Guidance

NHS charities guidance

Updated 31 October 2022

Applies to England and Wales

1. Introduction

1.1 Who is this guidance for?

This guidance is particularly intended to be useful to those who have a formal or informal role in the management of NHS charities in England and Wales. This includes:

  • members of trust boards of NHS bodies (including NHS Foundation Trusts)
  • individual trustees (where bodies of individual trustees have been established by the Secretary of State for Health and Social Care/Welsh Ministers)
  • employees of trusts allocated responsibility for day-to-day management of NHS charities or who are given the status of fund advisers/holders
  • employees of the NHS charities

1.2 ‘Must’ and ‘should’: what the Commission means

In this guidance:

  • ‘must’ means something is a legal or regulatory requirement or duty that trustees must comply with
  • ‘should’ means something is good practice that the Commission expects trustees to follow and apply to their charity

Following the good practice specified in this guidance will help you to run your charity effectively, avoid difficulties and comply with your legal duties. Charities vary in terms of their size and activities. Consider and decide how best to apply this good practice to your charity’s circumstances. The Charity Commission (‘the Commission’) expects you to be able to explain and justify your approach, particularly if you decide not to follow good practice in this guidance.

In some cases you will be unable to comply with your legal duties if you don’t follow the good practice. For example:

Your legal duty It’s vital that you
Act in your charity’s best interests Deal with conflicts of interest
Manage your charity’s resources responsibly Implement appropriate financial controls & Manage risks
Act with reasonable care and skill Take appropriate advice when you need to, for example when buying or selling land, or investing (in some cases this is a legal requirement)

Trustees who act in breach of their legal duties can be held responsible for consequences that flow from such a breach and for any loss the charity incurs as a result. When the Commission looks into cases of potential breach of trust or duty or other misconduct or mismanagement, it may take account of evidence that trustees have exposed the charity, its assets or its beneficiaries to harm or undue risk by not following good practice.

1.3 What about Welsh NHS charities?

The term NHS is used in this guidance to refer to the NHS throughout England and Wales. The Commission recognises, however, that the NHS in Wales has different governance structures and different accounting and auditing arrangements from the NHS in England. It is important to note that policies adopted by the Department of Health and Social Care for NHS charities in England do not automatically apply to NHS charities in Wales. References to the Department of Health and Social Care ‘DHSC’ therefore only reflect the position in England. Advice should be sought from the Welsh Government concerning its policies on issues arising from NHS legislation for Wales.

1.4 Who should you contact regarding NHS legislation?

In this guidance the Commission distinguishes between:

  • the exercise of statutory powers under NHS legislation (which fall to the Secretary of State for Health and Social Care/Welsh Ministers respectively)
  • the day-to-day oversight of, and policies relating to, NHS legislation that affects NHS charities (which fall to DHSC and the Welsh Government respectively)

In practice trustees, and those who administer NHS charitable funds, should contact the DHSC and the Welsh Government on all issues relating to NHS legislation and the resulting policies.

1.5 What about charities linked to NHS Foundation Trusts?

Although such charities do not fall within the statutory definition of an NHS charity they are dealt with in this guidance. For most purposes the charities are to be dealt with in the same way as those held by other NHS trustees, but where differences apply the Commission has included an extra paragraph (‘In the case of NHS Foundation Trust charities …’). In practice the main differences between such charities and other NHS charities relate to the auditing arrangements see section 7.

2. What is an NHS charity?

2.1 The working definition employed by the Commission to identify an NHS charity is that:

  • the charity is established for charitable purposes relating to the NHS
  • its trustee arrangements have been established by the Secretary of State for Health and Social Care/Welsh Ministers under NHS legislation
  • the individuals responsible for ensuring that trustee duties are fulfilled are appointed by the NHS by one means or another

The Commission, for the purposes of this guidance, has included charities linked to NHS Foundation Trusts in its working definition of NHS charities. There are also several Academic Health Science Centres. The former NHS charitable funds of the merged NHS partners of such Centres are included under the working definition of NHS charitable funds for the purposes of this guidance.

A number of former NHS charities (previously managed by categories of trustee body appointed by the Secretary of State for Health and Social Care) elected to convert to ‘independent’ charities when those categories of bodies were abolished in 2018. A condition of their conversion included that they entered into memoranda of understanding with the NHS providers whose services they support.

These new charities are typically charitable companies, and are still regarded informally as “NHS charities” and included in the working definition applied in this guidance.

2.2 Charities not administered by NHS appointed trustees

Charities that aim to support the work of the NHS, but which have trustees who are not appointed through the Secretary of State for Health and Social Care/ Welsh Ministers, are not NHS charities for the purposes of this guidance, for example Hospital Leagues of Friends.

