Scottish Government

This draft Regulatory Impact Assessment aims to provide information on the options considered in relation to the accounts regulations for charities operating in Scotland, and their likely impact on the charitable sector. Under Scottish Cabinet rules, any piece of legislation which will create or extend a regulatory regime must include a consideration of the impact of regulation on the relevant sector. We would welcome your comments on the assumptions made here, in order to revise this RIA and improve its accuracy.

Purpose and intended effect of regulation

(i) The objective

The Scottish Executive is committed to reform the regulatory regime for charities, in order to support the charities sector and to safeguard the public interest in relation to charities. The Charities and Trustee (Scotland) Bill is currently being considered by the Scottish Parliament. This draft Regulatory Impact Assessment ( RIA) forms part of the consultation paper setting out the Executive's proposals for the accounting regulations which will follow the Bill if enacted.

This RIA provides background information on the options which were considered developing the proposals, and the probable impact and cost of these options. We would welcome views on the issues considered in this RIA, which will be amended and published in final form when the regulations are laid before the Scottish Parliament.

Devolution: The regulations will only apply to charities operating in Scotland.

(ii) The background

In 2004 the Scottish Executive introduced the Charities an Trustee Investment (Scotland) Bill to the Scottish Parliament. The Bill followed the recommendations made in 2001 by the Scottish Charity Law Review Commission (the McFadden Commission) and had been consulted on during the summer of 2004.

Section 45 of the Bill confers powers on Ministers to make regulations setting out the detailed accounting requirements for all charities registered with OSCR. The current regulations are made under sections 4 and 5 of the Law Reform (Miscellaneous Provisions) (Scotland) Act 1990 and will fall when the Bill is passed and these sections of the 1990 Act are repealed. The new Bill provides us with the opportunity to update the accounting requirements for charities to meet current accounting standards and best practice.

In 2004 the Charity Commission reviewed the Statement of Recommended Practice: Accounting and Reporting by Charities (the charities SORP) in line with the Accounting Standards Board ( ASB) code of practice. The proposals for the new regulations follow the new Charities SORP to ensure that recommended best practice and the law are compatible. The principles adopted in the SORP of improved transparency and accountability are consistent with those driving the Bill and it is therefore felt to be appropriate for the regulations to rely on the Charities SORP. The regulations seek to deliver a system that is fit for purpose and protects the public interest without being over burdensome or more costly than necessary.

(iii) Risk assessment

The new regulations are an essential part of the implementation of the Bill. Without the new regulations, the accounts provisions of the Law Reform (Miscellaneous Provisions) (Scotland) Act 1990 and Charity Accounts (Scotland) Regulations 1992 cannot be repealed.

These regulations do not take account of the new Charities SORP and do not meet current accounting practice. The inconsistency between the regulations and the SORP would increase the possibility for confusion and encourage the development of inconsistent approaches. This would severely hamper the attempts to provide a transparent and straightforward regulatory framework for charities in Scotland and undermine the principles of the Charities and Trustee Investment (Scotland) Bill.

Options

Option 1: Do nothing

This is not a viable option as when the accounting sections in the Charities and Trustee Investment (Scotland) Bill are commenced the current regulations will fall. This would leave no detailed accounting requirements for charities in Scotland and would seriously undermine the principles of clarity and transparency which underpins the Charities and Trustee Investment (Scotland) Bill.

Option 2: No detailed regulatory requirements and require accounts produced on an accruals basis to follow the SORP.

By relying on the SORP charities will be able to meet changing accounting practices inline with the SORP without being forced to meet conflicting statutory obligations. This option would allow for the adoption of the updated accounting practices. There would be no clarity as to how receipts and payments accounts should be compiled.

Option 3: Set out clear requirements in regulations which refer to the methods and principles in the SORP.

