COVID-19: Finance and funding for charities

During the course of the government’s coronavirus briefing on 8 April, the Chancellor announced a £750 million package for charities. From what we understand so far, this is to be applied to ‘frontline charities’ across the UK, such as hospices and those supporting domestic abuse victims, for example.

The Chancellor set out plans for the £750 million to be broken down as follows.

• £360 million will be provided as grant funding to be directly allocated by government departments to charities they consider provide key services and support vulnerable people during the crisis. We are not aware of the specific criteria as yet, but we have been told that £200 million of those grants will support hospices, and the rest will go to ‘organisations like’:
  • St John Ambulance to support the NHS;
  • victims charities, including domestic abuse, to help with ‘potential increase in demand’ for charities providing these services;
  • vulnerable children charities, so they can continue delivering services on behalf of local authorities; and
  • Citizens Advice to ‘increase the number of staff providing advice during this difficult time’.
• £370 million will be for ‘small and medium-sized charities’ to ‘support those organisations at the heart of local communities which are making a big difference during the outbreak, including those delivering food, essential medicines and providing financial advice’. This will include:
  • a grant to the National Lottery Community Fund for those in England; and
  • £60 million being allocated to charities operating specifically in Scotland, Wales and Northern Ireland.
• The last £20 million has been pledged to the National Emergencies Trust appeal as a minimum contribution as part of a pledge to match what the public donates to the BBC’s Night In on 23 April.

We are told that government departments will now work ‘at pace’ to identify priority recipients, with the aim for charities to receive money in the coming weeks. The application system for the National Lottery Community Fund grant pot is expected to be up and running within a similar period of time.

In announcing the above, the Chancellor explained that these measures are aimed at those charities ‘on the front line of fighting the coronavirus’ which ‘provide critical services and support to vulnerable people and communities’ and who cannot ‘shut up shop’.

The Chancellor was also clear to point charities in the direction of previously announced government measures, such as the job retention scheme (meaning furloughing staff). However, unfortunately there was no comment on the ongoing question of the extent to which charities in receipt of public funding are eligible.

Therefore, whilst this is this is an excellent start, more assistance for the sector is likely to be necessary. First, the Chancellor stated ‘the truth is that we will not be able to match every pound of funding [charities] would have received this year’; the current forecasting from sector bodies is that there will be a shortfall of approximately £4.3 billion in the charity sector over the course of the coming year. On top of that, it appears that a significant portion of charities in the UK will be unable to access this funding.

Therefore in consideration of the significant shortfall, the length of time it will take for these measures to be rolled out, as well as what seems to be a relatively narrow application of the additional government funds to only certain charitable causes, charity trustees should continue to be mindful of wider points around their financial strategy, as well as considering other sources of assistance available to them.

We are not, of course, investment advisers and cannot offer investment advice, but it is clear that the market is facing a difficult period and you will therefore not be alone in being in this position, whether in the charity sector or beyond.

Although circumstances have changed considerably these last few weeks, the essential duties of a charity trustee have not. It is therefore important that charity trustees are mindful of their continuing duties and ensure these are applied to the same level albeit in these different circumstances. The Charity Commission’s CC3 guidance, The Essential Trustee, is a useful tool to remind yourself of, and further consider your responsibilities (paragraph 6.2 is particularly helpful in the circumstances).

Charity trustees will in particular need to be mindful of acting reasonably and prudently in the circumstances, in consideration of the powers contained in your governing document, as well as your overarching duty of care to your beneficiaries. Trustees should also ensure they manage their charity’s resources responsibly, acting with reasonable care and skill.

It will also be important at this time of uncertainty to continue to follow best practice and maintain strong governance including to ensure that whatever decision you might need to make, you take a proper note of the discussion and the decision made.

As such, you should consider any investment strategy or policy you might already have, together with the information available to you, with a view to securing the best outcome for your charity as might reasonably be expected at this time. This may mean that trustees should take appropriate professional advice where you deem it necessary, and any trustee who might have specialist knowledge in managing investments can provide support. However, trustees with specialist knowledge should be mindful that they have a higher duty of care when offering such guidance, see paragraph 8.1 of The Essential Trustee.

Trustees should also seek the advice of any investment committees or delegations they may have established, and if you have an investment manager then you should be speaking to them too.

Whilst trustees will be prioritising current cash flow concerns, you should also keep one eye on your financial considerations for the future, so that where possible your strategy also means you can continue to meet the needs of your beneficiaries through the economic recovery and beyond. Therefore, if you are contemplating selling investments, rather than waiting for markets to recover, it is important to ensure you have considered all the options (including the points below regarding other forms of funding) and make an informed decision based on the information you have available to you.

