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Introduction

How to fund your newly-founded charity (or indeed any other third-sector organisation!) will be imperative to achieving its aims. Successfully running a charity means abiding by your responsibilities as a trustee, which means remaining legally compliant. Decisions around how you fund your charity lies with the board of trustees. They will oversee the organisation, make important decisions about its direction and strategic initiatives, answer to the governing body (the Charity Commission) and ensure it is legally compliant. The management side of the organisation is concerned with how these objectives are supposed to be met, which includes the allocation of funding. Below we will highlight some of the way in which you might fund your charity and any legal obligations you need to take into account. ‘At the end of 2016, YouGov interviewed over 1000 UK SMEs and we had the stats analysed by the Centre of Business and Economics Research (CEBR). According to this research, the Charities Sector loses over £1.2 billion through not taking care of their legal business so now it is even more important to make sure you know your rights and obligations with regards to the law. So with that in mind, we hope you enjoy Part 3 of our Charity guides to the law which address some of the ways in which you might fund your charity and any legal obligations you need to take into account.

Funding Legally: An Overview

As part of your legal obligations to act in your Charity’s best interest and to manage Charity resources properly you need to make sure that you fundraise legally and that you manage funds responsibly and keep them safe.

As a trustee, although you might not be involved with the day-to-day running of fundraising activities, it is your duty to make sure the charity remains solvent and so decisions around which fundraising tactics are most appropriate lie with you. Remember, it is your legal duty to act within the best interests of the charity and also to act with reasonable care and skill.

There are 6 key principles that trustees should follow to manage fundraising properly. They are:

  1. Planning your fundraising effectively.
  2. Supervising your fundraisers so they act in your charity’s best interests.
  3. Protecting your charity’s reputation and assets so that you consider your donors reaction to how you are fundraising and you protect against loss or fraud.
  4. Ensure that you know and comply with the legal requirements that apply to your fundraising.
  5. Ensure that you know and comply with the codes of practice that apply to your fundraising.
  6. Being open and accountable.

A list of things to think about would be:

  • How much do you need to raise?
  • What is the most effective method for raising this sum?
  • Importantly, does the method correlate with the values and ethos of your organisation? This will affect public opinion of you.
  • Do you want to achieve a secondary purpose with the fundraising activity such as to raise awareness and educate the public?
  • Should you take professional advice before embarking upon the chosen method e.g. sourcing funding-industry expertise?
  • Have you also checked out the Code of Fundraising Practice?

It is extremely important to have a commitment to best fundraising practice.

There have been a number of changes in the regulation of fundraising recently to address the issues arising from the collapse of Kids Company and cases where people have been overwhelmed with requests for donations. The new regulator for charitable fundraising is The Fundraising Regulator (FR) who has taken over the role of the Fundraising Standards Board. If self-regulation of fundraising does not work then the government may arrange for the Charity Commission or another body to regulate this area. The FR is instituting a number of changes so you need to keep up to date with them.

With that in mind, here are some of the ways you could be raising money once you’ve established what kind of approach would suit you best. You need to avoid being dependent on just one source of income.

