The Regulator for Charities in England and Wales
In this section...
AUDIT AND INDEPENDENT EXAMINATION DISPENSATIONS UNDER S.44(1)(F) OF THE 1993 ACT
Functional responsibility
| For action | Advice and Orders | For information | All operational staff |
1. Preamble
2. The law
3. Accounts audited by the Comptroller and Auditor General or the Auditor General Wales
4. NHS Charities and Local Authority Charities
5. Circumstances permitting dispensation
6. Dispensations and charitable companies
7. Altering a charity’s financial year
8. Levels of authority
9. How to record that a dispensation has been granted
Glossary of Terms used in this Guidance
Index to further related information
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| The Law | Refer to a lawyer | Refer to an accountant |
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1. Preamble | |
| This guidance sets out those situations where the Commission can use its powers to either allow an auditor, who is not a Companies Act auditor, to carry out an audit, or to allow an independent examination to take place instead of an audit. | |
| Charities which are Non-Departmental Public Bodies, or Central Government, NHS or Local Government related will find sections 3 and 4 of particular interest. | |
| An explanation is provided in section 5 as to the bases on which we can grant dispensation | |
| There are significant limitation on dispensation we can grant to charitable companies that is explained in section 6. | |
| This guidance concludes by setting out the flexibility charities have in altering the length of their financial year and our powers to assist non-company charities to alter the length of their financial year section 7. | |
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4. NHS Charities and local authority charities | |
| 4.1 Introduction 4.2 National Health Service charities 4.3 Charities connected with local government 4.4 Other cases | |
| There are a number of issues relation to scrutiny that may arise in the context of charities associated with the National Health Service or Local Authorities. The sections that follow look at the external scrutiny requirements of the 1993 Act as they apply to such charities and the particular circumstances in which such charities may seek dispensation from audit or independent examination requirements. It also explains the circumstances in which a dispensation is unnecessary because the audit arrangements will take place under the 1993 Act. | |
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Provision for the Audit Commission appointees and for the Auditor General for Wales to act as auditors of NHS Charities (without the need for an audit dispensation from the Charity Commission) is made in section 43A and 43B of the Charities Act 1993, which was inserted into the Act by the Order. Where these provisions apply there is no need for a dispensation to be obtained. |
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An English National Health Service charity, for these purposes, means a charitable trust, the trustees of which are: |
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(a) a Strategic Health Authority; |
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(b) a Primary Care Trust; |
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(c) a National Health Service trust all or most of whose hospitals, establishments and facilities are situated in England; |
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(d) trustees appointed in pursuance of paragraph 10 of Schedule 4 to the National Health Service Act 2006 for a National Health Service trust falling within paragraph (c). |
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(e) special trustees appointed in pursuance of section 29(1) of the National Health Service Reorganisation Act 1973, section 95(1) of the National Health Service Act 1977 and section 212(1) of the National Health Service Act 2006 for such a National Health Service trust, or |
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(f) trustees for a Primary Care Trust appointed in pursuance of paragraph 12 of Schedule 3 to the National Health Service Act 2006. |
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A Welsh National Health Service charity, for these purposes, means a charitable trust, the trustees of which are: |
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(a) a Local Health Board; |
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(b) a National Health Service trust all or most of whose hospitals, establishments and facilities are situated in Wales; |
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(c) trustees appointed in pursuance of paragraph 10 of Schedule 3 to the National Health Service (Wales) Act 2006 for a National Health Service trust falling within paragraph (b); or |
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(d) special trustees appointed in pursuance of section 29(1) of the National Health Service Reorganisation Act 1973, section 95(1) of the National Health Service Act 1977 and section 160(1) of the National Health Service (Wales) Act 2006 for such a National Health Service trust. |
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Where the trustees of an NHS charity wish to elect for an independent examination, the threshold criteria having been met, an election must also be made under Section 43A(3) or 43B(3) of the 1993 Act by Audit Commission or in the case of Welsh NHS charities by the Auditor General for Wales. In such circumstances there will be no requirement for us to give a dispensation. |
