Trust Accounts, Audits, Independent Examinations & Tax
Contents
- Introduction
- Audits
- Independent Examination
- CBS Regulatory Framework
- Trusts & Tax
- Mutual Trading
- Trading Surpluses
- Corporation Tax Computations & Returns
- Tax FAQ’s
- Resources
Why the need for an independent review of the Trust Accounts?
The Trust Board is elected to manage the affairs of the Trust on behalf of the members.
The Annual Accounts are a report on the financial activities of your Trust provided for the members to assess how the Board have carried out their function in the last financial year.
- How much money was raised?
- How was this money spent?
- What assets – such as cash, or shares in the club – does the Trust have?
- How much money does it owe?
One of the guiding principles behind all Supporters’ Trusts is transparency.
That means not just doing the right things but being seen to be doing them.
An independent person reviewing the accounts adds credence to the view that the Trust Board are being open in the manner that they are managing the Trust on behalf of the members.
Audits
What is an Audit?
An Audit is a review of the Trust Accounts in line with the codified International Standards of Auditing (ISAs).
The Audit not only checks the voracity of the figures but also considers the adequacy of the underlying accounting records, the processes in place to ensure that all transactions are accurately recorded and whether the Trust has performed in compliance with its Model Rules or Constitution.
ISAs are onerous regulations governing the way the Auditor performs their role.
The Auditor is required to maintain comprehensive records that describe how they planned their work, the processes they undertook in carrying out that plan and ‘evidence’ to support each of the conclusions they have reached.
The end product of an Audit is the Audit Report contained within the Accounts.
When does the Trust need an Audit?
The Model Rules provide for “audited accounts” to be presented at each AGM.
Therefore, an audit is required for each year unless members voted to opt out of audit at the preceding AGM.
The onus in the various IPS Acts enshrine the right of members to hold the Board of the Trust to account for their actions and spending in the previous year, and they do this through gaining an independent report into the financial affairs of the Trust.
Who is qualified to conduct an audit?
This is a restricted field. Only those people who are qualified as ‘Registered Auditors’ under the Companies Act can carry out an Audit.
Anyone who is not sure whether they are so qualified is almost certainly not so qualified. The pool of available Auditors is shrinking and the demand on them to do ‘pro bono’ work for Charities and other Not-for-Profit organisations is increasing.
The ISA regulations require investment in time and training and all Audit firms are subject to external examination themselves to ensure they conform to the regulations.
What do we need to do as a Trust?
As alluded to above, the requirements of an Auditor in performing a full audit will be significant.
The Trust should do as much of the preparatory work as is possible, have robust accounting records and have available all the required documents in good order. This will reduce any additional work required by the Auditor, increase the likelihood that your Trust can retain the Auditor for future years and keep costs down to the minimum.
We have produced a checklist and guidelines to assist Member Trusts.
Independent Examination – the Audit alternative
What is an Independent Examination?
An Independent Examination (IE) is a form of lay audit.
It is not governed by statute and is not governed by International Standards of Auditing. It therefore carries significantly less weight than a full Audit.
In essence, an audit will assure members that the accounts are right, whilst an IE will confirm to members that there is no evidence to suggest the accounts are wrong.
The IE does amount to an Independent Review of the Trust Accounts and therefore goes some way to meeting the principle of openness by providing a level of comfort to Trust Members that the accounts presented at the AGM have been subject to an independent review.
Nevertheless, it is for the members of each individual Trust to decide whether the IE is sufficient as a form of scrutiny of their Society Board Members.
Whilst the process of IE will provide more information to members than a simple balance sheet, or a lay audit conducted without any guidelines, by its very nature, it cannot be seen as a replacement for an audit.
If members have any doubts, they should vote to retain a Full Audit.
The IE must follow the guidelines produced by the FSA.
The guidelines are based on the procedures set out initially by the Charities Commission but there is no link to that organisation and the Charities Commission has no connection whatsoever to the guidelines as they are applied to an Independent Examination of a Supporters Trust registered as a Community Benefit Society.
The examination is carried out by an Independent Examiner. The Examiners Report is required to be included in the Accounts presented to Trust Members for the AGM.
What do we need to do as a Trust?
If you are using a version of the Model Rules before 2014, you will first need to pass an amendment to your rules removing the need to have an annual audit, and replacing it with a rule that states that the Trust has to decide each year whether the members require an audit or require an Independent Examination.
Rules from 2014 onward already contain this rule.
Your AGM will need to pass a resolution each year stating that the members request that the society has an Independent Examination.
This resolution must be passed by a specific threshold.
You should also note that the rule change and exemption resolution cannot be passed retrospectively. If your Trust has failed to complete audits for previous years of account, you must still get those audited to fulfil your legal obligations.
We have produced a template of the AGM motion to exempt the Trust from audit.