Land and buildings of former charitable voluntary hospitals and other land held by NHS charities

Pre-1948 voluntary hospital sites

Legal requirement - section 6 of the National Health Service Act 1946 transferred virtually all existing ‘voluntary hospitals’ to the Minister of Health from the appointed day (5 April 1948) ‘free of trusts’. As the health service has developed, the ownership of hospital sites has devolved to local NHS bodies. The effect of section 6 was that property previously held on clear charitable trusts for a hospital ceased to be charity property.

If a hospital site is subject to closure and/or sale it is very unlikely that its pre-NHS status as the property of a charity will have any relevance to that closure/sale. Consequently, the Commission would not have a role to play in the disposal and the provisions relating to the disposal of land in the Charities Act 2011 would not apply.

The Commission would not have any jurisdiction over decisions relating to closure of the hospital.

There have been a few cases in which, at the point of disposal, the NHS body has identified that such a site did not appear to have been transferred in 1948. Where this has been confirmed by the DHSC the trustee(s) should seek advice from the Commission. This would also apply to charitable property that first came into use by the NHS after 5 April 1948, but the ownership of which has not been formally transferred from its previous trustees.

Section 6 was re-enacted under sections 219 and 221 of the National Health Service Act 2006 with effect from 1 March 2006.

Land acquired by NHS charities since 1948

If an NHS charity has purchased, leased or received a gift of land since 5 July 1948 that land will be held on the trust for the charity concerned. Depending on the documents that gave effect to the transfer of ownership to the charity (and any declarations of trust made subsequently in relation to that land) it may represent:

  • ‘designated’ land (land held on trust for a specified use)
  • permanent endowment of the charity (but not designated)
  • permanently endowed designated land
  • an unrestricted asset of the charity, held on trust for its objects

Such land would be subject to the legal requirements relating to the disposal of charity land in the Charities Act 2011.

See Sales, leases, transfers or mortgages: what trustees need to know about disposing of charity land (CC28).

Legal requirement - the Commission has no jurisdiction in relation to clinical or other operational matters related to the NHS and will not provide advice or guidance concerning NHS bodies’ responsibilities in these areas.

3. NHS charity trusteeship and the governance implications

3.1 The short answer

The default statutory arrangement for the administration of charitable funds linked to the services of one of the categories of NHS body listed below is that the body concerned will have sole corporate trusteeship of those funds.

Such a body does, however, have the legal ability to agree to transfer that trusteeship either to another such NHS body or to an independent charity - provided a memorandum of understanding (complying with DHSC guidance) has been agreed.

3.2 In more detail

From 2018 the only trusteeship arrangement for NHS charities is for an NHS body to hold the charitable funds linked to its services (and sometimes to the services of smaller NHS bodies in its locality) in the capacity of a corporate trustee.

The NHS bodies listed below can act as the trustee of charitable funds in a corporate capacity:

  • National Health Service Trusts (NHS Trusts)
  • NHS Foundation Trusts (FTs)
  • Integrated Care Boards (ICBs)
  • Special Health Authorities
  • NHS England

The responsibility for the management and use of these funds held on trust generally lies with the board of a NHS body acting as corporate trustee. This model applies to almost all NHS charities, the vast majority of which have the board of an NHS trust or FT as corporate trustee. There are no NHS charities which have a Special Health Authority or NHS England as a corporate trustee.

Implications for governance where there is a corporate trustee

Having a corporate trustee raises a number of issues for all those concerned with the administration of the NHS charitable funds. In particular:

a. Who is/are the trustee/trustees?

Groups of individuals within the administration arrangements for the charitable funds sometimes come to be (wrongly) labelled as the trustees, for example:

  • the members of the board of the NHS Trust
  • members of a charitable funds committee established for day-to-day management of the funds
  • individual fund holders/advisers
  • employees of the charities or of the corporate trustee

There is only a single trustee, namely the NHS body that has been appointed as corporate trustee.

b. The agency of staff in receiving donations

There is sometimes a perception that those who solicit/collect/receive funds from donors within the NHS acquire a trusteeship role in relation to those donations. In particular there is a belief that those individuals can direct or determine the spending of those charitable funds they receive.

Legal requirement - the correct approach, which arises from the statutory basis on which NHS trustees are appointed, is that any donation made by a third party for charitable purposes:

  • in a hospital or other NHS service setting
  • through an employee of an NHS Trust, or ICB, in the course of their employment

falls automatically into the trusteeship of the NHS appointed trustee. This is on the proviso that those purposes are within the statutory remit of the current trustee.

Employees of the NHS Trust or ICB are not entitled to solicit funds for restricted purposes that they have themselves decided, for example to fund research that they are conducting. If a donor imposes such a restriction it will fall to the trustee to implement the restriction.

Employees may choose to make donations from their net declared earnings. In such cases they are as free as any other donor to impose a restriction on their donation.