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The accounts of some other charities connected with the health service may also be audited by the Audit Commission by virtue of arrangements made under s.29 (1) of the Audit Commission Act 1998. If the charity does not fall within the definition of an English National Health Charity then the audit will be carried out under section 43 of the 1993 Act and the Audit Commission will not be eligible for appointment without dispensation. |
| If the charity trustees wish for the Audit Commission to act as auditor and they so agree then we will consider making a dispensation where we are satisfied the alternative arrangements are sufficiently similar to the relevant requirements of section 43 of the 1993 Act. The dispensation is therefore granted under Regulation 34(3) (a) based on the terms of the audit engagement being sufficiently similar to the requirement of section 43 of the 1993 Act. | |
| It should be noted that whilst s.29 (1) of the Audit Commission Act 1998 permits the Audit Commission to undertake such audits, it does not provided a statutory framework for such audits and therefore the dispensation is not given under Regulation 34(2) (a). | |
| Whilst a dispensation under Regulation 34(3) (a), given on the basis of arrangements or requirements that are sufficiently similar, are given for a particular financial year, our practice in relation to Audit Commission appointments is for the dispensation to cover those particular years that they act as auditor and is effectively an ongoing dispensation unless the terms of their engagement as auditor change significantly. | |
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Where the charity trustees can identify cost or other administrative saving resulting from the appointment of the Audit Commission and we are satisfied that the audit will meet the requirements and report on those matters required by section 43 then a dispensation may be granted without accountancy advice. Where these criteria are not met accountancy advice should be sought. |
| Foundation NHS Trusts and s.51 trustee bodies (NHS Act 2006) are permitted to appoint their own auditors. Under the 1993 Act, however, charitable funds held by a Foundation Trust or s.51 trustee body do not constitute "NHS charities". Consequently if a Foundation Trust or s.51 trustee body wishes to appoint the Audit Commission (or the Auditor General for Wales) to audit its charitable funds a dispensation will be required from the Charity Commission (as those bodies do not qualify to act as auditors under the amended s43 Charities Act 1993). A standard short procedure and model letter have been agreed between the Charity Commission and the Audit Commission to ensure that the alternative arrangements are sufficiently similar to the relevant requirements of section 43 of the 1993 Act. In the case of The Auditor General for Wales acting as auditor then dispensation may be granted under Regulation 34(2) (b) - see section 3 above. | |
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Again, dispensations can be granted without accountancy with the minimum of process. Accountancy advice need only be sought where concerns arise that the arrangement entered into is not in the best interests of the charity. |
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Whilst the new sections 43A and 43B introduced into the Charities Act 1993 will reduce the need for dispensations to be granted to enable the Audit Commission and Auditor General for Wales to undertake audits of most NHS charities accounts, a dispensation will still be needed when trustees wish the Audit Commission to act for charities connected with local authorities. The Audit Commission may undertake such audits under section 29 of the Audit Commission Act 1998 but a dispensation from us is required. |
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Under s.29(1) of the Audit Commission Act 1998 (which replaced s.29(1) of the Local Government Finance Act 1982), the Audit Commission (District Audit) may: |
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audit the accounts of certain bodies connected with local government or the National Health Service. |
| The Secretary of State has given approval under s.29(3) of the Audit Commission Act 1998 for the Audit Commission to act in all cases where a charity has a local authority as managing or custodian trustee and wishes to appoint the Audit Commission as auditor. | |
| We are satisfied that the standard form of agreement (engagement letter) produced by the Audit Commission provides for an assurance about the financial affairs of the charity which is comparable to that contemplated in the 1993 Act. | |
| A dispensation from us will enable charities connected with local authorities which exceed the audit threshold from the obligation to appoint a registered auditor. | |
| Dispensation is not automatic. The trustee must make an application to us. However, we do not envisage withholding a dispensation except in exceptional circumstances. | |
| Charities with a local authority either as managing trustee or custodian trustee are covered by the arrangements but unless the managing trustee: | |
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| dispensation should be refused. The application must be made by the charity trustee. | |
