Charity Chat September 2015
- AuthorDavid Porter
David Porter continues his series of blogs with the aims of ‘Charity Chat’ to make Trustees, Directors, Governors and Committee Members (the Trustees) aware of their obligations and the processes that have to be followed to run the Charity correctly. The references I make are to the Charities Act 2011 (the Act) unless stated to the contrary. If there are matters you wish to raise please let me know.
Charities are not businesses which is why they are exempt from income and corporation tax and in many case rates. Donors do not give money to charities so that it can be paid into the bank or be invested. All money received by a charity has to be expended on providing the charitable activities set out in its objects.
What are Charitable Reserves?
It is obviously accepted that it is appropriate for charities to expend its income on running the charity. That is paying wages and general running costs, but at a level commensurate with the needs of the charity. It is accepted, however, that the charity needs to protect itself against hard times, which may occur from time to time. It is therefore acceptable to have reserves to cover those eventualities. The acid test is ‘How long does the charity need to continue if it intends or needs to close down’. If the charity is a hospice or runs care homes it clearly will need time to relocate its patients. This might take 6 months, it could take 1½ years. It is for the Trustees to decide on the amount.
How much should the reserve be?
If it costs £500,000 to run the charity then 6 months reserves would be £250,000. The Charity should therefore try to set aside, usually over a period of time, £250,000 to cover the requirement. The £250,000 should be removed from the general account at the bank and re-invested. If it remains in the bank the Trustees may take the view that they have sufficient monies to carry out a project and forget that some of the funds represent reserves. If the reserves are invested either in a different account or in the financial markets they cannot be readily accessed and are therefore protected.
Identifying the reserves
The charity’s accounts should include a statement as to the amount of the reserves and the reasons for them. It is important that the trustees agree a reserve policy and put it in writing and in the accounts. Individual donors, funders and grant givers will inspect the accounts and if they see a substantial sum, as investments, might ask why the charity is seeking further funds. The reserve policy will alert them to the fact that the reserves are not held to be expended on general day to day expenditure or individual projects. As a result, they will ignore those sums and consider the application or gifts on the basis of the needs of the charity without the reserves. It is surprising how many applications for funds are turned down because the grantor perceives, from the accounts without a reserve policy, that the funds are not needed.
What aren’t reserves
Some monies and assets are already restricted and identified for specific purposes. They cannot be used for reserves and a note in the accounts should identify what they are. For example these could be:
- Restricted funds: where money has been provided for a specific project.
- Permanent endowment: where perhaps a building or assets have been given to be used specifically for the purposes of the charity and nothing else. If the building were to be sold, with the appropriate consents, the proceeds of sale would still have to be used for the same purpose.
For further details see my article on Reserve Policies.