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The trouble with restricted funds

I recently read the following analogy from Jem Stein of Daring Capital, an investor specialising in early-stage social entrepreneurs.


A quick guide to restricted funding:


Charity: We want to buy a table to eat at.
Funder: Great. We love funding tablecloths. They are so pretty and give everyone a nice warm fuzzy feeling.
Charity: That's great. So, the thing is that below a tablecloth is a table. You can't see it but it's essential to eat at.
Funder: Ah, but tables are expensive and boring so we want to fund as many tablecloths as possible as they directly support the end user.
Charity: But without a table the tablecloth will go on the floor.
Funder: Can't you find the money somewhere else?

This captures nicely the broad difficulty with restricted funds: that they are prevented from maintaining the very fabric of the charitable organisation. As such they lack flexibility and can deny charities the chance to use their own judgement and experience over where the charity’s resources can best be deployed to achieve maximum impact.

As a reminder, the distinction between restricted and unrestricted funds comes from both charity law and the Charity SORP.


Unrestricted funds are free to use for any activity within the charity’s purposes. 


Designated funds are a part of unrestricted funds that a charity’s trustees can choose to set aside for particular specific purposes. Designated funds remain unrestricted and trustees can undesignated or redesignate these at any time.


Restricted income funds, on the other hand, have legally restricted status and can only be spent by trustees on specific purposes; these criteria being narrower than the charity’s overall purposes. ‘Restricted funds’ is a legal concept and can only arise in the following circumstances:

  • When a donor specifies that their donation can only be spent on a particular purpose;
  • When a charity launches a fundraising appeal for a particular purpose and invites donations towards that purpose
     

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If you would like to discuss this topic further, then please contact a member of our Charities team at James Cowper Kreston.


Kind regards

Mike Bath | Partner

T: +44 (0) 7557 340691 | E: MBath@jamescowper.co.uk

     

The information in this newsletter must not be relied on as giving sufficient advice in any specific case.   

   
   

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