| It should be noted that whilst s.29 (1) of the Audit Commission Act 1998 permits the Audit Commission to undertake such audits, it does not provided a statutory framework for such audits and therefore the dispensation is not given under Regulation 34(2) (a). | |
| Whilst a dispensation under Regulation 34(3) (a), given on the basis of arrangements or requirements that are sufficiently similar, are given for a particular financial year, our practice in relation to Audit Commission appointments is for the dispensation to cover those particular years that they act as auditor and is effectively an ongoing dispensation unless the terms of their engagement as auditor change significantly. | |
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In cases where the local authority is the managing or custodian trustee, the dispensation may be issued without the advice of a Commission accountant. In all other cases the advice of a Commission accountant should be obtained before either granting or rescinding a dispensation. In considering the application the accountant will consider the relationship between the applicant charity and the Local Authority and consider if the nature of that relationship justifies the request to appoint a non-companies act auditor. |
| OG 15 L1 sets out the form an application for dispensation should take. This model letter forms part of a technical release from the Audit Commission and we would expect any charity making an application on these grounds to have been made aware of it by their professional adviser. OG 15 L2 sets out the wording we should use in granting the application. | |
| This will include charities, other than those referred to in sections 4.2 and 4.3 above, whose accounts are audited under a statutory provision other than the 1993 Act. | |
| You will need to confirm that the charity is required to have an audit and that this is a statutory requirement (or a requirement contemplated by statute). "Legislation" in this context includes delegated legislation. (An audit arranged under s.29(1) of the Audit Commission Act 1998 does not falls within this definition as the legislation does not impose any specific requirement for the audit or specify duties). Regulation 34(2) (a) permits a dispensation to be issued where the accounts of a charity are to be audited in accordance with any statutory provision contained in or having an effect under an Act of Parliament which imposes requirements which are sufficiently similar to those of section 43(2). | |
| To grant a dispensation we need to be satisfied that: | |
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Where applications for dispensation are received, advice should be sought from a Commission accountant. In considering the application the accountant will consider the relationship between the applicant charity and the public body and consider if the nature of that relationship justifies the request to appoint a non-companies act auditor. |
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5. Circumstances permitting dispensation | |
| 5.1 Accounts audited under a similar statutory provision 5.2 Audited or examined under similar arrangements or requirements 5.3 Exceptional circumstances 5.4 Exceptional circumstances - changes in audit thresholds 5.5 Exceptional circumstances - changes in the definition of gross income 5.6 Exceptional circumstances - prior year rules 5.7 Exceptional circumstances - other cases 5.8 No recordable transactions | |
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We are able to grant a dispensation under Regulation 34(2) (a) of the Charities (Accounts and Reports) Regulations 2008 if the accounts are subject to a statutory audit requirement other than that of Part 6 which, in our opinion, provide sufficiently similar requirements to section 43(2) of the 1993 Act. |
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The dispensation is given to a particular charity. |
| We must make it a condition of any dispensation that the trustees provide us with a copy of the audit report on the accounts for the relevant year audited under the alternative provisions if requested by us to do so. | |
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Regulation 34(2) (a) enables us to give a dispensation where the impact of any statutory provision would effectively create a dual requirement for the charity to be audited to a similar standards that would effectively meet the scrutiny and reporting objectives of the 1993 Act. |
| For a dispensation to be granted under this provision we need to be satisfied that the requirements imposed as sufficiently similar to those required by section 43 of the 1993 Act. In particular, we would need to consider the who is enabled by the alternative statutory regime to undertake the audit and the auditing standards the appointee is required to follow by law or a matter of professional standards, the matters on which the auditor report and the concurrence with the key requirements for a charity audit report. The alternative regime need not be identical but we should be satisfied that audit provides similar assurance to that of an audit under the 1993 Act. | |
| The dispensation can be granted in advance of the audit taking place based on our consideration of the provisions of the alternative audit regime and the assurance it is likely to provide. | |
| In all cases we should ensure that the dispensation is granted on the condition that the trustees provide us with a copy of the audit report on the accounts for the relevant year audited under the alternative provisions. | |
