This article was published in 2020. Click here for an updated guide, including information on changes brought by the Charities Act.
With charities facing a significant decline in income due to the coronavirus pandemic, many are in urgent need of alternative sources of funding to tide them over.
Many will be looking for external support from policy makers, as well as those funders which have established response funds for charities, community groups and other voluntary organisations which have been affected by the outbreak of the coronavirus. Charities will also be looking closely at their reserves.
Charities may need to consider whether they can access their restricted funds and endowments to plug the shortfall in income. Charities may hold large “general” permanent endowment funds, which must be invested and only the income can be spent to support the charity’s activities. Those charities may want to think about whether some of that endowment is needed in addition to the income.
Charities may also hold restricted funds and endowments which can only be used for specific activities or projects. They will want to consider whether those restrictions should be changed or released in order to make those funds available.
Now is a prudent time for those charities which have restricted funds and endowments to review them and consider whether and how they can be used to support their activities.
Grant-making trusts and foundations holding restricted funds and endowments may similarly want to consider whether restrictions on funds they hold can be released to enable them to increase their grant-making activities to support charities, community groups and those in need.
It may be (as we often find when assisting clients with fund reviews) that some of your funds are not in fact subject to legally binding restrictions i.e. are not restricted funds at all and can be unlocked for use by simply removing a designation, rather than following any complicated procedures.
If the restrictions are legally binding, the Charities Act 2011 contains various powers enabling trustees to change and release restrictions over restricted funds and to allow endowments to be spent. Certain conditions must be met and, except with small endowments, Charity Commission consent must be obtained.
Alternatively, there may also be express powers to enable your charity to achieve these changes in the governing document of the restricted fund/endowment. This might be a grant agreement, deed of donation, or the terms of a will where the restricted fund comes from a bequest or such-like.
If the powers in the Charities Act 2011 or in the governing documents cannot be used, it may be possible to obtain a scheme from the Charity Commission to make the changes. This could apply, for example, if the fund does not fall within the relevant financial threshold or meet conditions for use of the power.
The Charity Commission has assured charities that its approach to regulation will be as flexible and pragmatic as possible at this time, while helping trustees to consider the wider or longer term impact of their decisions.
It has made specific reference to restricted funds in its recent guidance on responding to Covid-19. The Charity Commission cautions that accessing or releasing restricted funds should only be considered if other options such as using reserves are not possible, encouraging charities to carefully consider the wider and longer term impact on financial resilience and donor relationships. The Charity Commission recommends seeking professional advice but, constructively, promises to be as helpful as possible.
As highlighted by the Charity Commission’s ‘Revitalising Trusts Programme’, there are a significant number of charities and restricted/endowment funds held by charities which have been dormant or otherwise ineffective for some time. Now is the time to consider how they might be used as effectively as possible for the benefit of the charity sector and those who are reliant on its support.
For more information on unlocking your restricted funds please click here.