In summary, the employees are the trustee’s agent when they accept donations from third parties for charitable purposes linked to the NHS body: they cannot themselves impose conditions on the trustee.

Accepting or soliciting funds for non-NHS charitable purposes will not result in those funds belonging to the NHS trustee. If employees want to raise funds for other (non-NHS) charitable purposes during the course of their employment, however, they must of course seek proper authority. This is not least because that fund-raising may be in competition with the trustee’s fund-raising efforts. An NHS body is also entitled to control what activities take place on its sites and during the paid hours of employment of its employees.

c. What is the dividing line between the exchequer and ‘charitable’ spending by the NHS body?

The dual role of statutory service provider and corporate trustee of charitable funds can create a conflict of interest for an NHS body when deciding how to apply the charitable funds.

The Commission’s policy on charities and public service delivery is set out in its publication Charities and public service delivery: an introduction (CC37). In very broad terms there are few legally defined boundaries for services that must only be provided and funded directly by the public sector. It is therefore legitimate for charities to consider becoming involved in the delivery of such services provided:

  • a clear charitable purpose is served that falls within the trusts of the charity concerned
  • the decision is made in the interests of the charity to further its charitable objects
  • there is a clear open, and independent process of decision making by the trustee to support the decision to apply charitable funds in this way (including an assessment of how far the public sector body’s duty of provision extends)

The principles of proper trustee decision making are set out in the Commission guidance It’s your decision: charity trustees and decision making (CC27).

In summary, for corporate NHS trustees the underlying issue is not that certain types of spending are automatically ruled out with regard to the charitable funds. Instead the issue is that the corporate trustee must be able to demonstrate that, before applying charitable funds towards service delivery, there has been a clear and open decision- making process. That process must be independent of that body’s decisions concerning the use of its exchequer funds.

The Commission does not suggest that a corporate trustee must necessarily convene separate meetings etc, but it must ensure that charity business is dealt with as separate item or items on board agendas. The decisions made should be separately recorded within the board minutes (or as separate minutes) and, ideally, the trustee should retain a record of the basis on which key decisions were taken and not merely the decision itself.

4. Registering NHS charities and the use of ‘model’ documents

4.1 The short answer

Because NHS charitable funds are held on statutory trusts there is no doubt that they are charitable: the question of whether they are always used for charitable purposes is separate. On that basis the process of registration of such funds does not include a test of charitable status.

The Commission’s practice, using a power under s12 Charities Act 2011, is to link under a single ‘linked registration’ all the charitable funds administered by a single corporate trustee or body of individual trustees.

The Commission has developed a range of ‘model’ deeds and supplemental deeds to support NHS Trusts in formalising the establishment of new NHS charities (where the charitable funds are held only on statutory trusts or informal trusts, such as those resulting from an appeal).

4.2 In more detail

Compulsory registration criteria

NHS charities are subject to the same registration criteria as all other charities, see Set up a charity. But the process of registration is different (it is considerably reduced). It does not involve the Commission having to decide whether the trusts concerned are charitable. The funds in question are automatically held on charitable trusts if they have been received by NHS trustees for charitable purposes within their statutory remit. If the governing document of the charity follows one of the Commission’s models there is unlikely to be any requirement to revise the governing document as a condition of registration.

If a restricted fund of one of the charities:

  • has income in excess of the registration threshold (£5,000)
  • is ongoing, for example is not a short-term appeal
  • has its own written trusts (including separate purposes from those of the charity in which it has been held)

it is likely to constitute a special trust for the purposes of the Charities Acts and should be registered as a charity in its own right. In practice the Commission would use a linking direction to add this trust to a linked group that includes a reporting charity. If the trustees and their professional advisers are unsure whether a restricted fund constitutes a registerable charity they should contact the Commission.

4.3 Reporting charities and linked charities

What are linked registrations?

The Commission’s register enables charities administered by a single trustee to be linked under a single registration number. The link is made under s12(2) Charities Act 2011. One of the charities serves as the reporting charity for SORP purposes and the remainder are linked charities for SORP purposes.

a. A new linked registration following a change of trusteeship

Reorganisations of services within the NHS often result in transfers of trusteeship of NHS charities between NHS bodies. Where the reorganisation results in an NHS body (that already has a linked registration) dissolving and its charitable funds transferring to a new body (which does not have a linked registration) the Commission will ‘recycle’ the existing group registration as the new linked registration. Once the Commission has the required evidence of the change of trusts it can:

  • update the details of each charity in the linked registration (this will include updating the governing document and may include the name and objects text)
  • update the linked registration
  • update the contact details if required

b. A new trustee for some charities in group but old trustee continuing

Where the reorganisation of NHS services results in agreement between the existing trustee and a new provider to move some charitable funds to that newly created NHS body as trustee (without any existing NHS bodies dissolving) it is appropriate to create a new linked registration relating to the new body.