Whilst the above applies to all charities, grant-makers or charities which rely particularly heavily on their investment income to be able to conduct their charitable activity should consider their current commitments and grant-making strategy (including requests for assistance from current grantees affected by the crisis) alongside financial forecasting, so to balance the needs of current beneficiaries with their long term viability.

Updated on 10 June 2020:

Until 3 June 2020, the Charity Commission guidance on reporting serious incidents was ‘business as usual’. Its COVID-19 FAQs referred to it being ‘ultimately the responsibility of the charity trustees to continue to report serious incidents using our current guidelines, and we will continue to ask trustees to use their judgement in deciding whether an incident is significant in the context of their charity and should be reported to us’. The Commission’s serious incident reporting guidance notes significant financial loss as being a reportable event in this table. However, on 3 June 2020, the Commission issued supplementary guidance and examples on reporting serious incidents in the pandemic.

If trustees think spending reserves may be necessary, then reserves can be used (and indeed are there to help) in circumstances such as these, which the Charity Commission understands. The Charity Commission’s FAQs, Coronavirus (COVID-19) guidance for the charity sector, note the current challenges to charities’ financial positions. The Charity Commission states that:

‘Reserves can be spent to help cope with unexpected events like those unfolding at present.’

This encourages trustees to consider their short, medium and longer term priorities and to review certain projects, spending or activities to see whether they can be stopped or delayed for now in order to focus on essential spending.

It also reminds charities to consider any restrictions on the use of funds or assets.

• If restrictions have been imposed, it may be tempting to think that these extraordinary times call for such restrictions to be ignored. However, it may not be necessary to consider that – the restrictions may be capable of being released or there may be other options available.
• The important thing will be to consider all the options, take appropriate advice, make a careful decision (see the Commission’s guidance, It’s your decision) and to record that decision.

The phrase ‘Cash is King’ is being used a lot right now, and sensible cash flow projections are necessary to understand what your charity is committed to over the coming weeks and months. Current indications are that the economic recovery could be slow and more gradual than originally hoped. As such, projections will provide good visibility on what you can delay paying out, or where you can make savings, meaning you can better prioritise the use of your available cash.

In considering spending reserves, charities should make an informed decision. First, we are not aware of how long this crisis might continue, and so charities might wish to look at the level of their reserves and over what period these could be used. Trustees should also find out what external resources are available before making a decision to spend reserves or liquidate assets. This will therefore include investigating whether your charity is eligible under the measures which the government announced on 8 April, as well as seeking assistance from the other government schemes, where applicable, as set out further in these FAQs.

Various other funds are offering support to the sector (like the National Emergency Trust, as referenced by the Chancellor, or the recently announced assistance from the Charities Aid Foundation). Help could also include speaking to donors and grant-makers about not only releasing restrictions on existing funds, but also asking for their further assistance at this extremely difficult time.

As charity trustee you will naturally be concerned to deal with the immediate income crisis. However, in making decisions, you should also try to have an eye on the impact for the longer term – so not to lose sight of the relationships which can help your charity emerge from this crisis. Making the right decisions now can make things easier further down the line.

You should be mindful that if you do chose to spend down your reserves, then it might be necessary to report this to the Commission (please find further information on this below), as well as updating your charity’s risk register.

We have had unprecedented announcements on spending, whilst at the same time the government clearly appears to be keeping its position under review. We know that the government has put back the comprehensive spending review (to set out expenditure plans over the next 3 years) which was due to begin in July 2020, so that Ministers can concentrate their efforts on the coronavirus crisis.

Despite such seismic movement in the government’s spending promises, there has been no indication as yet that there will be any change to previously planned grant funding. This response from the Secretary for International Development (albeit made before the Chancellor’s announcement on 8 April) suggests that the government is taking a practical collaborative approach to their international aid programme at this time; the inference being that the government is not putting a moratorium on its spending.

Therefore, we cannot be sure either way at present, but it is sensible to consider the risk, as with other risks, and steps which may be taken to mitigate it (which may include making contact with your usual government accounting officer to see what assurances may be offered).

Clearly, face to face fundraising and fundraising events are not possible at the moment, and the Institute of Fundraising and the Fundraising Regulator recognised as such quite early on. The Fundraising Regulator has gone on to provide guidance on fundraising, here.

However, there are many ways in which fundraisers can reach donors remotely, in compliance with government COVID-19 guidelines. We understand that in fact a number of charities and fundraising agencies are generally reporting positive responses from people who are in lockdown at home and who are pleased to have an opportunity to help.