This option will ensure the regulations meet Scottish needs and meet current accepted accounting practice, reducing the possibility of conflicting requirements. Referring to the principles and methods in the SORP provides the increased flexibility of allowing the regulations to adapt as accounting practices change. The requirements for receipts and payments accounts are clearly laid out.

Option 4: Implement regulations which re-state the requirements in the charities SORP.

This option would allow for the adoption of current accounting practices and ensure that the thresholds could be easily altered if necessary. It would however mean that the regulations lose the flexibility of adapting to changing accounting practices by referring to the SORP.

Benefits

Option 1: Do Nothing

There are no benefits to this option as there will be no clear regulations for charity accounts. This would cause confusion among charities as to what they were required to do to comply with the provisions in the Charities and Trustee Investment (Scotland) Bill and would not provide clarity for the general public.

Option 2: No detailed regulatory requirements and require accounts produced on an accruals basis to follow the SORP.

This option would allow for the adoption of the updated accounting practices and allow the flexibility to adapt to changing practices but there would be no clarity as to how receipts and payments accounts should be compiled. Stating the thresholds in regulations instead of Primary legislation allows them to be altered more easily as circumstances change.

Option 3: Set out clear requirements in regulations which refer to the methods and principles in the SORP.

This option will ensure the regulations meet Scottish needs and meet current accepted accounting practice. Allowing the regulations to adapt as accounting practices change and the requirements for receipts and payments accounts will be clearly laid out. Stating the thresholds in regulations instead of Primary legislation allows them to be altered more easily as circumstances change.

Option 4: Implement regulations which re-state the requirements in the charities SORP.

This option would allow for the adoption of current accounting practices but would mean that the regulations lose the flexibility of adapting to changing accounting practices by referring to the SORP. Stating the thresholds in regulations instead of Primary legislation allows them to be altered more easily as circumstances change.

Business sectors affected

All existing charities operating in Scotland will be affected by the proposals in the attached consultation paper. Currently non-charitable voluntary organisations may also be affected, since they may gain access to charitable recognition for the first time, under the revised definition of charity contained in the Bill.

Of the 27% of the sector for which we have information approximately 33% have an income over £25,000 and are currently required to provide fully accrued accounts. Increasing the threshold to £250,000 will mean approximately 8% of Scottish charities will have to produce fully accrued accounts, allowing the vast majority of charities to produce simplified accounts on a receipts and payments basis ⁷. All charitable companies will have to produce fully accrued accounts to comply with company law.

Charitable RSLs and Higher and Further education institutions will be required to provide accounts to OSCR but will be allowed to follow their more specialist SORPs where these conflict with the charities SORP.

Issues of equity and fairness

The proposals will introduce a proportionate and consistent regulatory regime for all charities operating in Scotland. Regulatory requirements will be greater for larger charities, and do not aim to increase burdens on smaller organisations.

A proportionate approach has been taken to those charities covered by other specialist accounting procedures. The proposals also introduce a requirement on the charity regulator to seek to work in partnership with other existing regulators, to reduce the regulatory burden on charities.

UK charities operating in Scotland with an income between £250,000 and £500,000 will be required to have their accounts audited despite not having to in England and Wales. We believe that all charities operating in Scotland should be subject to the same audit requirements.

Compliance Costs

Increasing the threshold for producing fully accrued accounts from £25,000 to £250,000 means that roughly an extra 27% of charities will now be able to choose to produce accounts on a receipts and payments basis. Increasing the audit threshold from £100,000 to £250,000 will allow around 7% more charities to opt for independent examination instead of audit. These figures are taken from SCVO's "Analysis of the Scottish Charities Sector" and are based on the 7762 charities they have financial information on. Assuming there are 28000 charities in Scotland this means an extra 7560 charities could choose to produce simplified accounts with an extra 1960 able to have their accounts independently examined. This is a de-regulating move which will simplify accounting procedures for a sizeable number of charities.