Types Of Funding And Legal Considerations

  1. Government Funding
    Whilst the Charity Commission itself does not fund charities, you can get funding from some government departments where your cause lies within their current priorities. Unfortunately, as you will know already, this is quite difficult to come by due to recent cuts. There are government funding programmes and you can find out more about these here. Increasingly, government organisations are contracting for services from the voluntary sector.
  2. Gift Aid
    You know when your friends run half-marathons and do crazy things for charity and you see that ‘claim Gift Aid’ button when you donate? Well, this is actually something a charity can register for to increase the value of donations from UK taxpayers. In a nutshell, charities can reclaim tax from HMRC on any donation made by a taxpayer provided the donor has made a Gift Aid declaration and the charity can prove how much each donor has given. In these cases You can claim 25p for every £1 donated. Register for Gift Aid here.
  3. Foundations and Trusts
    There are several foundations and trusts in the UK who are set up to donate grants (non- repayable funds) to other charities. Each trust has its own favoured cause or geographical area of interest and will support charities who further these aims. These grants are not usually for large amounts so it’s probably not wise to use them as your primary source of income. However, their simple procedures and flexible process mean you should certainly look at what’s on offer. Check out the Association of Charitable Foundations website to source potential trusts and Trustfunding.org.uk.
  4. National Lottery Fund
    You probably know that the National Lottery was created to raise funds for charity. It currently gives over £1billion a year to organisations with good causes. The main board for charities is the Big Lottery Fund which distributes over £600million a year, and there is a small grants scheme (Awards for All) for grants under £10,000. Big Lottery Fund grants range from £300 to over £500,000 and you can apply no matter what kind of good-cause organisation you are - from a small community group to a large international charity. To find out more information and to apply visit their website.
  5. Wills and Legacies
    Some people set up a charity having unexpectedly received a large sum of money in a will or your charity might be left a sum in someone else’s will (perhaps a previous beneficiary). This is naturally a sensitive subject and as such you must follow best practice guidelines and act to the highest standards. Donors should use their own solicitors if they would like to leave a donation in their will. Sometimes, a charity can offer to pay for the will of the donor to encourage people to donate. The solicitor will, however, be acting in the best interests of the donor and not the charity.

    Avoid potential ethical risks by putting in place procedures to prevent:

    • Potential donors becoming too close to one member of staff which can result in that person being paid instead of the charity.
    • The donor giving money promised to the family. You might be approached by the family to explain this situation and a legal battle could ensue.
    • Putting pressure on vulnerable people. If a legacy was made because ‘undue influence’ was applied, then the will and legacy might be invalid.

    You can find out more about best practices and other potential problems with this method on the government website.

  6. Fundraising and public appeals
    When you think of raising funds for a cause or charity, you almost immediately think of the more ‘direct’ forms which you see as street fundraisers, door-to-door requests and bucket collections. Whilst this might be an effective way to engage with the public about your cause and drive revenue to support it, there are strict guidelines to follow. The government is cracking down on tactics which could come across as intimidating and you might want to consider whether these tactics are effective overall for your cause. You should have an accessible complaints procedure in place which will promote confidence and protect you against fraudulent activity (side note: if you ever suspect your organisation has been a victim of fraud, report this to Action Fraud). Here are a few rules you need to be aware of if you decide to employ these methods:
    • You’ll likely be subject to strict data protection laws (under the Data Protection Act 1998) if you take personal details from people e.g. names, contact details, credit/debit card numbers. The Information Commissioner’s Office (ICO) has a handy guide that goes into detail about your obligations here.
    • If you employ professional fundraisers, commercial participators or just generally pay someone to raise funds for you they MUST make a ‘solicitation statement’ to donors. This will cover things such as who they are raising for, what proportion of the funds the charity receives, how their remuneration is collected, how much the fundraiser itself will receive etc. The Institute for Fundraising provides guidance around when you need to provide a statement, as it might not be immediately obvious. Trustees need to be sure that using a fundraiser is good value for money.
    • For face-to-face collections, The Charities Act 2006 makes it clear that a licence or ‘permit’ is required for the collection of funds from the local authority in whose area you wish to operate.
    • For broadcast and telephone appeals, if a donor has given over £100 to a professional fundraiser or commercial participator, they actually have a 7-day grace period where they can ask for the money back.
    • If you are holding a raffle or a lottery (or any other ‘gaming’ activity e.g. a ‘bingo night’) with the proceeds going to the charity or organisation, you are subject to the rules and regulations of The Gambling Act 2005, which is governed by the Gambling Commission.
    • Another popular activity is holding events. These are often subject to local licensing laws along with laws concerning alcohol (if you are serving this, see gov. website for more details), food safety standards and consumer protection.
    • If you want to contact people by telephone or online, as well as being subject to Data Protection you also must abide by the Privacy and Electronic Communications legislation which has stringent rules around contacting people for marketing purposes. The Information Commissioner’s Office (ICO) goes into detail about the regulations here. If you want to collect online, you will be subject to this and also the Consumer Contracts Regulations 2013, which replaced the Consumer Protection (Distance Selling) Regulations 2000, and cover things like providing pre-contract information and cancellation rights. You will also want to be compliant with the Consumer Protection from Unfair Trading Regulations which contain a global ban on unfair commercial practices. Also a new Fundraising Preference Service is to be introduced shortly so that people who register with it cannot be contacted for donation requests. You can also find out more info from us about Data Protection laws in ‘Part 1 - Setting Up’ of our Charities guide series.
    • As you can expect, if any of your fundraising activities involves children or vulnerable people, you will be subject to rules which protect them. See the Charity Commission’s guide here.