Who qualifies as an Independent Examiner?
Whilst examiners do not have to hold a professional accountancy qualification, the Trust Board Members must appoint a person suitable for the circumstances of the Trust.
An understanding of accountancy principles and accounting standards will be needed and where possible a qualified accountant should be selected.
The guidance also gives consideration to the criteria of independence when selecting an examiner.
The prospective examiner should consider these guidelines prior to accepting appointment.
An independent examiner is an independent person who is reasonable believed by the Trust Board to have the requisite ability and practical experience to carry out a competent examination of the accounts.
An independent person
For an examiner to be independent that individual should have no connection with the Trust Board members which might inhibit the impartial conduct of the examination.
Whether this connection exists will depend upon the circumstances of a particular Trust but the following persons at least will normally be considered to have such a connection:
- Members of the Trust Board or anyone else who is closely involved in the administration of the Trust;
- a major donor to or major beneficiary of the Trust; or
- a close relative, spouse, partner, business partner or employee of any person who falls within the two categories above.
Requisite ability
An independent examiner must obviously be competent for the task that they are to do and must be familiar with accounting methods but need not be a practising accountant.
People such as local authority treasurers or retired accountants, would be suitable as independent examiners. All Trust accounts are prepared on the accrual’s basis so a commensurate understanding of accountancy principles and accounting standards will still be needed.
The quality of evidence of ability which is required will depend upon the size and nature of the Trust’s transactions. Trust Board members should consider taking independent references on the capability of the prospective independent examiner to carry out this function.
Practical experience
Trusts should satisfy themselves that prospective examiners have practical experience relevant to the Trust in question which might be by virtue of that person having:
- had an involvement in the financial administration of a Trust of a similar nature;
- acted successfully as an independent examiner on previous occasions for a Supporters Trust
- relevant practical experience in accountancy or commerce.
Selection procedures
Trusts should discuss fully with the prospective examiner the work of the Trust and their expectations.
They should ensure that the prospective independent examiner is conversant with the FSA Guidelines for independent examiners and the nature of the independent examiners’ report as set out in those guidelines. Trusts should take all necessary steps to satisfy themselves as to the matters referred to above
Letter of engagement
Trusts should ensure that any written terms of engagement recognise but do not limit the examiner’s duties. It is strongly recommended that Trusts issue an engagement letter to the Independent Examiner on initial appointment to properly set out the roles and responsibilities of each party. This initial letter should be renewed each year.
Trusts that do not follow these guidelines and gain suitable assurances from prospective examiners and from any references cannot be satisfied that they have taken all reasonable steps to obtain a competent independent examination of their accounts for the period in question.
We have produced a sample ‘Letter of engagement’ template.
CBS and Supporters Trusts – Regulatory Framework
There are 3 legal criteria relating to whether you require an audit:
- Legal, arising from the CBS regulations.
- Organisational, arising from your Rules.
- Procedural, arising from your last AGM.
All have to be met in order to be exempt.
The assumption underpinning this system is that since the Audit is the primary means for members to hold the Board to account and to scrutinise them, the audit is owned by them and done for their convenience, and not that of the Board of a Society.
Legal
If the Trust has a subsidiary company, or has assets of more than £1.4M, or has a turnover of more than £1,000,000, then it MUST have an audit.
If it has a turnover between £90K and £350K, it must have at least an accountant’s report, which falls considerably short of a full audit.
If the Trust has a turnover below £90K no audit is required BUT….
Organisational
If the Trust’s rules stipulate a full audit is required, then the rules have to be followed, regardless of asset base and turnover in that year.
The Model Rules all include a provision for full audit, so unless a Trust has passed an amendment to remove this, then your Trust must have an audit.
Procedural
If your Trust is eligible to dispense with having an audit (i.e. doesn’t meet the criteria in ‘Legal’ and has removed the rule on requiring an audit) then the Trust still needs to have voted at the previous AGM to dispense with having an audit for the subsequent year.
If such a motion wasn’t tabled, or wasn’t approved by an 80% majority, or where the numbers voting against counted for more than 10% of the total membership, then your Trust will still require an audit.
Trusts and Tax
One of the common questions we are asked is “what are the tax liabilities of Community Benefit Societies?”
It is acknowledged that some member organisations will operate purely as supporter trusts while others are supporter owned football clubs. The latter will have more varied activities and so their tax issues will be more complex. However, many trusts with no investment in their club also undertake commercial activities and so they too will have an exposure to CT.
For supporter trusts acting as a parent company to a football club incorporated as a company limited by shares, the guidance will be relevant only to the parent trust and the tax affairs of the subsidiary football club will be outside the scope of this note. Trusts with such a structure should undertake planning to minimise their overall tax liability, taking professional advice where necessary.
