In what ways can a charity use its funds?

Charitable Funds

Many people in England and Wales provide charities with funds whether this is through individual donations given by themselves, donations through a fundraising event or funds provided to the charity through a charitable trust or a will.

Funds given for a specific purpose

Often funds given to charities will be given for a specific purpose. In this case the funds must specifically be used for this purpose. The accounting records of the individual charity should therefore distinguish between the different types of funds which are provided to them and the terms by which they were given.

What is meant by the term funds?

Funds given to charities can include monetary funds but can also include property and assets of any sort provided to individual charities.

Restricted versus unrestricted funds

The funds provided to charities will usually fall into one of the following two categories:

  1. Restricted funds
  2. Unrestricted funds

Restricted Funds

Restricted funds can be split into the following two categories:

  1. Restricted income funds
  2. Endowment funds

Restricted Income Funds

Restricted income funds are funds which are often created by charitable trusts whereby the purposes are specified by that trust. The purpose will either be specified by the donor in a specific letter or the terms of a public appeal which may have been running at the time of the donation.

Do they have to be used for the specified purposes?

Restricted income funds can only be used for the specific purposes for which they are given.

What happens if they are used for any other purposes?

If restricted income funds are used by a charity for any other purposes than those which were originally specified then this could amount to fraud or deception.

Endowment Funds

Endowment funds can be split into the two following categories:

  1. Permanent endowment funds
  2. Expendable endowment funds

Permanent Endowment Funds

Permanent endowment funds are funds which are given to a charity to be held as capital. In this case the donor has given no power to either the Board of Trustees for the charitable trust or the management company in charge of the trust to convert them to income.

The capital must therefore be retained for the charity, however, this does not stop the investment income derived from it – for example the dividends from the shares – being available for the general purposes of the charity. However, in some cases this will not be possible as this will be expressly forbidden in the terms of the trust.

What role does the Charities Act 2006 have to play?

The Charities Act 2006 enables charities to spend permanent endowment funds according to various safeguards and procedures which apply according to the size of the charity.

Smaller charities

Smaller unincorporated charities which have available endowment funds which are valued are less than £10,000 and which have an annual income of less than £1,000 are able to spend permanent endowment funds through their trustees or management committees without the involvement of the Charity Commission. Furthermore they will not be required to advertise their intention to do so.

However, this all depends upon the proviso that this is done for the reason that they believe that the charity’s purposes would be more effectively achieved.

Larger Charities

Larger Charities which have a single purpose, endowment funds valued at more than £10,000, an annual income of over £1,000 are able to pass a resolution agreeing to spend a permanent endowment fund.

However, in order to do this the following procedures under the Charities Act 2006 must be adhered to:

  • The resolution must be filed with the Charity Commission
  • The resolution must contain a statement of the Trustees’ or the Management Committees’ reasons for passing it
  • The resolution must be advertised
  • There must be evidence of the wishes of the donor or the donors of the permanent endowment fund
  • There must be evidence of the needs of the beneficiaries
  • There must be evidence of the social, economic and legal environment in which it operates

Once all this has been done the Charity Commission will then provide notification to the Trustees or the Management Company as to whether it agrees with the resolution. This notification will be provided by the Charity Commission within three months of it being originally filed.

Expendable Endowment Funds

Expendable Endowment Funds are funds which are given to a charity as capital but there is no restriction on them being converted into spendable income. The discretionary power of whether or not to do this will rest with the Board of Trustees or the Management Company in control of the charity.

The funds will remain as capital in nature until they are converted into income.

Unrestricted Funds

Unrestricted funds can be split into the two following categories:

  1. Non-designated or general funds
  2. Designated Funds

Non-designated or general funds

Non-designated or general funds are funds which are available to an individual charity for the general purposes of that charity. These funds will be spent in whichever way that the Board of Trustees or the Management Company in charge of the charity sees fit in accordance with the stated objectives of the charity.

These funds are not earmarked in any way or for any specific purpose meaning that the Trustees or the Management Company can set the priorities for the funds and how and when they are spent.

What is an example of non-designated or general funds?

When a charity fundraising event occurs which does not have a specific purpose but simply to raise money for a certain charity all funds raised will be regarded as non-designated or general.

Designated Funds

Designated Funds are also funds which are available for the general purposes of the charity however, they have been chosen by the Board of Trustees of the Management Committee in charge of the charity to be used for a specific purpose.

When will a decision concerning designated funds be made?

A decision to designate certain funds for a specific purpose will be made at meetings by the Board of Trustees or the Management Committee of the charity.

Will funds that are designated always remain designated?

The Board of Trustees or the Management Committee will have the power to change decisions regarding funds designated for specific purposes and designate them to other purposes or simply leave them as non-designated or general funds.

Do all charities have to provide details of their accounts to the Charity Commission?

All charities are accountable to the Charity Commission providing them with full details of their accounts – i.e. how much money comes in and how much money is spent.