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COVID-19 update for charities 23 April

The COVID-19 pandemic is having a significant impact on charity finances. During these uncertain times, many trustees will be thinking about the cash required to enable a charity to maintain services while seeing a rise in demand.

Delivering services differently and remotely, furloughing staff, lost income and what the future will look like after the pandemic are all likely to be high on the list of trustees’ considerations. Trustees should also be thinking about the spectre of insolvency, and the personal impact on the clients and staff of the charity winding up.

In the second of two updates on charity finances, we look at the latest on the following:

The insolvency regime
Financial reporting changes

It is worth remembering that trustees have a duty to act in the best interests of furthering the charitable objects of the organisation. Placing this at the heart of discussions should help boards to focus on what needs to be done and when to make difficult decisions.

The insolvency regime

While the social distancing regime applies, many charities will likely be finding it difficult to continue business as usual and will be looking to deliver services and programmes more remotely.

Charity costs are unlikely to have changed much as a result of the current situation, but income may be taking a real hit – to the extent where the organisation may feel it can no longer continue. Insolvency will, then, be a real concern for some trustees and senior managers. Insolvency can arise when a charity’s liabilities are greater than its assets, or when it is unable to pay its debts as they are due to be paid.

For incorporated charities (charitable companies limited by guarantee and CIOs), there is a risk of trustees becoming personally liable where a charity continues to trade whilst insolvent, or likely to become insolvent. The Government has announced a suspension of wrongful trading provisions for three months from 1 March 2020, which provides some breathing space for incorporated charities. Further details are expected as to how that suspension will be implemented, and trustees are encouraged to act responsibly, ensure that decisions are made with regard both to the law and to any ongoing responsibilities to third parties, and that records are kept of the discussion and decision made.

For trustees of unincorporated charities and charitable trusts, there is also the personal risk arising from any losses the charity may face and the risk arising from situations where there are insufficient assets in the charity to meet financial demand.

The issue of ongoing financial viability will be a recurring theme of trustee discussions for at least the short- to medium-term, and the longer the lockdown is in place the greater the number of charities for whom it will become a significant issue. Now, then, might be a good time for non-financial trustees to reacquaint themselves with the Charity Commission’s CC12 guidance on managing charity finances and strengthen their financial skills and knowledge.

Insolvency is a tricky situation and professional advice and guidance should be sought at the earliest opportunity.

Financial reporting changes

The Charity Commission has already announced that it will show some flexibility in its approach to regulatory filing by charities. Charities seeking an extension should contact the Commission as soon as possible by e-mail to request a filing extension.

For charities incorporated under companies legislation, Companies House has announced the ability for organisations to apply in advance for a three-month extension for filing accounts. Those citing COVID 19 as a reason for extension will be granted an automatic exemption. Details about the online system can be found here.

Governance can sometimes be seen as bureaucratic and burdensome, and at a time when trustees may be required to make decisions quickly and based on incomplete information, process may be seen as unnecessary. This could, though, not be further from the truth. Now is the time to double-down on your charity’s governance practices, ensuring key decisions are made in good faith, within reasonable decision-making principles and in line with the legal duties of trustees. Those decisions, and the supporting rationale, should be properly recorded and retained – and that’s the case whether the decision is made by a remote meeting, via electronic communications or by means of delegated authority.

The Charity Commission has useful guidance on trustee decision-making, and the Institute also offers a number of resources on minutes and remote meetings, which can be accessed via the links below.