Keep it legal: Reserves

Trustees of a charity are under a general legal duty to use their charity's income to further the charity's objects within a reasonable time of receiving it.

However, charities are allowed to hold reserves if they have the legal power to do so and are able to justify the need. There is no legal definition of reserves, but they are understood to be the part of a charity's income that is freely available for general purposes. Some charities' governing documents give their trustees an express power to hold income in reserve, but board members will more often have to rely on their implied power to do anything that is necessary to further the objects of the charity.

Appropriate policy

Trustees are responsible for establishing an appropriate reserves policy for their charity, explaining the rationale for that policy and taking appropriate action where the level of reserves is more than is necessary to fulfil the purposes of the charity. In that case, trustees are under a legal duty to agree a scheme with the commission to spend excess reserves on charitable objects that are as similar as possible to the charity's stated objects.

The reserves policy must be spelt out in the charity's annual report. It should cover the reason why the charity does or doesn't need reserves, what level (or range) of reserves the trustees believe the charity needs, what steps the charity will take to establish or maintain reserves at the agreed level and the arrangements for monitoring and reviewing the policy.

The Charity Commission's view is that a charity should be able to justify its level of reserves by reference to its current position and future prospects. The amount that is appropriate for one charity will not necessarily be appropriate for another, because forecasts for future income and expenditure and analysis of future needs, contingencies and risks - both internal and external - will all vary.

It is important to get the level of reserves right, because a high level of reserves can dissuade potential donors from giving to the charity and can also give the false impression to the beneficiaries that the charity is not doing enough to further its objects.

- Ros Harwood is a partner and head of charities at Dickinson Dees.

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