Where charities are considering expanding their efforts, or moving into remote fundraising, as with other decisions of the charity, trustees should make an informed decision and document it appropriately. In particular, trustees are likely to want to consider if such a move is appropriate for your charity (in light of reputational and logistical points, for example), and to be satisfied that they can do so in a way which is compliant with data protection rules. Our data protection team has produced this set of FAQs, which we hope is of assistance in considering those obligations. The Information Commissioner’s Office also has a set of FAQs, which you might find helpful.

In coming to a decision on fundraising strategies, trustees may wish to consider whether the necessary ‘investment’ in a new fundraising campaign is proportionate to the projected outcome in a downturned market; with household incomes uncertain, new direct debits and donations may be more difficult to come by, for example. So again, financial forecasting will be a key tool at this time.

Corporate partnerships may also be an option, but again charities should be mindful of pairing with businesses at a time of unheard-of financial uncertainty and may be wary of committing scarce resources to facilitate a commercial partner’s requirements.

Just as with other appeals, if you fundraise to support your response to COVID-19, you should be clear whether any funds are donated to your general charitable funds or to a specific campaign. If they are donated to the latter, be clear what happens to any excess, so that should you find yourself in the fortunate position of being able to apply funds outside your coronavirus measures, you are free to do so.

Fundraising of course does not necessarily have to come from the public, or business. Trustees should consider approaching their bank to see what options are available, such as discussions about temporary overdraft facilities, or drawing down funds from deposit accounts.

Equally, to assist with concerns over things such as liquidity, if you are not eligible under the government’s measures for charities, there could be funds available to you from organisations such as the National Emergency Trust and the Charities Aid Foundation has established an emergency fund for small charities and organisations hit hardest by coronavirus. As noted below, there are also government schemes aside from the measures announced on 8 April, which could help specifically at this time; we hope this note is useful for setting out the available schemes.

It is in most cases perfectly reasonable for charities to enter loan facilities but, as you recognise, there are some things to consider before doing so. The first is to check you have power to borrow – most charities will (and, if not, it may be possible to change your governing document to allow this).

Then you must consider whether it is in the best interests of the charity to enter into the loan. As trustees you should consider carefully the terms of a loan facility and be satisfied that these are reasonable, taking advice where necessary. At this time, and at any other time when considering a loan, it is important to be clear on the charity’s financial position when you assess the risks of entering into such an arrangement – will the charity be able to satisfy the terms of the loan, for example. As ever, trustees should document clearly the reasons for their decision.

If the proposed lender is a supporter of the charity, the trustees should also consider potential conflicts of interests and how such an arrangement may impact on the relationship with the supporter. It may be sensible to investigate what other loan facilities may be available.

As noted elsewhere in these FAQs, it is also important to consider whether other help is available to you first – for example, there may be grants available which would not be repayable, whereas, of course, a loan would need to be repaid, and you may be charged interest.

There are added considerations if the lender would like security, particularly over property:

• first, as with borrowing, you should check whether you have the power to offer security;
• if the request is for a charge over property, then there are also specific charity law requirements to follow, including to obtain and consider proper advice given to the trustees in writing (which could be by email) – see the Charity Commission’s guidance CC28;
• if security will be requested over funds or property held subject to restrictions (eg property gifted to the charity for a certain purpose, which may be held as ‘permanent endowment’), you may not be able to offer the requested security;
• you should also consider whether offering such security would affect your ability to seek perhaps more impactful lending in the future; and
• such formalities as charges over property might be difficult at present if, for example, a survey is required (to determine the value of the property); this could delay the drawdown of the loan given that generally surveyors are not visiting premises at the moment.

Of course all these factors should not deter you, however, if the trustees, once they have considered the options, are satisfied that taking the loan (and offering security if sought) is the best option for the charity and we would of course be pleased to advise you in these and the appropriate formalities.

We are unsure how long the current measures might last and so it is difficult to predict whether liquidating assets will be necessary. These assets are of course what will likely help you in navigating your charity’s recovery, and raising cash when it is possible to hire out your space again.

It is a decision for the trustees as to how you manage the charity’s assets. In making any decision, however, the trustees need to consider all the options available, so that they make an informed decision in the circumstances (see the Commission’s guidance It’s your decision). While liquidating the asset may be one option for generating funds, we would also recommend that the trustees investigate what other cash or help is available to you to assist in providing cash flow – some options are noted in response to other questions, above.

In addition to those other points, above, if you rent the space then it may be possible to return it to your landlord, but there are additional considerations here; we will shortly be releasing FAQs on charity property points and the current practicalities around charity tenant and landlord relationships. However, we have already published more general commercial landlord and tenant FAQs here.

If you own the property, an important consideration is that the property market is slowing and so at this time, it may not be possible to sell the space, and so seeking support from other sources may be a quicker way of securing cash.

