Restricted funds - an overview

In the context of the UK social sector, the core difference between restricted funds in a charity and a Community Interest Company (CIC) lies in their legal purpose and the governing bodies that oversee them. While both are legally bound to use these funds for a specific purpose, the charity's legal framework is more stringent, rooted in charity law and overseen by the Charity Commission. In contrast, a CIC's use of restricted funds is governed by company law and the CIC Regulator, with the primary purpose of benefiting the community.

What Are Restricted Funds?

Restricted funds are donations, grants, or other financial contributions given to a social purpose organization with specific conditions on how they can be used. 💰 This means the funds are "ring-fenced" for a particular project, activity, or purpose as outlined by the donor or funder.

For example, a grant given to a charity to build a new community centre is a restricted fund. That money cannot be used to pay for staff salaries, office rent, or any other general running costs unless the funder explicitly allows for a small percentage to be used for these purposes. Organizations must keep clear records and account for these funds separately from their unrestricted or general funds.

Charities and Restricted Funds

Charities are governed by charity law and the Charity Commission. When a charity receives a restricted fund, it creates a legally binding trust. This means the trustees have a fiduciary duty to ensure the money is spent exactly as the donor intended.

• Legal Responsibility: Trustees are personally liable for any misuse of restricted funds. Misappropriation is considered a serious breach of trust and charity law.

• Donor's Intent: The donor's intent is paramount. The charity must be transparent in its fundraising appeals to avoid unintentionally creating restricted funds for a specific purpose when it intends to use the money for general operations.

• Flexibility: It's incredibly difficult to change the purpose of a restricted fund. The Charity Commission has a formal process that must be followed, especially if the original purpose is no longer needed or is impossible to achieve.

• Reporting: Charities are required to report on their restricted funds in their annual accounts, providing a clear breakdown of income and expenditure for each fund.

CICs and Restricted Funds

Community Interest Companies (CICs) are a type of social enterprise, operating as businesses with a primary social purpose. They are governed by company law and the CIC Regulator.

• Asset Lock: A key feature of a CIC is the "asset lock." This legal clause ensures that all assets, including restricted funds, are used for the community's benefit and cannot be distributed for private gain to directors or shareholders.

• Source of Funds: While charities can receive public donations and grants that create restricted funds, CICs primarily receive restricted funds through grants from public bodies or charitable trusts. They can't issue charitable tax receipts for donations, which often limits the type of restricted funds they can receive from the general public.

• Regulations: While the CIC Regulator ensures the company is operating for community benefit, the oversight of specific restricted funds is less prescriptive than the Charity Commission's. The primary obligation for a CIC is to ensure the funds are used for the purpose outlined in the funding agreement, which aligns with its overall community purpose.

• Flexibility: In some cases, a CIC may have slightly more commercial flexibility in how it uses a restricted fund, as long as it's still for the benefit of the community and within the terms of the agreement. For example, a grant for a specific project might allow for a higher percentage of core costs to be included than a similar grant given to a charity.

 The information featured in this article is for guidance only, no liability is accepted for the opinions it contains.