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Where a dispensation is sought by a charity connected with an NHS charity or a local authority you should refer to section 4 of this OG to check whether a dispensation is required. Where the audit is carried out by the Comptroller and Auditor General or the Auditor General Wales the dispensation should be considered under Regulation 34(2) (b) – see section 3. |
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Instances of dispensations on the basis of sufficiently similar statutory requirements are uncommon and in all cases accountancy advice should be obtained as part of the consideration of the application. |
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5.2 Accounts have been audited or examined under other similar arrangements or requirements | |
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We are able to grant a dispensation under Regulation 34(3)(a) of the Charities (Accounts and Reports) Regulations 2008 if the accounts have been, or will be, audited or examined (as appropriate) to a standard, under other requirements or arrangements, comparable to that provided by Part 6 of the 1993 Act . |
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As the arrangements to be made in place of an audit and examination under the 1993 Act relate to a particular financial year the dispensation is made in respect of a particular financial year and not generally on a recurring basis. |
| The Commission must make it a condition of a dispensation granted under this regulation that the trustees provide a copy any report made to the trustees to us on request (this request should be made in all cases). Where this condition is not met the Commission may revoke the dispensation granted. | |
| This dispensation under Regulation 34(3) (a) can is given in respect of a particular financial year on the basis of our assessment of the nature of the audit or examination carried out or to be carried out. Granting a dispensation will involve consideration of the qualifications / suitability of the person who carries out the examination or audit and the nature of the procedures and report to be provided. | |
| Charities administered by bank trust corporations, which may have internal audit arrangements for the trusts under their administration, are examples of charities which may seek this type of dispensation. Internal audit arrangement however tend to focus on the control environment generally rather than the activities and affairs of a specific charity. We would therefore need to be assured the procedures undertaken focused specifically on the charity seeking the dispensation. It is unlikely that internal audit could be regarded as sufficiently similar to an independent audit under the 1993 Act. | |
| In practice, obtaining information to satisfy ourselves that the audit or examination processes, and the degree of independence, are comparable to Part 6 will be difficult. The nature of the audit work and matters to be reported on may be established through a review of the engagement letter setting out the terms of the appointment. | |
| Applications for dispensations under Regulation 34(3) (a) are uncommon. | |
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Accountancy advice must be sought in all cases. In making our assessment regard will be paid to the independence of the arrangements, the skills and abilities of those undertaking the scrutiny, and the comparability of the examination or audit arrangements with either our Directions for Independent Examination or in the case of an audit with international standards of audit and guidance issued by the Auditing Practices Board, in particular, Practice Note 11: The Audit of Charities in the United Kingdom. |
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Regulation 34(3) (b) of the Charities (Accounts and Reports) Regulations 2008 recognise that there may be exceptional circumstances which justify the examination of the accounts by an independent examiner instead of an audit. |
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The Commission has no power under the Charities (Accounts and Reports) Regulations 2008 to grant a dispensation from independent examination on the basis of exceptional circumstances. |
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The Commission must make it a condition of a dispensation grant under this regulation that the trustees provide a copy of the examination report to us on request (this request should be made in all cases) and require the trustees to comply with the requirements of section 43(3) of the 1993 Act as though an election had been made for an independent examination. Where these conditions are not met the Commission may revoke the dispensation granted. |
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As the dispensation is given due to exceptional circumstances it may only be given in respect of a particular financial year and not on a recurring basis. |
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Trustees should also be inform that independent examiner that their report they must disclose (Regulation 31(f)) that the examination has taken place instead of an audit, and state when the Commission dispensed with the requirements for an audit under section 43(2) of the 1993 Act. |