c. Registering a new charity within a linked registration

Where there is an existing linked registration the Commission will only usually require sight of the governing document of any new NHS charity (photocopy or PDF format) as a basis for proceeding to registration. When the governing document is in draft form the trustee(s) should consider whether:

  • the objects appear to reflect the underlying trusts
  • it appears appropriate for the trustees to establish a charity or would a ‘designated fund’ within the general purpose charity be more appropriate
  • the administrative clauses correctly reflect the trustee position, for example if there is a corporate trustee have the names of its board members incorrectly been listed at the start of the Deed instead of naming the corporate body

Subject to these considerations the Commission will, if the deed in question is in force and the charity has income of £5,000 or above:

  • enter the charity on the register as an additional linked charity of the linked registration
  • confirm the registration in writing, and record a linking direction under s12(2) of the Charities Act 2011

5. Transfers of funds following reorganisation of NHS services and conversions to independence

5.1 Transfers of NHS charity funds between bodies

Where there is a reorganisation of NHS services, it may be necessary to transfer associated charitable funds held by NHS charity trustees to other NHS bodies to reflect the restructuring.

DHSC expects NHS Charities operating under a corporate trustee model to use their own grant-making powers in the normal course of transferring charitable funds. Detailed guidance on this (including guidance on what information will need to be provided to the Commission) can be found in part 3 of the Department of Health guidance NHS funds held on trust: guidance on the acceptance, management and transfer of charitable funds for NHS bodies.

5.2 Conversion to independent status

In 2013 the Department of Health agreed that NHS trustees could properly opt to establish a ‘successor’ independent charity to which the NHS trustees could transfer the funds and assets of the NHS charities they controlled, with some formal authorisations to be given by the Commission.

Detailed guidance about this process can be found in NHS Charities Together guidance How NHS charities can convert to independent status.

6. Classifying funds (restricted v unrestricted and designated) and reviewing structures

6.1 The short answer

It is crucial to the correct management and use of NHS charitable funds that they are correctly classified as either restricted or unrestricted. Once this classification has been completed it is possible to consider how to structure the charities and the funds held by the trustee in a way that:

  • minimises the administrative burden
  • maximises the flexibility for the trustee in spending decisions
  • reflects, if appropriate, the structure of the services the charitable funds have been given to support

The Commission supports the principle of trustees aiming to reduce the proportion of the funds they hold that are restricted. It also supports trustees seeking to reduce the number of charities they administer. In addition the Commission supports rationalisation of designated unrestricted funds, where that process will result in more effective support to the services for which they were donated. The guidance below offers specific suggestions and strategies to achieve greater flexibility and reduce administration.

6.2 In more detail

The general position for charities

The terms ‘restricted’ and ‘unrestricted’ are contained in the Charities SORP. What follows is a summarised explanation only.

a. Restricted funds are funds which either:

  • must be used for specific purposes (set out by, for example, the donor(s) at the point of donation - including bequests - or by the terms of a public appeal or even by the terms of a grant)
  • are subject to a restriction on the expenditure of capital (also known as ‘permanent endowment’ or ‘expendable endowment’ depending on the exact terms of the restriction)

A particular fund may of course be restricted in both these ways (by purpose and a limit on the ability to spend capital). If it is, and the income is above the registration threshold, the fund may need to be registered see Compulsory registration criteria. Trustees who receive a restricted donation or other restricted payment (the income from which will be below the registration threshold) can properly choose to add that sum to the funds of an existing charity provided that:

  • that charity’s objects are wider than the restriction
  • the restricted funds are accounted for as such within the accounts of the charity

These legally binding requirements for (or limitations on) use are known as ‘trusts’ (and fall within the definition of ‘trusts’ given at s353 of the Charities Act 2011). Funds should only be classified as ‘restricted’ if they are subject to trusts. Please see (d) in this sub-section.

b. Unrestricted funds are those funds which are given to a charity (whether solicited or unsolicited) without any restrictions imposed by the particular donor or grant maker

They could include proceeds of an appeal, provided that the trustees have included a disclaimer to the effect that the appeal proceeds may be used for other purposes of the charity in the event that the appeal purposes cannot be fulfilled. Endowment funds, permanent endowment or expendable endowment, are always restricted funds). Unrestricted funds, therefore, are the funds of a charity that may be spent at the discretion of the trustees, in furtherance of the objects of the charity in which the funds are held, without any distinction between capital and income.

c. Designated funds

The trustees may exercise their discretion to set aside part of the unrestricted funds of a charity for designated purposes. By way of example a proportion of the funds held within a general research charity may be designated specifically for cancer research.

