Rules on restricted funds

The Society Network Foundation's diversion of leftover money is under scrutiny. Laura Soley, pictured, says it is a frequent misconception that getting the donor's permission to make the change is all that is required

Laura Soley says changing a charity's purpose requires more than just the donor's permission
Laura Soley says changing a charity's purpose requires more than just the donor's permission

The Charity Commission announced in February that it would scrutinise a potentially incorrect transfer of funds from restricted to unrestricted status at the Society Network Foundation, the charitable arm of the Big Society Network, a social impact project launched in 2010 by the Prime Minister, David Cameron.

SNF has said it has done nothing wrong in diverting leftover money, given by the Cabinet Office for the children's fitness project Get In, into its unrestricted funds after the government cancelled the project. The commission's scrutiny continues.

Professional advisers say it is more common for fund restriction issues to cause minor headaches than major difficulties. The Charity Commission's guidance, Charities and Reserves (CC19), is "fairly clear, even though it is four years old", according to John Howard, a partner at the accountancy firm Wilkins Kennedy. He says restricted and unrestricted funds are "well understood" as concepts.

There are two broad categories of restrictions on funds: whether the fund can be spent and what the fund can be used for.

If the purpose for which a charity has been given money is no longer achievable, that purpose must be changed. This is not just a matter of getting the donor's permission to make the change - a "frequent misconception", according to Laura Soley, a partner at Bates Wells Braithwaite.

"If the income of a restricted fund was £10,000 or less in the most recent financial year, it might be possible for trustees to use the statutory power to resolve to change the purposes, subject to Charity Commission consent," she says. Otherwise, the commission must be asked to make a scheme to change the restrictions, she says.

Purposes cannot undergo radical changes: the commission will "look to substitute new purposes that are as close as possible to the original".

Howard says the commission is flexible in making these schemes, with a key exception. "The commission is much less open to allowing money from restricted funds to be used to cover a charity's core administrative costs," he says.

Eva Abeles, a senior solicitor at IBB Law, agrees: "Where appropriate, charities should be encouraged to start a conversation with potential donors about any restrictions they might wish to place on a proposed gift," she says. It might be more appropriate to express the desired aims of donations as "non-binding wishes" rather than legal restrictions, she says.

"Discussions with potential donors enable the charity to assess whether a proposed restriction is contrary to the Equality Act 2010 and also whether it falls within the charity's objects and future operational plans," says Abeles.

She cites the example of a gift being made to a charity to spend on a care home for people with a specific disability, only for the charity's work to change by the time the gift is received, so that it is now assisting independent living for beneficiaries.

"If expressed as a non-binding wish rather than creating a restricted fund, the gift in the will can be used by the charity to assist independent living without first having to expend charity resources to amend the restricted fund's objects," she says.

There is clearly a fine balance to be struck between giving a charity the flexibility to use donations however it sees fit and respecting the wishes of donors.

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