| Circumstances which can properly be regarded as exceptional are hard to define but generally relate to circumstances that are unlikely to reoccur and would result in an audit for one period only. Where a charity regularly undertakes a particular income generating activity then an increase in the amount receivable in respect of that activity in a particular year would not generally be regarded as an exceptional circumstance. The sections that follow look at particular circumstances that we will generally accept as exceptional. | |
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The Charities Act 2006 introduced new audit thresholds into section 43 of the 1993 Act. The audit threshold for financial years commencing on or after 27 February 2007 is a gross income exceeding £500,000 (now an income only threshold), or where gross assets exceeding £2.8m provided gross income also exceeds £100,000. |
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For accounting periods commencing on or after 1 April 2008 the Charities Act 2006 (Charitable Companies Audit and Group Accounts Provisions) Order 2008 amend the 1993 Act extending its scrutiny regime to small charitable companies applying the same scrutiny thresholds to small charitable companies as to other charities subject to the requirements of Part 6 of the 1993 Act. |
| Where a change in thresholds has been announced some charities may wish to apply the new thresholds immediately and seek a dispensation from audit. Often the argument put forward is there is little point in having an audit for a single financial year when the charity will be relieved of an audit requirement in the subsequent financial year as a result of an increase in thresholds. | |
| Whilst a legislative change in itself cannot generally be taken as creating exceptional circumstance, it may create exceptional circumstances where the audit threshold is exceed in only one financial year and it is unlikely that the charity will exceed the audit threshold in future periods. | |
| Where a change in thresholds has taken place and has been implemented, we will exercise our powers in a proportionate way to assist charities to substitute an independent examination in place of an audit where such exceptional circumstances can be demonstrated. Provided a number of criteria are met we are willing to offer a dispensation in these circumstances as an interim measure until the new thresholds are effective. | |
| In determining whether exceptional circumstances exist the charity would need to demonstrate that exceeding the audit threshold is not a recurring event. In particular that: | |
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In addition there may be regulatory or other consideration that would make a dispensation contrary to the interests of the charity. Accountancy advice will be required prior to a dispensation being granted in any of the following circumstances: |
| (a) the charity is subject to a section 8 inquiry or was subject to such an inquiry in the year preceding the financial year; | |
| (b) the charity is in default with its filing obligations; | |
| (c) the charity is also registered with the Office of the Scottish Charity Regulator (OSCR) and an audit will be required under Scottish charity law; or | |
| (d) there has been a significant fraud, loss or breakdown of internal financial controls that has, or could have, led to a loss of charitable funds in the financial year. | |
| Where a dispensation is granted we should advice the trustees to consider the appointment of an examiner who is a member of a body listed in the 1993 Act as qualified to undertake the examination of charities with income over £250,000 as this will reduce the risk inherent in the dispensation. | |
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Trustees should also be informed that the independent examiner when making their report must disclose (Regulation 31(f)) that the examination has taken place instead of an audit, and state the date when the Commission dispensed with the requirements for audit under section 43(2) of the Act. |
| For accounting periods commencing on or after 1 April 2008 where the applicant is a charitable company and it certifies that it meets both the definition of a small company in the year for which a dispensation is requested and that it is not required to have an audit under its Memorandum and Articles of Association then a dispensation may be granted when relevant criteria are met. It is important to note that where an audit is required under the Companies Act then we have no power to grant a dispensation from audit. | |
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Provided all of the applicable criteria set out above are met then a dispensation can be given without accountancy advice. In all other instances seek advice from a Commission Accountant. |
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5.5 Exceptional circumstances - changes in the definition of gross income | |
