Posted by Alexander on 04/02/2021

More restricted and unrestricted thoughts

My blog about abolishing restricted income enabled me to have a number of conversations with people who know considerably more about this area than I do. 

Amongst other things I’ve learned that it’s not about the SORP.  SORP (and with it restricted income) is simply an expression of a legal requirement for charities to demonstrate their spend which goes back to Victorian times.  To unravel it would involve changing the Charities Act which is not something to be approached lightly. 

I’ve learned that endowments – and potentially other legacy assets – present a major challenge to abolishing restricted income.  And I’ve learned that there are genuine concerns about the impact abolishing restricted income would have at a time when public trust in charities is low. 

But I’ve also learned that there is a lot of frustration with restricted income from charities and funders alike.  I’ve learned that charities in the UK are more regulated and have more requirements placed on them – even without SORP – than any other country in the world.  And I’ve also been talked through the impressive and open processes for engaging with SORP and the slightly more complex processes for changing the Charities Act. 

So is it worth pursuing?

Here are four key questions and some tentative answers:

 

1. How important is restricted income (a) to the public at large (b) to funders/donors?

My hunch is not very.

  1. Public trust with charities tends to be undermined by a mix of high profile scandals and statistics about chief executive salaries and how much money makes it to the frontline.  Restricted income does not directly address any of these issues.  Indeed it probably exacerbates them.
  2. For funders it’s a little more complicated.  Whilst many are increasingly keen on giving unrestricted funding to charities, restricted income can be a convenient way for funders to frame demands for specific outcomes.  Any replacement would have to find a way to enable fundraisers to do this without recreating the whole apparatus.  On which subject….

 

2. What would replace restricted income?

To state the obvious it would have to be demonstrably better than the current system and would have to be thoroughly tested.  My working hypothesis is that charity finances should be free to run like any private or public sector organisation.  If funders want specific outcomes then they can agree a contract.  If the contract is broken the funder has recourse to the law in extreme cases and to the Charity Commission in less extreme ones – and of course will never give money to the charity again.   On the particular challenge of endowments, Charities could set up separate organisations just as many already do, for example by having separate trading arms. 

   

3. How large are the benefits of removing it?

There are tangible benefits to removing restricted income.  Charities would save money and time almost immediately.  Management accounts and indeed audited accounts would be simpler and easier for everyone to understand.  Better decisions would be made.  Risks would be reduced. 

But the most interesting benefits I think are less tangible and more cultural.  There would be an onus on Charities to find their own ways of demonstrating their impact and an assumption that Funders are giving money to the Charity rather than to specific projects.  Good charities would thrive and have the freedom to be more strategic.  Relationships between funders and charities would be more grown up.

 

4. How difficult would it be to remove?

Based on my conversations and research so far I suspect it would be – and should be – a pain and involve huge amounts of consultation, teamwork and a dollop of luck to get the momentum required.  All offers of help and advice gratefully received!

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