Coronavirus and charities: weathering the ‘perfect storm’

There have been many news stories in recent months about the impact of coronavirus on the third sector, with commentators dubbing the pandemic the ‘perfect storm’ for charities.

The crisis has caused an increase in demand for services from charities at the same time as the sector has been hit with the most significant loss in income that any of us will witness in our lifetime. Added to this are the challenges of working from home and the loss of staff and volunteer time through self-isolation and furloughing.

Research by CAF published in June shows that a quarter of the charities surveyed had seen an increase in demand of more than 50% and half of the charities surveyed were concerned that they would not survive for more than a year without additional funding. This funding crisis has caused many charities to apply for some form of emergency grant funding over recent months.

Various emergency funds have been made available to support charities through the crisis, including: £750m of government funding announced in April, £200m in grants by the National Lottery Community Fund, over £70m raised by the Big Night In (including government match funding), and the announcement in May of a further £150m in additional emergency funding from unlocking dormant bank and building society accounts. Last week, the Charity Commission and UK Community Foundations also announced that further funding has been secured from DCMS to support the existing programme to release funds from dormant trusts (this programme has already released £32m to charities since it was launched in 2018). However, the reality is that the funding being pumped into the sector barely scratches the surface of the total income lost, with a shortfall of £12.4bn estimated for this year.

The emergency funding has been predominantly targeted at charities carrying out work to respond directly to the impact of COVID-19, leaving many charities unable to access additional funding at all. For those that have successfully applied for funding, the grants received are unlikely to help with any shortfall in income for central costs, as most grants are being made subject to restrictions as to how they may be applied. So, in order to weather this ‘perfect storm’, many charities are facing incredibly difficult decisions. Before taking any significant strategic decisions (such as staff redundancies, closing services, etc.), it is important to fully understand the funds that are available. Charity trustees should take the time to understand the terms on which their funds are held and how they may be used during this time to support the charity’s survival.

Broadly speaking, there are three types of funds held by charities:

• unrestricted funds: these are general funds that are available for any costs of the charity, including overheads and central costs such as salaries and rent payments
• designated funds: these are funds that have been designated by the charity trustees to be used for a specific purpose
• restricted funds: these are special trust funds that must only be used for specific purposes within the charity’s wider charitable objects.

It is very common for designated funds to be confused with restricted funds, but the distinction is crucially important when looking to identify funds that might be available to plug a gap in income during difficult times. Designated funds may be re-categorised by the charity trustees and used for the charity’s general purposes, but restricted funds are not so easily released.

A restricted fund is created when a person makes a donation or grant or payment to a charity on legally binding terms that restrict how the funds may be used. It is also possible for restricted funds to be created on the sale of an asset that was gifted to the charity subject to legally binding restrictions (most commonly when permanent endowment land is sold). Restricted funds may be restricted as to the use of income or capital or both, they must be separately accounted for and administered strictly in accordance with the restrictions that apply to them.

It is sometimes possible to use statutory powers to release restrictions affecting restricted funds, but it is very unlikely that these powers will be available in respect of very recent grants made specifically for purposes connected with the COVID-19 crisis. Additionally, the Commission has warned that releasing restricted funds “should only be considered if other options such as reserves are not possible” and that trustees should “carefully consider the wider and longer term impacts of making such a decision”.

Charities will be looking at all options available for raising much needed funds at this incredibly difficult time. In particular, as the lockdown restrictions start to be relaxed, many will be considering restarting fundraising activities. The Institute of Fundraising (in consultation with Public Health England and the Health and Safety Executive) has produced some guidance on public fundraising during the pandemic, which should be considered before embarking on any new fundraising ventures.

If you would like advice and support in identifying and/or releasing restricted funds, or advice on proposed fundraising ventures, or if you need any other legal advice during this time, please get in touch with Liz Brownsell or another member of the Charities Team.