Designation of funds may also be used where donors have expressed a preference without imposing a ‘trust’. Designated funds remain unrestricted since the trustees can remove the designation at any time. These designations, whilst being a perfectly acceptable and common practice, do not themselves create legally separate charities. Designated funds continue to be held ultimately for the overall purpose of the charity in which they are contained. Designated funds should be recorded within the summary of unrestricted funds in a charity’s accounts.

Funds given on this basis (of a donor preference falling short of a restriction) are normally to be treated as designated funds for use in relation to a particular ward, department, speciality or service.

d. Are donors’ wishes ‘trusts’?

An authoritative commentary on trust law explains the position as follows:

If a gift in terms absolute is accompanied by a desire, wish, recommendation, hope, or expression of confidence that the donee will use it in a certain way, no trust to that effect will attach to it, unless on the will as a whole, the court comes to the conclusion that a trust was intended.

(Underhill’s Law of Trusts and Trustees, 15th edn)

In simple terms this explanation means that the answer to the question is ‘no’. A trust does arise from an unequivocal restriction imposed by a donor but it does not arise from a ‘desire, wish, recommendation, hope or expression of confidence’ that the trustees will use it in a certain way.

In practical and accounting terms the implication is that donations should be presumed to be unrestricted (and not subject to a ‘trust’) unless the donor places an unequivocal restriction on it, for example by saying it ‘must be used’ or ‘can only be used’ for a specified purpose or by giving to a specific appeal. For a particular donation to be treated as restricted requires positive evidence of restriction. In most cases trustees should make this classification only where there is written evidence of an intention to restrict, for example a will, a letter from a donor, terms of a grant, appeal literature. For appeals please see section 6.8.

6.3 The position for NHS Charities

a. Historical formalisation of trusts of charitable funds

Many registered NHS charities were established using the Commission’s published model trust deeds. The funds were previously held without written trusts.

The declaration of written trusts over funds held did not of itself affect whether the funds concerned were restricted or unrestricted. That classification was determined at the original point of receipt. Donations to NHS trustees without any restriction imposed at the point of donation should be regarded as unrestricted funds held for the statutory remit of the receiving trustee. Trustees have power to designate such funds (please see also (c) of this sub-section). Reviews of funds by trustees subsequently have indicated that many charities were erroneously created using the model documents where the funds in question were merely designated funds, and were not subject to restrictions.

b. The 2 different approaches to the process of formalising the trusts which developed following the publication of the Commission’s models were:

  • the single charity approach

Some NHS trustees opted to establish a single charity with objects reflecting their statutory remit. Within this charity they established designated funds, to which they apportioned some or all of the unrestricted funds of the charity. The designations typically reflected the perceived wishes of donors, for example donations made by cancer patients and their families (without formal restrictions) were allocated to a designated Cancer Fund. The trustees may also have held restricted donations within the single charity.

  • the general and special purpose charities approach (multiple charities)

Other NHS trustees opted to establish a general purpose charity to hold only those donations which appeared to be expendable for any purposes related to the NHS. All other donations (where it seemed either that donors had imposed a restriction or that the donation should be designated because donors’ wishes or intentions were clear) were allocated to special purpose charities. Some trustees opted for broad special purpose charities, for example one per hospital, and others established a greater number to reflect subdivisions of service provision, for example one per ward, one per medical condition etc. In some cases several hundred special purpose charities were established.

Under this second approach the unrestricted funds held within the special purpose charity were made subject to a trustee imposed limitation (the declared object). In practice this means that, the funds of such special purpose charity must be applied within the objects declared in the trust deed, but:

  • the unrestricted funds within the special purpose charity remain ultimately unrestricted for the statutory remit(s) under which they were received - if the charity dissolves the unrestricted funds are released to be available for that/those remit(s)
  • new donations naming the special purpose charity (in the absence of any further donor restriction) should be regarded as unrestricted funds of the charity, as they are subject to the power to dissolve the charity (even if the donor is unaware of the terms of the dissolution clause)
  • any restricted funds within the charity must be applied in accordance with the restriction - if the charity dissolves the restriction will remain intact wherever the funds are transferred
  • the funds of the ‘general purpose charity’ are wholly unrestricted to the statutory remit of the trustee, which should be reflected in that charity’s objects

c. Designations in the NHS context

As indicated, designations are created at the discretion of trustees from unrestricted funds of the charity. NHS trustees have the same power as other trustees to create designations from unrestricted funds received with no indication of an intended use.

In the context of the NHS, however, it is more typically the case that a donation will be received with the donor expressing a ‘desire, wish, recommendation, hope or expression of confidence’ as to use. In other cases the context of the gift, for example to a particular fund holder/adviser or within a particular setting gives a strong clue as to a donor’s probable wishes. These expressed wishes or contextual clues provide a fairly clear indication/expectation (but not a legal restriction) as to how the donation should be used, if possible and practicable.