    Overall, as a trustee it is your duty to make sure any fundraising activities comply with all the relevant legislation. The list above is not exhaustive so do seek professional help if you are stuck.

  7. Crowdfunding This is a popular way to raise money for your organisation via the public and essentially involves lots of people putting in relatively small amounts of money through a crowd- funding online platform. There are 2 main types for you to consider: reward-based and equity-based. Most charitable organisations will use a reward-based crowdfunding platform. In this case, investors will receive a tangible item or service in return for their money e.g. ‘invest £20 and you will receive free tickets to our performance.’ However other returns are intangible where donors expect nothing back except a good feeling for assisting the project. Some examples of the bigger reward-based platforms for voluntary and charity organisations are: Kickstarter, Crowdfunder and Indiegogo.

Dealing With Difficulties & Insolvency

We know it’s not nice to talk about getting into ‘difficulties’ and the idea of becoming insolvent, but it’s good to know the best way to handle the situation should problems arise. Remember, you may be accountable for the performance of your legal duties to your members and any relevant governing bodies such as the Charity Commission. Charities and charitable third-sector organisations do unfortunately get hit by fluctuations in the economic climate, for example, so here are some tips on how to prevent yourself from becoming insolvent (technically arising when either your charity cannot pay its debts as they fall due (the cash flow test) or its liabilities are greater than its assets (the balance sheet test)):

  • If you identify insolvency as likely being an issue, we would always recommend that you seek professional advice (in writing). Remember that as a director or trustee of a charity, if you do not take steps to mitigate that risk when it becomes a problem, you could be personally liable for the charity’s debts – (especially if you work as a trustee for an unincorporated charity which does not give you the protection of limited liability). We would recommend advisors such as EWS who advocate business recovery as their primary aim (for example through entering into an Administration or a Company Voluntary Arrangement for an incorporated charity) and seek to minimise the risk to trustees.
  • Be aware of ‘which funds are restricted and which aren’t’. You might have £2 million in the bank, but if that money has to be used specifically to purchase an X-Ray machine for your health-sector charity, you can’t then use it to pay staff, for instance.
  • Think about how you could change or restructure your charity’s activities e.g. looking for alternative sources of funding through the government or new fund-raising activities.
  • If you do decide to wind up your charity or cease to operate, as a legal requirement you must tell the Charity Commission so they can take you off the Register of Charities.

The Charity Commission has a helpful guide which goes into more detail on the above, that you should read here and there is also the Code of Fundraising Practice, which is particularly relevant with regard to public appeals. The government website provides further advice on the legalities and responsibilities which you should be thinking about as a trustee. Happy fundraising!

Conclusion

We hope you’ve enjoyed our brief guide to funding your charity, keeping the organisation’s legal obligations in mind. Whether you decide to go down the official ‘charity’ route or not, you should (hopefully!) take some wisdom and heed the best practice guidance of the Charity Commission and of all those other expert organisations that are mentioned through parts 1, 2 and 3. Finally, as this is only to be used as a guide, we would recommend you seek professional advice if you’re confused about any of the above- don’t get bitten. LawBite can assist with your organisation’s legal queries for around half the price of a standard law firm, with relevant documents and advice. If you’re unsure of what you need, we offer a free consultation too!

Contributors:

Lizzie Knight, Head of Marketing
Clive Rich, Founder and Chairman
Gwynne Jarvis, Charity LawBrief (LawBite lawyer)