The guidance is general in nature and does not aspire to address the individual circumstances of all trusts and so members should exercise appropriate caution when acting on the guidance set out herein and should obtain professional advice if further clarification of CT rules applicable to their circumstances is needed.
Mutual trading
HMRC confirms that “a mutual trader is not liable to pay tax on trading profits that arise from their mutual trade” but less helpfully observes that “there is no statutory definition of mutual trading”.[1]
The key issue for supporter trusts will be whether it is possible to obtain partial exemption for the element of its activities which can be deemed to be “mutual trading”. Although there is no formal guidance to this effect, certain tax experts have suggested HMRC accepts this approach.
HMRC’s “Company Taxation Manual” provide some further guidance on mutual trading.[2]
For a body to be engaged in mutual trading there must be:
- Complete identity, as a class, between the contributors to the mutual surplus and the participators therein (see BIM24105), and
- arrangements which ensure that the surplus ultimately finds its way back to the contributors and no arrangements for it to go to anybody else (see BIM24110), and
- a reasonable relationship between the amount a person contributes to the surplus and the amount distributed to them on winding up (see BIM24115), and
- arrangements which place control in the hands of the contributors to the common fund (see BIM24120).
A body will not pass the tests for mutual trading if its legal framework does not include these rules.
In layman’s terms this mean that, for a society to be exclusively engaged in mutual trading, it will generate all its income from its members, whether by fees and subscriptions or by members buying goods and services from the society. It will then spend its resources on providing benefits to those members. Annual surpluses should be reinvested in the society while any residual surplus on winding up would have to be returned to members. The treatment of surpluses in a winding up will be dictated by the society’s constitution.
In practice, most supporter trusts’ activities are likely to be a combination of mutual and non-mutual trading and so, in order to minimise their liability to tax, trusts’ accounting records will need to identify its different sources of income, direct costs associated with that income and other indirect costs which will need to be fairly apportioned between mutual and non-mutual activities.
Model Clauses in Trust Rules
HMRC guidance emphasises the importance of the society having a set of rules or constitution which governs the relationship between the society and its members. All member trusts incorporated as CBSs will have a set of rules which comply with best practice as communicated by the FCA.
The Model Rules for a Supporters Community Mutual contain the following dissolution clause which, although helpful in establishing CBS status, is not consistent with mutual trading status.
If on the winding up or dissolution of the Society there remains, after the satisfaction of all its debts and liabilities any property whatsoever the same is to be transferred to:
- a sporting charity or sporting charities operating in the Area; and/or
- one or more societies established for the benefit of the community operating in the Area; and/or
- one or more societies established for the benefit of the community”
To achieve mutual status, the dissolution clause would need to provide for any residual surplus to be returned to members although, as mentioned above, the FCA would not consent to this.
Trading Surpluses
Most member trusts will generate income from a range of sources both mutual and non-mutual.
Examples of exclusively mutual income will include the following.
- Membership fees and subscriptions;
- Donations and gifts from members.
It should be noted that, where donations and gifts from members are conditional on being spent on a specific purpose, the associated expenditure would then not be deductible for tax purposes but should be set against the above income.
Examples of non-mutual income would include the following.
- Bar and catering;
- Fundraising events;
Again, the direct costs of these activities should be offset to arrive at a net surplus which would be subject to tax.
Depending on circumstances, other income such as grants or lottery income may not be taxable but, in all such cases, the tax treatment of any costs directly associated with the income would follow the treatment of the income.
If its systems permit, a trust may be able to identify the element of non-mutual income generated from members, for example if members received a discount on presentation of a card, in which case it might be possible to exclude the net surplus from sales to members in calculating the liability to tax.
There is then likely to be a balance of general overheads (i.e. administrative costs, property costs, etc) a proportion of which would also be tax deductible subject to apportionment on a “reasonable” basis between mutual and non-mutual net activities.
Importantly, in relation to fundraising activities, trusts should be sure to take advantage of the “Peterhead” principle[3] in calculating costs associated with those activities. This 1953 court case ruled that, in relation to weekly fundraising dances, the taxpayer could make a deduction for costs that would have been incurred had proper commercial rates been paid for the facilities and services provided free or at undercharge. The taxpayer in question had been making extensive use of volunteer staff to deliver the events and quite reasonably argued that the “surplus” from the events was being overstated as a consequence. Trusts wishing to take advantage of this ruling should therefore maintain appropriate records and cost the volunteer services appropriately.
Some supporters’ trusts may generate income from fundraising activities with a view to donating any surpluses to their club, in which they hold no material investment. It is recommended that such trusts should seek professional advice to ensure that any such payments, especially regular ones, are fully tax deductible.
Moreover, trusts investing surpluses generated from trading activities in shares in their club should be aware that the cost of shares would not be tax deductible.
