With a shortfall in charity finances predicted, and tax system changes to navigate, how can charities stay on top of their finances in 2016? Nick Brown guides us through the fundamentals
In July of this year, the NCVO published a financial review which concluded that cuts to government funding (among other factors) will leave a staggering £4.6bn shortfall in UK charitiesí finances by 2018/19. There are things you can do to help weather the storm, and with 2016 upon us, top of the list of your New Yearís resolutions should be getting your charityís finances in order.
From taking account of changes in legislation and services, to keeping a track on your assets and liabilities and investing in training, good financial management is as much about being proactive as it is reactive.
In this article I want to take a look at some of the ways you can look to get a better grip on your charityís finances and be better prepared for future challenges. First though, letís look at two important upcoming changes from HMRC in 2016.
Be prepared for changes to the rules
The tax system is often prone to changes in rules, as well as the adoption of new systems. Itís wise therefore to keep an eye on any announcements coming from HMRC, as well as paying attention to the Chancellorís budgets, so you can make any necessary changes in good time.
Below are a couple of things to look out for in 2016:
· New Gift Aid Declaration (GAD)
In November HMRC published a new model GAD for both single and multiple donations. All charities will need to make sure they have updated their current declarations with the new wording by 5 April 2016. Any declarations made after this date will be invalid.
Although HMRC is accepting donations based on the new wording already, many charities will need to run down their stocks of printed material containing this text. They will also need to plan to update their materials and fundraising scripts to the new wording as soon as possible. You can find the new Gift Aid Declaration wording here.
· New VAT refund scheme for charities operating in certain areas
Following changes made in the Chancellorís 2015 budget, VAT refunds can now be made by any charities operating in the areas of palliative care, air ambulance, search and rescue or medical couriers. For more information please refer to the VAT Notice 1001.
Map your assets and liabilities
One of the most important prerequisites of running a financially responsible charity is keeping one eye on the future. For small charities that havenít already done so, this should mean creating a cashflow forecast so that you can predict income and outcome in the months ahead, based on recurring and one-off payments and receipts.
Part of creating a watertight accounting model for your charity will be mapping your assets and liabilities. Your assets can include bank accounts, property, expertise and intellectual property, while your liabilities must take into account all future liabilities like pensions.
Factored into this must be a clear understanding of the tax reliefs your charity is entitled to claim. Any changes to your funding model could mean losing these benefits, so itís important to know what they are, and under what circumstances you could lose access to them.
Understand and utilise your skill base
One of the ways you can help create a financially effective and strategic charity is to look to your main asset; your trustees. As well as being passionate about the charityís aims and goals, trustees will often bring a huge amount of skills to the table. Whether itís IT, marketing or financial know-how, you should utilise and nurture this skill base.
If none of your trustees have any financial training then you could look to invite professionals to the table that will help you fill this skill gap.
Itís not just trustees either. Employees and volunteers may also have important and useful skillsets you just didnít know about, simply because you havenít asked. Whether itís basic bookkeeping knowledge or a chartered accountancy qualification, make sure you understand the people who make up your charity, and utilise your skill base.
Invest in training
Once youíve ascertained how much financial expertise you have on board, you should not only look to use it, but also to nurture it and grow it. Training is an important part of this. Both the DSC and the NCVO offer financial training material on their websites and run courses throughout the year.
As well as helping your trustees, volunteers and employees gain general skills around things like campaigning, volunteer management and governance, there are courses that deal in specific legislation that even qualified accountants will need brushing up on. Remember, just because someone once practiced accountancy it doesnít mean theyíre up to speed on all the specific legal and financial legislation concerning charities.
Outsource where necessary
However talented your skill base is and whatever you put aside to invest in their training, there will inevitably be times when you need to outsource certain financial functions. One of these may be payroll, which is notoriously time consuming.
There are also specific regulations and rules to take into account when it comes to applying government grants and tax accounting. Some accountancy firms have departments that deal specifically with charities and not-for-profits, and itís advisable to seek their advice on matters such as these.
While you may have a trained bookkeeper on your staff, they wonít make up for the expertise you can find outsourcing certain accounting functions to an external firm. While it may seem the cheaper option to use a volunteer, the financial penalties for them getting anything wrong are too great to take the risk. So whatever you do internally, make sure you keep your accountant in the loop.
For a complete breakdown of charity tax rules and forms visit HMRCís resource pages.