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Spring-Budget-Notforprofit2021
Read time: 19 minutes
Last updated: 3 Mar 2021
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Spring Budget 2021: the arts against all odds - accounting for the effects of COVID-19 on arts and cultural charities

The last twelve months have demanded an incredible display of resilience from arts and cultural charities, and you’ve certainly risen to the challenge.

Where previously in-person ticket sales may have provided your primary income stream, you’ve now got online audiences and developed new revenue-generating activities. 

The power and importance of art to the nation has been highlighted in global fundraising campaigns such as ‘The Show Must Go On’ in support of theatres, museums and galleries. We’ve seen great engagement with online exhibitions, fundraisers and education resources, as well as literature, film and TV being consumed more than ever. All providing audiences with that much needed temporary escape from reality. As we move into Act Two: Post COVID-19, we see an opportunity, and with announcements made in the Spring Budget there is light at the end of the tunnel. 

To support you on the road to recovery, this article outlines the impacts of the Chancellor’s announcements, coupled with the roadmap to re-opening announced by the Prime Minister, as well as some common accounting themes we’ve noticed as we continue to support clients in this sector. 

About the authors

Catherine Biscoe

+44 (0)20 7556 1384
biscoec@buzzacott.co.uk

Luke Savvas

+44 (0)20 7556 1460
savvasl@buzzacott.co.uk

Where previously in-person ticket sales may have provided your primary income stream, you’ve now got online audiences and developed new revenue-generating activities. 

The power and importance of art to the nation has been highlighted in global fundraising campaigns such as ‘The Show Must Go On’ in support of theatres, museums and galleries. We’ve seen great engagement with online exhibitions, fundraisers and education resources, as well as literature, film and TV being consumed more than ever. All providing audiences with that much needed temporary escape from reality. As we move into Act Two: Post COVID-19, we see an opportunity, and with announcements made in the Spring Budget there is light at the end of the tunnel. 

To support you on the road to recovery, this article outlines the impacts of the Chancellor’s announcements, coupled with the roadmap to re-opening announced by the Prime Minister, as well as some common accounting themes we’ve noticed as we continue to support clients in this sector. 

Alternative revenue generating activities

Alternative revenue generating activities 

Due to the impact of social distancing requirements, many arts and culture charities have looked for alternative projects to allow them to continue to generate income while normal activities aren’t possible. We’ve seen several examples of these enterprises, including: commercial filming (using venues in a way that’s possible with significantly fewer people onsite) and opening space for local community hubs during lockdown periods. 

It’s important to bear in mind that while some of these new activities are likely to continue to fall within the charitable objectives of your charity, and as such would be appropriate for them to be presented as charitable activities in the financial statements. The more commercial activities being undertaken are likely to require disclosure as “trading” income – these could include using your space as a community hub or producing online content with an educational purpose.   

Another area to consider when undertaking alternative activities is how to allocate support costs given the change in the mix of projects being undertaken. Due to significant shifts in activities during COVID-19 closures, the basis of calculation for how to allocate support costs may need to change from time spent (given furloughing of staff) to floor space used, for example.  

It should also be considered whether a shift in activities will impact on grant funding agreed prior to the pandemic, as there may have been restrictions on the level of commercial services you can provide. We’ve noticed that funders are generally being more relaxed with arts and cultural venues since the first lockdown and understand that use of the venues to generate income, whether charitable or commercial, is necessary during this period. 

Similarly, with a shift to more commercial activities, the level of income that doesn’t fall under the charity’s primary purpose should be kept under review and carried through trading subsidiaries as required. This is to ensure your charity doesn’t surpass the small-scale trading limits for charities, which would result in potential corporation tax liabilities.

Allocating furloughed staff expenditure

Allocating furloughed staff expenditure 

For many of you, staff costs represent a significant proportion of total expenditure, and as a result of the pandemic you may have had to put employees on furlough, via the Coronavirus Job Retention Scheme (CJRS), as projects, performances and exhibitions have halted, or been reimagined to suit an online environment.  

If the employment costs of large numbers of staff are being funded by the CJRS, allocating this spend to projects or activities may be considered distortive or misleading by some users of the accounts. Others might see such costs as just another support cost to be apportioned. The following considerations are relevant here:  

  • How many staff have been furloughed?  
  • Were their salaries previously allocated directly against projects or not?  
  • Are projects being funded predominantly by restricted or unrestricted grants? 

Further considerations should be taken into effect depending on how your charity is funded: 

  • Your activities are largely funded by unrestricted income (such as ticket sales) - most staff costs have previously been classified as support costs. Or, if the number of staff for whom a CJRS claim is being made is relatively small (e.g. due to high use of contracted staff), the distortive effect of allocating the cost of staff may be minimal. In such circumstances, which are likely to apply to museums and theatrical production companies in particular, continuing to apportion costs on a similar basis to previous years may be appropriate.  
  • You’re a more project-based charity – you may have altered your approach to provide less staff intensive online projects for beneficiaries, allocating a high proportion of staff time to these activities could produce an unfair overstatement of expenditure on project work, particularly if a high proportion of staff have been furloughed.  
  • Your projects are predominantly funded by restricted grant income - it would not be appropriate to show the cost of staff funded by the unrestricted CJRS grant against projects in the restricted fund. In such scenarios, it is likely to be more appropriate to show the cost of furloughed staff as a separate line of “other expenditure” which directly offsets the CJRS income. 