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Section 97 of the 1993 Act states that a reference to the gross income of a charity: “means its gross recorded income from all sources including special trusts”. This broad definition is interpreted for administrative purposes by the Commission when setting the Annual Return requirements and making the Annual Return regulations under section 48 of the 1993 Act. This administrative definition of gross income is reviewed annually in preparation for the Annual Return process. However the Annual Return applies to periods ending in a calendar year and so a charity may start its financial year anticipating income is defined in one way but when its year is completed and it comes to file it may find that the definition of gross income applicable to its filing (and therefore to our interpretation of audit and other thresholds) has changed. Changes to the definition of gross income are rare and in view of this and the potential unexpected disadvantage a change many cause to a minority of charities, it may be reasonable to offer a dispensation due to the exceptional impact a change in the definition of gross income can have in triggering a requirement for an audit. |
| Where a charity is able to demonstrate that its routine level of income is normally below the audit threshold, and that following a change in the definition of gross income for the Annual Return in respect to the charity's first year of filing under this 'new' definition it now requires an audit we can consider granting a dispensation. This is provided the audit requirement is solely as a consequence of a change in the definition of gross income and the charity was otherwise anticipating that only an independent examination would have been required. A dispensation is not available for second and subsequent years of filing on these grounds because the 'new' definition now fairly applies because it is known to the charity in advance of the financial years to which it relates and so it is no longer an exceptional circumstance. | |
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When applying the charity may wish to use adapt our standard letter relating to 'change in audit thresholds' and we would make a dispensation under Regulation 34(3)(b). In addition there may be regulatory or other consideration that would make a dispensation contrary to the interests of the charity. Accountancy advice will be required prior to a dispensation being granted in any of the following circumstances: |
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Provided all of the applicable criteria set out above are met then a dispensation can be given without accountancy advice. In all other instances seek advice from a Commission Accountant. |
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Under the 1993 Act (before the amendments introduced by the 2006 Act took effect) where the audit threshold has been exceeded in either of the two financial years immediately preceding the relevant financial year, an audit was required for non-company charities. This requirement (known as the "two year rule") was dropped for financial years starting from 27 February 2007. |
| Whilst the dropping of the two year rule will be of help to charities with financial years starting on or after 27 February 2007, it will still apply to charities whose current financial year started before that date. There are therefore likely to be some charities with an income or expenditure of less than £250,000 for the current financial year which must have an audit because of the two year rule. | |
| Where a charity is able to demonstrate that its routine level of income and expenditure is normally below the threshold, and that exceeding the audit threshold in a previous year was due to exceptional circumstances, such as a capital grant, and that the cost of an audit would be disproportionate to the charity in view if its activities, then consideration can be given to granting a dispensation based upon exceptional circumstances. | |
| It is not considered necessary that an independent examination should have been carried out before the dispensation is granted. | |
| In determining whether exceptional circumstances exist, the charity would need to demonstrate that exceeding the audit threshold is not a recurring event. In particular: | |
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| It should be noted that the prior year rules that were previously contained in the 1993 Act did not apply to company charities and therefore dispensation cannot be given on this basis. | |
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In addition there may be regulatory or other consideration that would make a dispensation contrary to the interests of the charity. Accountancy advice will be required prior to a dispensation being granted in any of the following circumstances: |
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Provided all of the applicable criteria set out above are met then a dispensation can be given without accountancy advice. In all other instances seek advice from a Commission Accountant. |
| When considering whether to offer dispensation on grounds, other than the two-year rule, consideration will be given to the exceptional circumstances outlined by the applicant. It should be noted that the receipt of a large grant or similar funding is of itself an insufficient reason to grant a dispensation for an independent examination to take place because we consider that the risks associated with the increased resources merit the higher degree of assurance provided by an audit. | |
| Neither could the dispensation be given year after year to the same charity, simply because the trustees felt that their independent examination arrangements gave an assurance which was comparable to an audit. | |
