An independent investigation into alleged financial irregularities at Charity Business has revealed that the company raised no fixed-fee invoices for the period May to September 2011 until October, meaning it failed to declare around £50,000 of output VAT in the correct VAT period.

The report by Haines Watts accountants was prepared in order to assist the board of parent company CBusiness Holdings “in their consideration of allegations of financial irregularities” brought by two Charity Business employees.  Civilsociety.co.uk has seen the first draft of the report, which is undated but is understood to have been prepared during October and delivered to the board on 21 October.

Haines Watts was already the auditor for Charity Business, but to “maintain independence”, the review was supervised by someone other than the audit partner.

In conclusion, the investigators stressed that in general, client money was paid out on a timely basis as agreed, that there was no actual loss to clients, and there was “no evidence of systematic misuse of client funds”.

VAT issues

However, the report does raise “a number of VAT issues”.  It shows that no invoices for monthly fixed-fee services were raised in April 2011, so that no output VAT was declared and paid on the company’s VAT return for April to June.  This was estimated to be around £10,000.

And a number of invoices were raised early in January 2011, apparently to beat the VAT rate rise to 20 per cent, in breach of HMRC rules. This underpayment was estimated to be in the region of £3,000-4,000. As a result, the investigators advised the company to “consider whether to raise VAT-only invoices to its clients to recover the VAT or whether to bear the cost”.

Regarding the £50,000 VAT bill for the May to September period, the report said that the board must decide whether to submit a voluntary declaration to HMRC to cover the late VAT or to account for it on the October to December VAT return.  

Steve Round, one of the two remaining directors of CBusiness Holdings, told civilsociety.co.uk that he could not discuss the contents of the report or what happened after the board received it, because it was now with the liquidators and formed part of their investigations. Chairman Bruce Keith did not return calls.

Client money held together with company money

The report also revealed that client money was sometimes held in the same account as office money. Direct debit income for charity clients was paid into the office account and then paid out to the client from that account, although in some cases involving large amounts, these “may be” transferred to the client account from the office account and then paid out to the client from that account. There were no written procedures for the handling of client money.

There were four large amounts of client money belonging to the UK Council for Psychotherapy which were paid into the office account and then transferred to the client account after periods varying from two to 14 days. These amounts ranged from £109,125 to £610,139.

The report’s authors pointed out that while Charity Business was “not a regulated business with regard to its treatment of client monies” and therefore had no legal obligation to hold client money separately from its own, good practice should dictate that they be kept apart.

“In view of the charitable status of its clients and the fact that these are donations it would be preferable if client monies were entirely separated from business monies,” the report said.  

Charity Business’s CEO Mark Freeman was the only employee that could authorise client money transfers, according to the report.

UKCP's chief executive, David Pink, said the organisation was "surprised and disappointed" to hear from civilsociety.co.uk that there may have been irregularities in business practices at Charity Business.

"We have received all of our expected payments from our members via Charity Business," Pink added. "We are pleased, despite the short notice given on the demise of Charity Business, to be well on our way to going live with a new supplier."

£10k bridging transfer

The report also singled out a specific instruction by Freeman to transfer £10,000 from the client account to the office account on 11 May 2011 and back again on 13 May 2011.  According to the report, this arose because the instruction for payment of the company’s quarterly VAT bill was set for 11 May 2011 rather than being set up to coincide with the regular monthly direct debit collection run, which came in on 13 May for £38,925.  Therefore, the money was used for two days to help cover the company’s VAT liability of £15,249.

Had this transfer not taken place, and £6,000 of client money not already been in the office account, the company would have exceeded its £45,000 overdraft limit by £11,000.

“The risk to clients was if the company failed in that two-day period,” the investigators stated. “This did not happen and there was no actual loss to clients.”

The report also states that the investigators were waiting for information regarding two other transfers from client account to office account, totalling £23,500.

Cashflow forecast

A cashflow forecast prepared by Freeman in October also shows how precarious the company’s financial situation was.  This forecast suggested that the overdraft facility would be exceeded by around £10,000 in the last week of December, the first week of January, and then again in the third week of January 2012 – and by more if the VAT liability was included.

Freeman was dismissed as CEO as a result of the report and has since filed a claim for unfair dismissal.  Click here to read more about this.

Freeman responds

Invited to respond, Freeman issued a statement to civilsociety.co.uk that said: “As a director of Charity Business for 12 years until October 2011 I was sorry to hear that it had ceased trading.  My current venture has no connection to outsourcing activities.

“The board was aware that in respect of the VAT the business had a HMRC ruling as to how to operate under a shared services environment.  This would have allowed the sector to benefit from the European ruling and Charity Business was in the process of implementing that framework throughout 2011.

“In respect of the client funds the business was not required to be regulated and the funds were never at risk as set out in the report.

“The claim for unfair dismissal was not defended by Charity Business and the Tribunal is now rendering a summary judgement against the company.”

Liquidator’s statement of affairs

Documents filed at Companies House by RSM Tenon, liquidator of CBusiness Holdings Ltd, last week, show that there is no value attached to any of the assets on the balance sheet.

The net debts total £597,332, of which £455,159 relates to other companies in the CBusiness group. External creditors are owed £110,755 and HMRC is owed £27,418, though none of this is attributed to VAT.

The figures make clear that shareholders, which include Triodos Bank, will not get any money back.