and Audit) Order 2015 increases the charity audit income threshold to £1 million; and
- adds the IFA and CPAA to the list of professional accountancy membership bodies able to carry out independent examinations of charities with income more than £250,000; and
- SI 2015/322 - The Charities Act 2011 (Group Accounts) Regulations 2015 increases the group accounts preparation and audit income threshold to £1 million.
As noted above:
- asset thresholds in this respect remain unchanged; and
- the changes apply in England and Wales only.
An update to the Mercia Charities Manual is scheduled for release in April 2015 and will take account of the changes made by the legislation above.