| Although it is difficult to lay down any hard and fast rules, the general principles to apply are based on demonstration by the charity that the circumstances are exceptional and not recurring and consideration by us and the trustees of the risks involved. Our approach is that the increase in audit thresholds has resulted in a more focussed targeting of the audit regime. We will not therefore agree dispensations which fall outside the situations described above unless there are truly exceptional circumstances. These are likely to be on a "one off" basis and we must be satisfied that the exceptional circumstances and the nature of the funds otherwise subject to audit are such that there is a reduced risk to the charity to justify a lower standard of external scrutiny. | |
| Should applications for a dispensation arise due to external scrutiny requirements in the governing document then this would not be interpreted as creating exceptional circumstances but the trustees should instead be advised to consider removing the requirement for an audit from their governing document. | |
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If uncertain as to whether the reason given by trustees demonstrates an exceptional circumstance, then advice should be taken from a Commission Accountant. |
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5.8 No recordable transactions in the relevant financial year | |
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For accounting periods commencing before 27 February 2007 then if the charity has had no recordable accounting transactions in the relevant financial year even though the charity is continuing to provide a charitable service (eg, a "community land" charity) a dispensation may be sought under Regulation 10(2)(d) of The Charities (Accounts and Reports) Regulations 2005 . |
| Accountancy advice need not be sought if the applicant verifies that no transactions have taken place in the financial year. | |
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For financial years commencing on or after 27 February 2007 the thresholds requirements for audit or examination are based only on gross income in the financial year and so no requirement can arise where there are no accounting transactions in the financial year (s.43 of the 1993 Act). |
| For financial years commencing on or after 27 February 2007 the complex rules whereby the gross income or total expenditure in a previous financial year could trigger an audit in the two subsequent financial years have also been removed. | |
| There may be historic instances of a technical default where gross income or total expenditure had been in excess of £250,000 in one of its two preceding financial years, which would make it subject to audit. The circumstances where we will consider a dispensation in such cases is explained in section 5.4 above. | |
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6. Dispensations and charitable companies | |
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For financial years commencing before 1 April 2008 charitable companies that are incorporated under Companies Act provisions were subject only to the external scrutiny arrangements of Companies Act 1985. The Commission therefore has no powers to give either a dispensation for audit or providing a report by a Reporting Accountant in the case of small charitable companies. |
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For financial year commencing on or after 1 April 2008 small charitable companies whose accounts for a financial year are not required to be audited in accordance with Part 16 of the Companies Act 2006 may still be subject to audit or independent examination under the provisions of the 1993 Act. |
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We may provide dispensations under Regulation 34 of the Charities (Accounts and Reports) Regulations 2008 in relation to scrutiny requirements of section 43 of the 1993 Act to small charitable companies on the same bases as set out in section 5 above. However, we may not grant a dispensation for accounting periods commencing before 1 April 2008 or in relation to any audit duty imposed by the Companies Act 2006. |
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Where a dispensation request is received from a charitable company accountancy advice should be obtained to ensure no requirements arise for audit under Part 16 of the Companies Act 2006 |
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7. Altering a charity’s financial year | |
| 7.1 Why change the financial year? 7.2 Charitable companies 7.3 Non-company charities 7.4 Giving our consent | |
| A charity may wish to alter its financial (accounting) year for many reasons, for example to coincide with the financial year of its parent charity, where two or more charities prepare combined accounts under a uniting direction or to coincide with a subsidiary's financial year or to coincide with that of major public sector funders in order to economise on reporting costs. | |
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Charitable companies are subject to company law and are therefore bound by the provisions of the Companies Act and we have no power to give consent to alter a financial year end. Non-company registered with us and excepted charities are permitted to alter their financial years in accordance with the Charities (Accounts and Reports) Regulations 2008 but in certain circumstances they are required to obtain our consent when altering their financial year. |
| A new financial year begins immediately after the old financial year has ended without a gap so ensuring that no transactions are missed and that all transactions are reported in a financial year. All charities can vary a new financial year by up to 7 days either side of the end date of the previous financial year without it counting as an alteration. | |