NHS trustees should have due regard to these contextual clues/expectations as a basis for creating designations and allocating donations between designated funds. This will enable them to respect the wishes or perceived wishes of donors without, wrongly, classifying such funds as ‘restricted’. If it becomes impractical to maintain a particular designation the trustee(s) will be free to reconsider the use of the funds without seeking external authority. Where possible they should consider the spirit of the original donations when redesignating funds.

Historical accumulations of unrestricted fund: are trustees bound to expend them?

The general rule for all trustees is that they should expend unrestricted funds within a reasonable period of their receipt. The Commission recognises that, in some cases, trustees hold substantial funds comprising elements of endowment and of unexpended income and capital growth (much of it unrestricted) accumulated over many years. These invested funds provide a relatively stable income stream for the charities. In these circumstances the Commission would not expect trustees to expend the unexpended funds in a short period simply in order to comply with the general rule.

The Commission would expect the trustee(s) to frame suitable reserves policies concerning these funds, however, and to avoid further accumulation of unrestricted income or capital growth. If an urgent need arises for a substantial contribution of capital the trustee(s) should consider applying the historic accumulations before considering a new appeal to fund the contribution.

6.4 Can trustees change from a multiple charities approach to a single charity approach?

NHS trustees may feel that:

  • the administration and accounting burden of operating multiple charities is greater than for administering a single charity with designated funds and, where applicable restricted funds
  • that changes brought about by reorganisation etc result in substantially more bureaucratic processes where multiple charities are registered than if there is a single charity with designated funds (and, where applicable, restricted funds)

The Commission accepts that trustees are entitled to restructure their charitable funds in order to minimise administrative and other requirements. This is on the basis that, in most cases, it appears the majority of the funds held were originally received as unrestricted funds applicable for the statutory remit(s) of the trustee(s) or its/their predecessors.

6.5 Steps towards restructuring the funds to a single charity approach

Checking the current analysis of the funds

The correct future management of the funds will require a correct classification of the funds between restricted and unrestricted.

Step 1 - review previous classification:

The Commission would encourage trustees to conduct a one-off exercise to test the current classifications. In particular the trustee(s) should seek to match restricted funds to clear evidence of restriction at the point of receipt. Section 131 of the Charities Act 2011 requires charities’ accounting records to be preserved for at least 6 years, so this is the minimum period of records that should be considered. The statements of account themselves do not constitute primary evidence for classification. In the absence of such evidence the Commission takes the view that the funds in question can properly be reclassified as unrestricted.

Step 2 - consider designating funds no longer considered to be restricted:

If such a reclassification is made the trustee(s) should consider whether it may be appropriate to ‘designate’ a former restricted fund for the purposes for which it was previously inappropriately treated as restricted (because even where there is no formal restriction, many donations are given to NHS charities with a clearer donor expression of intent than might be the case with donations to a non-NHS charity).

Step 3 - consider whether restricted funds have been spent out

The trustee should also consider a ‘cut-off’ for past restrictions. Trustees are under a general duty to expend income within a reasonable period after it is received. If the total expenditure of funds within each charity broadly matches the total income (and has done so in most years) it is reasonable for the trustee to make the following working assumptions:

  • income received by the charity more than, say, 4 years ago has now been spent
  • the trustee spent all the unrestricted and the restricted income and had regard to any restrictions when spending (it did not set aside the restricted income, leaving it unspent)

It should therefore follow that the restricted income dating from more than 4 years ago has been spent. In classifying current balances, therefore, it will only be necessary, in terms of looking for restricted funds, to consider:

  • permanent endowment funds, whenever they were created
  • very substantial restricted funds that have been accounted for separately (where there is clear and continuing evidence of the balances carried forward)
  • restricted donations received within the last 4 years

Different trustees may work to a different (shorter) planned turnover of funds from the point of receipt to application, for example within 2 years or 3 years and can substitute that turnover period for the illustrative 4-year cycle shown above.

Unrestricted income that has been deliberately accumulated under a defined reserve policy would not be accounted for as restricted.

Actively reducing the proportion of restricted funds held

As restricted funds are subject to legally enforceable trusts, any misapplication of such funds (‘breach of trust’) could form the basis for action against the trustee(s). It is therefore desirable to minimise the proportion of funds held that are properly classified as restricted. The following practical steps may be taken by trustees to minimise the restricted funds they hold:

  • use of a suitably-worded receipt to limit the creation of new restricted funds
  • spending the restricted funds first, whenever possible, for example if charitable funding is requested for a particular project at a named hospital the trustee(s) should apply any funds restricted to that hospital in priority to unrestricted funds available for NHS-wide or trust-wide purposes
  • in relation to the permanent endowment funds trustees should consider whether (in the case of funds held on a trust for investment) it would be possible to apply a ‘total return’ approach to the unapplied returns - this might enable a significant proportion of the ‘endowment’ to be reclassified as expendable return

This is explained in more detail in the Commission’s guidance Total return investment for permanently endowed charities.

