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Lord Bassam of Brighton: I shall approach the amendment on a slightly different tack this time. As the noble Lord, Lord Hodgson, knows, I am usually the first to give him credit when it is due. I have admired for some time his instinct for deregulation, which is admirablewe are all in favour of deregulationbut he has let us down rather badly with this amendment. It would make things significantly worse, more difficult and expensive for potentially a large number of charities.
There are many landowning charities, such as those governing recreation grounds, allotments, libraries and so on, that have little or no income but have land interests. Because they are not required to prepare a balance sheet showing the market value of their assets, they are often not in a position to know whether they would exceed the £2.8 million asset threshold. There would have to be some sort of accompanying requirement on them to have their assets valued. However, some of those charities have such small liquid resources that, frankly, they could not afford the cost of a valuation, let alone the cost of the audit that they would then have to undertake if they found
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that, by chance, their assets were worth more than £2.8 million. It would be highly unsatisfactory if they had to sell some of their assets to pay for the cost of having those assets valued and their accounts audited. What would be the benefit in that? I cannot see it at all.
We know from Charity Commission figures that there are 123,000 charities with an annual income below £100,000. The proportion of those that have assets worth more than £2.8 million is not precisely known, but the commission's tentative estimate suggests that 10,000 or so charities could be caught by the requirement and would have to pay possibly for a valuation and certainly for a professional audit. I do not know how much such things cost; the noble Lord, Lord Hodgson, knows a great deal more about them than I do, but it seems out of all proportion to the risk involved in leaving them in the unaudited category. Those with income between £10,000 and £100,000 are in any case subject to a requirement for an annual independent examination.
Lord Hodgson of Astley Abbotts: I have enjoyed being on the end of the Minister's toasting fork. He has held my feet firmly to the fire. He makes a perfectly fair point, and I beg leave to withdraw the amendment.
(1) After section 49 of the 1993 Act insert
"49A GROUP ACCOUNTS
The provisions of Schedule 5ZA to this Act shall have effect with respect to
(a) the preparation and auditing of accounts in respect of groups consisting of parent charities and their subsidiary undertakings (within the meaning of that Schedule), and
(b) other matters relating to such groups."
(2) Schedule (Group accounts) (which inserts the new Schedule 5ZA into the 1993 Act) has effect."
The noble Lord said: This is a large group of government amendments. I shall not detain the Committee too long in explaining them, but some words need to be put on record so that the amendments can be made more comprehensible. I shall try.
In Grand Committee before the election, my noble friend Lord Dubs moved amendments on group accounting by charities. The purpose of those amendments was to introduce a requirement on a charity with subsidiaries under its controlwe shall call it the "parent" charityto prepare annual accounts relating to the whole group consisting of the parent and all its
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subsidiaries. The present requirement is that the parent and each of its subsidiaries should prepare accounts relating to itself alone. That does not give the reader of any individual accounts in any sense an adequate picture of the interconnected web of financial affairs of the group as a whole and, in some cases, can effectively allow the concealment of substantial flows of income and expenditure. I understand from the Charity Commission that, in practice, about 95 per cent of parent charities already prepare group accounts in the interests of transparency, so the new provisions will simply require them to carry on doing what they are already doing and will not impose any novel regulatory burden.
I responded sympathetically at the time to my noble friend Lord Dubs and agreed to consider his amendments with a view to tabling government amendments on Report. In the event and given the relatively complex drafting, there was insufficient time to prepare those amendments between Committee and Report. Members of the Committee will notice that the amendments are rather lengthy; we have taken the opportunity of the period since the Bill was reintroduced to prepare them.
I shall list the main provisions of the amendments. The first is to impose a general requirement to prepare group accounts on a charity which is a parent charity. The second is to allow my right honourable friend the Home Secretary by regulation to make exceptions to that requirement. That power could, for example, be exercised to relieve very small groups from the group accounting requirements in the interests of avoiding excessive burdens. Thirdly, the amendments allow regulations to prescribe the form and content of group accounts. Fourthly, they require a professional audit of the accounts of larger groups and a lesser examination of the accounts of other groups, using the same audit thresholds as apply to individual charities under the Bill. Fifthly and finally, they require the annual reports of parent charities to cover the group's activities as a whole.
Members of the Committee will no doubt want to study the new provisions closely at greater leisure, and I do not intend to detain the Committee with a detailed exposition of each one. Within the general framework that we propose, we remain open to sensible suggestions for refinements at the Bill's next stage. People should not take that as too big an invitation but, if something does not seem to suit or work, we want to know about it.
Lord Hodgson of Astley Abbotts: I thank the Minister for that comprehensive explanation of the matter that we debated at some length in Grand Committee in the previous Parliament. I shall not pretend that I traced the amendments from end to end, but has the Minister or his Bill team seen the letter from the Association of Charity
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Independent Examiners? It contains a number of detailed and technical points, to which, for the record, I shall refer briefly. I am sure that it would be then be helpful, given the Minister's kind invitation to consider refinements, if we could look at them in detail to ensure that we are, as he said, being properly deregulatory.
The concerns include the need for clarity about what is meant by "subsidiaries" and whether the proposals result in what is intended. The present position appears to be that parent charities who are incorporated, irrespective of the nature of their subsidiaries, must submit to consolidated accounts under company law. Subsidiaries that are themselves charities already have to account for their funds within the reporting of the parent charity, under the Charity Commission direction under Section 96(5) of the Charities Act 1993.
If that is correct, this proposal applies only to unincorporated parent charities with non-charitable subsidiariesfor example, charities with subsidiary trading companies. Given that this specific applicability results in the need to bring together charity and company law, the result is a sizeable increase in the volume and complexity of the accounting provisions of the current Charities Bill.
The second point concerns the definition of "gross income" and removing a number of charities out of the remit of independent examination and into the threshold of full audit. That is the reverse of the issue that the Minister chided me for a few minutes ago. By defining a charity's gross income as that of the,
in proposed new Schedule 5ZA paragraph 6(3)(b), it is easy to see that a number of charities which are currently eligible for independent examination, on the basis of an income comprising their own income plus the profit from their trading subsidiaries, would need move to a full audit if they had to include the income of their trading subsidiary, not just its profits.
The third and final point is the increased complication of independent examination which is, after all, meant to be a proportionate external scrutiny for smaller charities. As well as the charities which have to move to full audit, those whose aggregate gross income would remain small enough to allow them to opt for independent examination, rather than audit, would have a raft of new legislation to understand and comply with. Paragraph 6 of proposed new Schedule 5ZA, which deals with independent examination, would more than double the statutory requirements on independent examination.
In particular, the independent examination report would then have to be about the group, not just the single charity. That would entail both the examination of the subsidiary's accounts in some detail and an understanding of the principles of group accounts and consolidation, neither of which are requisite at the moment. This has both training implications for independent examiners and cost consequences for the charities affected.
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The Minister has proposed a complicated group of amendments and I have thrown back a complicated series of questions to him. I do not ask him to reply to these this evening, but it would be helpful if he could see whether this matter could be bottomed out before we reach the next stage of the Bill.
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