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Charitable companies prepare their first accounts for a period of not less than 6 months and not more than 18 months to their accounting reference date. Normally each subsequent financial year is of 12 months duration (Companies Act 2006 section 391(5) and 391(6)). Thereafter charitable companies can shorten their financial years as often as they wish but can normally only extend their financial year to a maximum of 18 months once in any 5 year period (Companies Act 2006 section 392(3)). When considering whether gross income exceeds the audit threshold, the income is pro rated to a 12 month period and then compared with the applicable threshold (section 477 (3) Companies Act 2006). |
| Any change in the accounting reference date must be reported to Companies House and for further information Companies House guidance can be accessed via their website http://www.companieshouse.gov.uk/about/guidance.shtml | |
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Non-company charities are governed by charity law. Part 6 of the Charities Act 1993 requires accounting records to be kept and for trustees to prepare a statement of accounts for each financial year in accordance with the Regulations. |
| Exempt charities are required to keep proper accounting records and prepare consecutive statements of accounts (section 46) but are not subject to the Regulations but an exempt charity's financial year is limited to a maximum length of 15 months. | |
| Registered and excepted charities are subject to the Regulations and the Regulations require the first financial year to be of no less than 6 months to a maximum of 18 months (see Regulation 3 of The Charities (Accounts and Reports) Regulations 2008). Any subsequent financial year is normally of 12 months duration but where there are exceptional reasons the trustees may elect to shorten it to a minimum of 6 months or extend it to a maximum of 18 months. We would generally accept the circumstances described in section 6 as providing sufficient reason. | |
| Trustees require our consent if they seek to alter their financial year more than once in any 3 year period i.e. if the year is changed, the year following and the subsequent financial year must be of 12 months duration unless we consent to any further change. When considering whether gross income exceeds the audit threshold, the income is that which is reported in the period however long or short it may be. | |
| A charity may only alter its accounting reference date (shortening or lengthening the financial year) where the trustees are satisfied there are exceptional reasons. Where our consent is required we should normally be advised in advance and before the accounts have been signed off by the trustees and where applicable submitted for external scrutiny. Where consent is given ensure that Information Division is advised so that the timing of the issuing of the Annual Return can be adjusted. | |
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Whilst a request will normally be approved, the advice of a Commission accountant should be taken when considering each request to identify if any risk factors are present which would lead us to refuse to approve the request. Risk factors which may give grounds for refusing the request include: |
| a) the charity is subject to a section 8 inquiry; | |
| b) the charity has previously shortened its financial year, and the history of the filed accounts are such that it is likely that the motive for the repeated shortening of the financial year is to avoid audit or external scrutiny; | |
| c) no exceptional reasons have been provided; and | |
| d) the exceptional reasons given are not considered persuasive. | |
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8. Levels of authority | |
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Audit dispensations may be granted by PB4s and above by letter. However in those few cases where accountancy advice is required this advice should be recorded as a file note. |
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9. How to record that a dispensation has been granted | |
| There is no legal requirement for us to log centrally the granting of an audit dispensation. The responsibility for complying with the audit requirements for their charity lies with the trustees. For the purposes of our records, it will be sufficient to record the granting of a dispensation on the CMS case log. | |
| A copy of the dispensation letter should be filed on the charity’s CR file. For this reason, the letter granting the dispensation should follow the recommended wording; and should not normally include details which are not for the public record. If, in exceptional circumstances, this is unavoidable, a copy of the letter should, instead, be scanned or filed on the charity’s key document file. | |
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Glossary of Terms used in this Guidance | |
| 1993 Act | |
| accounts | |
| annual report | |
| audit | |
| charity trustees | |
| exempt charities | |
| gross income | |
| Part 6 | |
| Regulation # / the Regulations | |
| threshold(s) | |
| total expenditure | |
| trustees | |
| unincorporated charities | |
Index to further related information
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