Please see section 6.6, which deals with options for the release or modification of restrictions that can no longer be fulfilled.

Dissolving the special purpose charities and reallocating funds to the general purpose charity

The model ‘special purpose charity’ declaration contains a power of dissolution in the following terms:

If it appears to the trustee that the objects no longer provide a suitable and effective method of using the trust fund, the trustee:

[1. may add the trust fund to the trust fund of the … (general purpose charity) …]

[2. shall in these circumstances, but only so far as the trusts attaching to any particular gift to the charity may permit, hold the trust fund upon trust to apply the income and at its discretion, so far as may be permissible, the capital for any charitable purpose relating to the National Health Service.]

The Commission is willing to accept the following interpretation of the first part of the clause:

‘The trustee(s) consider(s) that, because the funds held within the charity have mainly been received as unrestricted funds for NHS and trust-wide use, the limited objects of the charity no longer provide a suitable and effective method of using the trust fund’

This would allow use of the dissolution power as part of a restructuring exercise.

There were 2 options in the model clause (as annotated) for the future application of the funds. In practice both options should lead, in the first instance, to a transfer of funds to the general purpose charity. Where the donations held within the dissolving charity were linked to clear wishes of donors (whether expressed or reasonably inferred from the context) the trustees should consider designating the transferred funds for purposes similar to the objects of the dissolving charity. Any restricted funds previously held within the dissolving charity would remain subject to the restrictions.

Developing practices to ensure correct classification of future donations at point of receipt

Donations and other income are received in many different ways, with donors expressing the terms of their donations using a variety of different formulas. In the case of Appeals, donors may not themselves express the terms of their donation but it is implicit that the donations are restricted by the terms of the Appeal see section 6.8. It is the responsibility of the trustee(s) to establish a process of receipt of funds that will support the correct classification of the funds they hold (as well as ensuring accountability).

6.6 Options where restrictions can no longer be applied

The impact of some NHS legislation on the classification of funds

NHS legislation has included a number of unusual provisions that affect the way in which NHS charitable funds should be classified. In particular, in various instances the legislation has stated that ‘trusts’ cease to apply when the funds in question pass to the NHS trustee but that the trustee should aim to apply the funds for the former trusts ‘so far as (reasonably) practicable’. There is no explicit statement of what happens when it is no longer ‘practicable’.

Section 220 National Health Service Act 2006 - implemented from 1 March 2007 (restated s7 NHS Act 1946)

Section 7 of the NHS Act 1946 removed all trusts from charitable funds transferred to the NHS on the ‘appointed day’ but then went on to state that the trustee(s) should use the funds ‘so far as reasonably practicable’ for the purposes for which they were held prior to the transfer.

It is the Commission’s view that:

  • the expectation for trustees to continue to apply the original trusts ‘so far as reasonably practicable’ contains an implied power to cease to apply them when they are no longer practicable
  • such funds should be classified as restricted until and unless the trustee(s) exercise(s) the implied discretion to redirect the funds - once that discretion is exercised the funds should be re classified as unrestricted

6.7 Section 218 National Health Service Act 2006

Implemented on 1 March 2007, deals with bequests and other private trusts for hospitals. Section 218 restated s91 of the National Health Service Act 1977.

The Commission’s operational guidance  OG505 Redirecting Failed Charitable Legacies sets out in detail the key legal principles and how it deals with such cases. S218 NHS Act 2006 represents a limited exception to the general position set out in the Commission’s operational guidance, applicable to some gifts to hospitals.

Explanation of s218 provisions

If a bequest is made simply for the purposes of a particular health service hospital and is in the hands of non NHS trustees the provisions of s218 might apply. Generally bequests for charitable purposes related to the NHS are of 2 types:

Type 1:

An instruction to the executors or trustees to make an outright payment to a named hospital/service (or to the relevant NHS body as trustee). If such bequests include a restriction that cannot be fulfilled, a scheme of the Commission, or other formal authority may be required to amend/remove the restriction. This would be dealt with on cy-près principles.

Type 2:

An instruction to the executors or trustees to hold funds, as trustees, for a named hospital/service (or for the relevant NHS body). Section 218 of the National Health Service Act 2006 provides that:

“218 (1) Subsection (2) applies where the terms of a trust instrument authorise or require the trustees, whether immediately or in the future, to apply any part of the capital or income of the trust property for the purposes of any health service hospital

(2) The trust instrument must be construed as authorising or requiring the trustees to apply the trust property to the like extent, and at the like times, for the purpose of making payments, whether of capital or income, to the appropriate hospital authority.