Ensuring that expenditure is allocated to appropriate headings is important to provide a fair overview of your charity’s financial activities for everybody reading your accounts, whether the audience is a grant funder, interested beneficiary or a regulator.  

An extension to the furlough scheme was announced as part of the Spring Budget and the impacts of this should be factored into your reopening plans. You can find out more information on the updates to the furlough scheme here

Endless scenario planning and going concern

Endless scenario planning and going concern 

Pandemic or not – it has always been prudent to budget for several different scenarios to aid with reserves and cashflow planning. Sensitivity analysis, using a range of different assumptions, is a useful tool for management and the trustees to understand the financial impact on the charity of best and worst case scenarios.  

Scenario planning, sensitivity analysis and stress testing have been an ever-present companion for finance teams and management of arts and cultural charities over the past year. Constantly updating plans and financial forecasts and re-evaluating assumptions over: 

  • Public donations patterns 
  • Likelihood of success of grant applications 
  • Number of visitors allowed by the latest social distancing rules 
  • Length of time government support (such as CJRS) will remain available 
  • Future levels of inflation, austerity and/ or future government spending policy 
  • Changes in government tax policies (e.g. timing of VAT payments) 

In addition, the auditing standard on going concern was revised for accounting periods commencing on or after 15 December 2019, and so will apply for your December 2020 or March 2021 accounts. The revised standard places increased emphasis on auditors’ evaluation of the trustees’ assessment of the charity’s ability to continue as a going concern. As a result, you may have to provide the auditor with additional information relating to going concern. The audit team will scrutinise the going concern assessment, will challenge the robustness of forecasts, budgets and future plans, and stress test the key assumptions which underpin these.  

Cultural Recovery Fund

Cultural Recovery Fund 

The first round of funding from the Cultural Recovery Fund, administered by Arts Council England on behalf of the Department for Digital, Culture, Media and Sport, is well underway, meanwhile applications have been submitted for the second round of funding, covering the period from April to June. The outcomes of those applications is expected to be announced by the end of March. 

The Spring Budget saw the government committed to providing a further £300 million to extend the Cultural Recovery Fund, continuing support for key national and local cultural organisations. In addition, the government will also provide £90 million to continue supporting government-sponsored National Museums and cultural bodies in England. Please see our briefing for further details on Budget changes announced on 3 March 2021. 

The Arts Council had originally required that all funding from the first round of funding should be spent, or at least committed to be spent, by the end of March. However the ongoing national lockdown may mean that your plans for the first quarter of 2021 have changed significantly since your application was submitted, as reopening is delayed and activities are put on hold. Consequently you may have unspent funding at the end of March, and the Arts Council have announced that they will allow greater flexibility over how this can be used: 

  • Where your plans have changed, the Cultural Recovery Fund grant can be used to cover other eligible costs, even if these were not covered in your original application; 
  • If you still have unspent funds, then these can be used to reflate your reserves up to a level of 12 weeks’ income (so long as this doesn’t exceed your March 2020 reserve levels). You can use the grant in this way even if it wasn’t included in your original application, and no advance permission from the Arts Council is needed; 
  • Finally, if there are no further eligible costs to offset against the grant, and no scope to reflate reserves, then any remaining money can be carried forward to be used in the following quarter. 

In order to claim the final payment for the first round of funding, you will need to submit a statement of income and expenditure to the Arts Council certified by an independent accountant. We are currently in the process of planning and carrying out these certifications for a number of arts and cultural charities, and if your organisation has received funding that will require certification then speak to us about how we might be able to help. 

Gift Aid

Gift Aid 

Where events have been cancelled due to the pandemic, the government have now allowed Gift Aid to be claimed on ticket sales where the supporter has allowed the charity to keep the funds instead of claiming a refund.  

For Gift Aid used on general admission to view charity property, care should be taken that the donors are not automatically entitled to a refund due to closure as this would no longer be a ‘gift’ for Gift Aid purposes.  Careful consideration should also be given to voluntarily refunding the payment to the supporter as this may not be considered qualifying charitable expenditure and in the best interests of your charity.

More information and support
More information and support

The latest government guidance tentatively suggests that indoor entertainment and visitor attractions (including theatres, museums and galleries) will be permitted to open no earlier than 17 May (Step 3). Step 3 will also allow for indoor areas of hospitality to reopen, with table service required. This permission will be in line with the with wider social contact limits at this Step – in a group of 6 people or 2 households indoors; or in a group of no more than 30 people outdoors.

We, like you, look forward to this time, but in the interim, we have a range of support available for arts and cultural charities including guides and advisory insights. Alternatively, if you would like to speak to one of our experts about how we can help you with a cultural recovery fund audit, creative industries relief, claiming Gift Aid or other support, use the form below to get in touch with us.

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