For example, depending on what you use the space for, the government has announced a 12-month business rates holiday for retail, hospitality, leisure and nursery businesses. This can therefore be helpful for charities that own or run eg heritage buildings, charity shops, sports grounds or leisure facilities, theatres, museums and art galleries. Charities with properties that do not qualify for this relief can explore a claim for Empty Property Relief.

The Coronavirus Business Interruption Loan Scheme offers loans of up to £5 million through the British Business Bank. It should be noted that one of the eligibility criteria is that 50% of the organisation’s turnover is from ‘trading’, but it is not clear yet how trading is defined. At present, trustees might assume that their charity is precluded, but further clarification and adjustments are coming out day by day (as well as new measures), so the Scheme (or other support) may yet be available.

Spending restricted grant funds on a charity’s general purposes would be in breach of the terms on which the grant was made, and so generally this would result in breach of trust. However, in the circumstances it will be perfectly reasonable to approach grant funders to ask if it is possible to release restrictions on grant funding so that the funds are available to meet a charity’s general purposes (and anecdotally, we understand that some grant funders are already releasing restrictions voluntarily). It is also prudent to report to the grant-maker anyway on the impact of the government guidelines on the programme.

You should be mindful that grant-makers do not have to agree to remove the restriction, and so until you have the green light, it would be sensible to discount restricted funds in any cash flow forecast, on the assumption that they will remain restricted.

As noted elsewhere, there may also be other help available to you – please see the references above.

It is important to remember you are not alone and key bodies in the sector are looking to help, to ensure that as many charities as possible avoid this position. You are right to consider the question and to do so early as, subject to proposed changes, trustees can face personal liability under insolvency law.

Clearly a lot of organisations (charitable or otherwise) will be thinking about this. In consideration of this reality, the government has announced it intends to introduce legislation to parliament to amend the UK Insolvency Framework. This will include a temporary three month suspension (initially) of wrongful trading provisions, being those which can lead to personal liability for directors of companies that carry on trading despite insolvency (but note that provisions around director misconduct and fraud remain). These provisions are to be applied retrospectively from 1 March 2020. In announcing these more relaxed rules around insolvency, the government says this move will:

• ‘enable UK companies undergoing a rescue or restructure process to continue trading, giving them breathing space that could help them avoid insolvency’; and
• ‘this will also include enabling companies to continue buying much-needed supplies, such as energy, raw materials or broadband, while attempting a rescue, and temporarily suspending wrongful trading provisions retrospectively from 1 March 2020 for three months for company directors so they can keep their businesses going without the threat of personal liability’.

It will be crucial to maintain good governance, strong leadership and a clear strategy at this time of uncertainly. This will be supported by a charity creating a clear forecast of its cash flow, ensuring that trustees have the information they need to make vitally important decisions.

If an insolvency situation becomes relevant, then trustees should be aware of their added duties and responsibilities at such a time; the Charity Commission has further information on this which can be found here. It will also be important to consider early on what your employment obligations might be, as well as the impact on your beneficiaries, preferring a ‘soft’ closure, rather than one which could see you ‘drop out’. There may be merit in taking the opportunity to approach like-minded charities to discuss whether a merger or joint venture could be possible, so to ensure that your pooled resources help you in achieving your charitable aims.

You should speak to your professional advisors and you should also consider filing a serious incident report with the Commission if you do find yourself facing insolvency.

We should add that if charities become insolvent holding funds received as grants, those funds are held on trust, and it may be that a grant-maker will seek to reclaim them (depending upon the terms of the grant).

If you are worried about potential insolvency, please pick up the phone to your usual BDB Pitmans contact, or alternatively to our Restructuring and Insolvency team who will be more than happy to talk through your concerns.

As already touched on above, the Charity Commission maintains that reportable events remain at the discretion of a charity’s trustees. Generally speaking, reportable events fall into the following four main categories:

• harm to people who come into contact with your charity through its work;
• loss of your charity’s money or assets;
• damage to your charity’s property; and
• harm to your charity’s work or reputation.

In terms of what financial loss means, the table on page 3 of this Charity Commission document is useful. You will note that generally, the Charity Commission contemplates that loss of income is reportable if it affects your ability to carry out your charitable activities (which therefore also links in with the last bullet point, above).

As noted by the Institute of Fundraising, trustees should therefore consider whether eg cancelling a fundraising event (or other implication of the current situation) results in such an impact that the charity experiences significant loss which could result in a charity facing insolvency.

If you are in doubt as to whether to report, we would suggest that it is better to report – doing so may also assist the Charity Commission in building up a picture of the impact on the sector and particular areas of concern.