(3) Any sum paid to the appropriate hospital authority must, so far as practicable, be applied by it for the purpose specified in the trust instrument

(4) ‘The appropriate hospital authority’ means -

(a) where Welsh special trustees are appointed for the hospital, those trustees,

(b) where the hospital is managed by, and trustees have been appointed for, an NHS Trust, the trustees,

(c) where the hospital is managed by an NHS Trust, an NHS Foundation Trust and neither paragraph (a) nor paragraph (b) applies, the NHS Trust, NHS Foundation Trust, and

(d) in any other case -

(i) where the hospital is vested in the Secretary of State, the Special Health Authority exercising functions of the Secretary of State in respect of it or, where there is no such Special Health Authority, the Secretary of State,

(ii) where the Welsh Ministers have functions in respect of the hospital, the Special Health Authority or Local Health Board exercising those functions.

(5) Nothing in this section applies to property transferred under section 24 of the National Health Service Reorganisation Act 1973

(6) In this section -

‘health service hospital’ includes such a hospital within the meaning of section 206 of the National Health Service (Wales) Act 2006 (c. 42), and

‘Welsh special trustees’ means special trustees within the meaning of section 160 of that Act.”

The Commission cannot authoritatively interpret a Will: that is the role of the Court. Executors/trustees must therefore make their own judgment as to whether the terms of the Will fall under type 1 or type 2 above and whether s218 applies to the payment of funds across.

It is the Commission’s view that:

  • sub-section (1) applies to non-NHS trustees who hold the funds on a continuing trust for the hospital/service (Type 2), rather than subject to an instruction to make an outright payment (Type 1)
  • sub-section (2) effectively enables non-NHS trustees (typically executors) to transfer trusteeship of the funds to the NHS trustees
  • sub-section (2) only applies if the hospital in question is still open - if it is closed the executors must instead seek advice/authority from the Commission
  • the expectation for the NHS trustee(s) who receive funds under s218 to continue to apply the original trusts ‘so far as practicable’ - section 218(3) therefore contains an implied discretion to cease to apply them when they are no longer practicable
  • ‘trusts’ in this context would include any original requirement only to apply the income, not the capital (permanent endowment)
  • such funds should be classified as restricted until and unless the trustee(s) exercise(s) the implied discretion to redirect the funds - once that discretion is exercised the funds should be reclassified as unrestricted

If s218 applies there is no need for formal authority from the Commission by way of a scheme or otherwise to redirect use of these funds (such an eventuality would normally only arise if the hospital or service in question had already closed at the date that the will was being made or there had been a misdescription of the name of the hospital).

6.8 Section 222 of the National Health Service Act 2006

Implemented on 1 March 2007 (Section 222 restated s96A National Health Service Act 1977).

Introduction

In the NHS charitable sector, section 222 of the NHS Act 2006 provides for both:

  • excess funds to an appeal (subsection 7)
  • insufficient funds being raised (subsection 10)

In both cases the trustee has the default power (unless the appeal trust instrument makes a different provision) to apply the funds held ‘for such purposes connected with any of the functions of the [relevant NHS body] as the [trustee] considers appropriate’.

but

‘where under subsection (7) or (10) above property becomes applicable for purposes other than that for which it was given the [trustee] shall have regard to the desirability of applying the property for a purpose similar to that for which it was given’ (subsection 11).

Given these provisions there is little doubt that funds within an appeal made by an NHS trustee using the power under s222 are restricted at the point of donation but, if the circumstances in sub-section 7 or 10 arise the relevant funds can be treated as unrestricted.

As indicated above, reliance on the statutory power will rely on whether the Appeal has a formal instrument of government and whether the terms of the Appeal explicitly provided for an alternative to the statutory solution in the event of a ‘failure’ of the original trusts of the Appeal.

6.9 Charities Act 2011

Many NHS charities were first established under statutory trusts. These define the general purpose charities’ objects. NHS Trustees should therefore contact the Commission before taking or seeking any action under the provisions of the Charities Acts, which purports to change the objects beyond a statutory remit.

7. Accounting/auditing for NHS Charities

This guidance is now maintained by the Healthcare Financial Management Association (HFMA).

Find out more about accounting and auditing for NHS Charities.

8. Sources of further information

8.1 Other useful contacts and guidance

Healthcare Financial Management Association

HFMA
HFMA House
4 Broad Plain
Bristol
BS2 0JP

Tel: 0117 929 4789

Email: info@hfma.org.uk

Website: www.hfma.org.uk

NHS Charities Together

NHS Charities Together
Lake View House
Wilton Drive
Tournament Fields
Warwick
CV34 6RG

Tel: 0300 303 5748

Email: hello@anhs.org.uk

Website: www.nhscharitiestogether.co.uk

Other governance guidance:

Generic guidance on best practice in governance (including the ‘Charity Governance Code) within the voluntary and community sector can be found on the NCVO website.