OPERATIONAL GUIDANCE

CHARITY INCOME RESERVES

AN OVERVIEW

OG 43 A1 - 24 May 2000

Purpose of OG series 43: to supplement the information in CC19 by providing guidance to caseworkers on:

• our policy on the holding of income reserves by charities;

• how to recognise when a charity's level of reserves may be inappropriate;

• what action to take.

This series of OGs is entirely consistent with the information in CC19 which remains an accurate summary of our position. Some of the text from the publication is repeated in the OG for ease of reference.

Divisional responsibility

For action:

Charity Support Division

Contents

1. Meaning of "reserves"
2. Duty to apply income of charity and need for a "reserves policy"
3. Why this issue is important
4. Trustees' responsibilities
5. Our role
6. What happens if a charity cannot apply its resouces?

Meaning of expressions - list of Glossary terms used in this Guidance
Index to further related information

1. Meaning of "reserves"

In both this OG series and CC19 we use the term "reserves" to describe that part of a charity's income funds that is freely available for its general purposes after it has met its commitments and covered its other planned expenditure.

The term has no legal definition in relation to charities and you need to be aware that it will be used differently outside of the Commission. This is particularly important when you are in discussion with a charity's professional advisers - see OG 43 B1.

Section 2 of OG 43 B1 explains in detail which funds are included in our definition.

2. Duty to apply income of charity and need for a "reserves policy"

However the holding of reserves is not it in itself a cause for concern provided that the charity:

• has the legal power to do so (see OG 43 B2); and

• is able to justify the level of reserves it holds (see OG 43 B2).

3. Why this issue is important

Reserves are an issue of major importance to the charity sector. Issues surrounding reserves can generate difficulties controversy and conflict.

Reserves which are too large may:

• conflict with the trustees' duty to apply the income of the charity within a reasonable time;

• indicate inefficient administration - income funds which could be used to further the objects of the charity may be retained out of habit or unwarranted caution rather than with a definite end in view;

• cause public concern and bring that charity or even charity generally into disrepute - particularly where the charity continues to fundraise (see OG 43 B3);

• cause conflict with other charities who may find it difficult to raise funds in a similar field but with a lower public profile or for a less immediately emotive cause.

Reserves which are too low may:

• present a risk of insolvency;

• hamper proper medium-term planning and the ability to take advantage of change and opportunity;

• cause charitable funds to be used inefficiently - for instance in solving crises which could and should have been avoided; in entering into short-term contracts for the supply of goods or services when a longer term contract would have been cheaper and more efficient;

• create insecurity amongst beneficiaries supporters and employees of the charity;

• force the charity to disrupt or abandon aspects of its work as a result of a temporary drop in income or an unexpected expense.

4. Trustees' responsibilities

Apart from the general duty set out in section 2 above trustees are responsible for:

• establishing an appropriate reserves policy for their charity;

• justifying and explaining that policy; and

• contacting us if their charity has more resources than it could reasonably need to fulfil all of its purposes.

Trustees are strongly advised to read and understand CC19 and to reflect this in their annual report and accounts. Paragraphs 49 to 50 of this booklet contain recommendations about the disclosure of reserves policies in a charity's accounts. The Exposure Draft of the revised SORP (published in December 1999) reflects these recommendations. There should also be disclosure of the purposes and asset structures of all the different types of funds of the charity.

The preparation of accurate and informative accounts and annual report are an important aspect of a charity trustee's duty of public accountability and stewardship. Open and honest reporting of a charity's level of reserves and its reasons for holding them will reassure donors and the giving public generally that the charity is acting responsibly.

5. Our role

Our role is:

• to advise charity trustees and to encourage them to apply the principles set out above and in our published guidance;

• to explore any indications that the level or use of reserves might not be justified by challenging the detail of the charity's calculation and policy - this will include scrutiny of designated funds restricted funds and expendable endowments where appropriate;

• where the level of reserves appears inappropriate to examine the position in liaison with the trustees and to consider whether revision is necessary to bring it into line with our policy; and

• where mismanagement or misconduct persist charity resources are at risk or breaches of the law remain uncorrected to intervene by using our statutory powers. (The need to use our statutory powers in connection with reserves is likely to be rare and should be undertaken only after taking legal and accountancy advice. However it cannot be ruled out. If trustees insist on the retention of reserves which are demonstrably too high they are failing in their duty to apply the income funds of the charity within a reasonable time.)

6. What happens if a charity cannot apply its resources?

If a charity has more resources than it could reasonably need to fulfil all of its purposes the trustees should contact us. If appropriate we can make a Scheme to allow the charity to use its resources more widely than its existing objects permit.

The following words and phrases are defined in the Glossary of Terms:

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1993 Act
annual report
charity trustees
cy-près
expendable endowment
income funds
SORP / the Charities SORP
trustees

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