We have been unable to obtain a representative estimate of how much it costs charities to produce fully accrued accounts or those produced on a receipts and payments basis. It would be helpful if respondents could provide an indication of these costs.

It is extremely difficult to asses the cost of auditing to charities as they vary greatly depending on circumstances. However increasing the number of charities which can have their accounts independently examined should reduce costs for those charities as it is possible to have an independent examination for free. The proposed regulations therefore have the potential to reduce the accounting costs for a number of charities.

Training Costs

There will be additional training costs when the regulations are brought in to allow charities familiarise themselves with the new procedures. These costs include the adoption of the revised accounting procedures contained in the charities SORP which charities would have to consider whether or not new regulations are introduced.

The larger charities with an income of over £1m will probably employ their own Finance staff to produce the accounts. The Home Office has estimated that these charities will need to give staff 2 days of private study time to assimilate the changes made by the SORP and that charities with:

• an income of over £10m would train 2 members of staff who would both attend a training course.
• An income of between £1m and £10m would train 1 member of staff who would attend a training course.

The smaller charities are likely to rely more on there auditors and independent examiners to ensure compliance but some training will be necessary.

It is estimated that:

• charities with an income of £300k - £1m will send 1 member of staff to a training course in addition to 1 days private study
• half the charities with an income of £25-£300k will send a member of staff to a training course in addition to 1 days private study
• charities with an income of under £25k will use _ a days private study

Consultation with small business: the Small Firms' Impact Test

The regulations only apply to charities we therefore do not expect that they will have an impact on small firms or micro-businesses.

Competition Assessment

The accounts regulations for charities as set out in the consultation paper are not expected to have any impact on competition. It will make charities' activities and finances more transparent, and clarify the legal requirements of charities. However it will not distort or restrict competition within markets in which charities operate.

Enforcement and sanctions

The provisions will be enforced by the Office of the Scottish Charity Regulator ( OSCR).

The regulations provide that if a charity fails to provide OSCR with a copy of it's accounts then OSCR may publish the name of that charity on the OSCR website. The Bill provides that OSCR may appoint a suitably qualified person to produce the accounts at the expense of the charity.

If OSCR believes that the failure to provide accounts is an indication of other problems they may also launch an inquiry into that charity. The Bill provides that charity trustees must ensure that the charity complies with the duties imposed by the act. If following an inquiry OSCR is satisfied that there has been misconduct it may suspend a trustee, restrict the transactions the charity can enter into or freeze the charities assets for 6 months. OSCR may also apply to the Court of Session to have the sanctions made permanent.

There will be a right of appeal to an Appeal Panel (or direct to the courts) against any of these sanctions.

Monitoring and review

The regulator will be tasked with reviewing implementation of the legislation and regulations, and advising the Executive of any need for change. The Executive will review the impact of the regulations within ten years of it coming into force.

Consultation

The Charities and Trustee Investment (Scotland) Bill was developed following extensive consultation. This draft RIA and the proposals for the accounting regulations contained in the accompanying consultation paper is now produced for comment. It has been distributed to a range of key stakeholders, including national and local voluntary sector intermediary organisations, representative bodies of particular groups of charities, professional bodies, local authorities, and all those organisations which have responded to previous Executive consultations on charity law reform.

It is also available on the Scottish Executive website consultations page.

We would value your comments on this RIA, along with your responses to the consultation by 4 July 2005

Contact

Any queries about this RIA should be addressed to:

Fiona Warne
Charity Bill Accounts Regulations Consultation
Voluntary Issues Unit
Scottish Executive Development Department
2-G, Victoria Quay
Edinburgh EH6 6QQ
Tel: 0131 244 4023
Fax: 0131 244 5508
Email: charitybill@scotland.gsi.gov.uk

Summary and recommendation

Based on the cost/benefit analysis above, we recommend option 3.

The consultation paper has been prepared based on this approach.

We encourage you to submit comments on this approach, and any evidence on costs and benefits that may inform the legislative process.