Corporation Tax Computations & Returns
Regardless of a trust’s own view of its mutual status or whether or not it is generating taxable surpluses it should prepare and file tax returns (HMRC form CT600) in all cases and regardless of whether HMRC has ever requested a return. Failure to do so may result in financial penalties.
For limited companies, CT600s now have to be filed online, supported by accounts and a tax computation which, in most cases, now have to be submitted in iXBRL format which allows HMRC’s software to read the submissions. Conversion to iXBRL format requires specialist software, not commercially available for small companies, and so trusts are likely to need to rely either on their professional advisers or one of the specialist services advertising online in order to convert these documents.
Other entities (charities, CASCs, CICs, member clubs or unincorporated associations) may, by concession and subject to their turnover being below £632k p.a., continue to submit PDF accounts and CT600s via the Government Gateway.
HMRC does not appear to recognise a CBS as a separate corporate status. Accordingly, CBSs probably have the same obligations as limited companies although it may be possible for them to file via the Government Gateway selecting the option for member club/unincorporated association, thereby avoiding the obligation (and cost) of converting documents to iXBRL format. However, trusts would need to be aware that this approach might be challenged by HMRC.
Tax FAQ’s
As a Supporters’ Trust, how do we know if we are trading?
Trading involves operations of a commercial character providing goods or services to customers on a commercial basis.
What is a commercial basis?
Commercial activity is organisation in a business-like way with the likelihood of profit and is not primarily concerned with some non-business endeavour.
If the Trust owns and/or runs the club is that trading?
No. The club is a separate entity for tax. The club trades and pays tax on any profits that it makes. The club’s owners do not pay tax on the same profits.
Are our membership subscriptions taxable?
If they do not arise in the course of a trade, no.
If we send monthly newsletters to members, isn’t that trading?
The sending out of newsletters to members of a non-trading Trust is not of itself a trading activity.
What about donations to the Trust?
If they do not arise in the course of a trade, no.
We sell mugs/t-shirts/fanzines outside the ground every matchday to non-members – is this trading?
Yes, if undertaken on a commercial basis.
If the Trust raises funds by organising functions (e.g. discos) will these profits be taxable?
Whether these activities amount to a trade will depend on the particular facts of the case. If they are conducted on ordinary commercial principles then it is likely that they will amount to trading, and the profits will be taxable.
If we organise an annual fund-raising football match and charge admission, is this taxable?
The holding of an annual fund-raising event such as a football match where there is a charge for admission, may fall within the definition of a “trade”, with the result that any profits will be taxable.
Is the organisation of infrequent fund raising activity likely to be seen as trading?
Although activities such as running bazaars, jumble sales, dinner events and raffles may not amount to the carrying on of a trade in the ordinary sense, they may fall within the definition of a “trade”. If so, any profits earned are liable to corporation tax. However, see below for deductions that may be made in arriving at the taxable profits.
If the Trust trades, is that trade a mutual trade?
The trade is unlikely to be mutual trading. Any activity between members alone is unlikely to be trading. Any activity involving third parties cannot benefit from mutual trading status.
If the Trust trades and members provide their time and services free of charge what is tax deductible?
The amount that the Trust would have had to pay commercially to secure the services may be deducted in computing any taxable profit.
If the Trust runs a club established by its members for their own social or recreational purposes will any surpluses be taxable?
A club owned or controlled by the members does not, in its ordinary transactions with its members, carry on a trade.
The annual subscriptions paid for by members will therefore not be trading income of the club and any surplus will therefore not be taxable. However, if the Trust is carrying on a trade, subscriptions paid for access to the provision of goods or services provided by the Trust in the operation of its trade will form part of its trading income.
As a generalisation, Trusts are unlikely to be carrying on a trade. Thus no trade, no source, no tax.
If the Trust runs a lottery to provide funds for its football club what is the tax position?
This is a complicated area, if you need more information please contact HMRC or look on their website at www.hmrc.gov.uk/manuals/bimmanual/BIM61600.htm
If the Trust receives bank interest will this be taxable?
Yes, the Trust will be liable to corporation tax on its interest and other investment income in the normal way.
Conclusion
Member trusts’ constitutions do not meet the criteria set by HMRC for mutual trading and so trusts will have no automatic exemption from CT.
Nevertheless, elements of trusts’ activities, in particular, fees, subscriptions and donations from members, bear all the characteristics of mutual trading. Trusts should therefore argue that net surpluses from such activities are exempt from CT.
All trusts should submit annual accounts and tax returns to HMRC.
It is recommended that trusts should seek professional advice regarding their individual circumstances.
Resources
[1] https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim24015
[2] https://www.gov.uk/hmrc-internal-manuals/company-taxation-manual/ctm40960
[3] https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim24475
Guidance for an Independent Examiner
Independent Examiner Engagement Letter Template
Independent Examiners Report Example
Model resolution for the AGM Template
