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Insights

What can charities do to re-purpose restricted funds to release additional funding?

Posted on 27th March 2020 in Charities and Social Enterprise, Coronavirus Pandemic

Posted by

James Evans

Partner and Solicitor
What can charities do to re-purpose restricted funds to release additional funding?

Many charities are in desperate need of alternative sources of funding to maintain vital services to beneficiaries whilst the coronavirus crisis continues. This is pending any additional support for the sector which may be forthcoming from government, and further announcements on this are eagerly awaited.

Many charities are seeking external support, for example by way of emergency public appeals for donations, or to approach funders such as community foundations which have established response funds for organisations particularly impacted by the outbreak, including Devon Community Foundation.

But those charities lucky enough to have reserves will also be looking to make best use of them. Charities which have restricted funds and endowments should be reviewing them and consider whether there is any scope to release restrictions so they can be used to support their activities.

Understand nature of the funds you hold

Firstly, it is important that trustees have a clear understanding of the nature of the reserves they hold. Some may be Designated funds or Restricted funds, and some may be Permanent Endowment.

Designated funds are those that the trustees themselves have earmarked for a particular purpose. As the restriction is self-imposed, the trustees can decide themselves to undesignated the funds and apply them for new purposes. 

Restricted funds are funds given to the charity for a specific purpose. This is a legally binding obligation and the trustees cannot remove or relax the restriction by themselves.

Permanent Endowment funds are those where the original intention was for the asset to be held by the charity forever and cannot therefore be spent. 

Review terms of restriction

If the restrictions are legally binding, the terms on which the fund was given to the charity in the first place should be reviewed (for example this could be a Will, deed of gift, or grant agreement) as it may be that these terms contain a mechanism for the restriction to be changed.

Charities Act powers

Otherwise, it may be open to the trustees to use various powers under the Charities Act 2011 to change restrictions over restricted funds to create additional flexibility, and in some circumstances to allow funds held as permanent endowment to be spent, as long as certain criteria are met.

Whilst these powers apply primarily to unincorporated charities, such as charitable trusts, they can also be potentially used in appropriate circumstances by incorporated charities such as charitable companies and CIOs in relation to funds held by those charities.

In many cases except for the smallest funds, Charity Commission consent must be obtained, but the Commission has stated it “will be as helpful as possible.”

Consider wider impact of making changes

The Charity Commission have issued guidance to trustees that  accessing or releasing restricted funds should only be considered as something of a last resort, if other options such as using free reserves are not possible. The Commission also encourages trustees to carefully consider the wider and longer term impacts of making such a decision on the charity’s overall financial resilience and donor relationships. 

Further help

Trustees should seek professional advice on this if you can. Tozers’ charities team is happy to help. Please contact James Evans for further guidance.

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