Navigating uncertainty: The trustee’s duty amid the US aid freeze for UK charities

Understanding the impact of funding cuts and the trustee’s role in safeguarding financial stability

The Impact of the US Aid Freeze on UK charities

The domestic funding for UK charities is under significant strain. Government budgets are being squeezed, and economic uncertainty is leading to a decline in corporate donations and grant availability. While personal charitable giving in the UK has historically remained relatively resilient, the pressures on disposable income due to rising costs and taxation, including national insurance increases, are likely to impact donation levels, making it harder for charities to bridge funding gaps.

To further compound matters the recent freeze on US Government Overseas Aid, announced to facilitate a full review, is expected to significantly impact many UK charities. Although a US Federal Court has temporarily blocked the order, this reprieve may be short-lived.

For many UK-based development charities, US aid forms a critical part of their funding mix, enabling them to support some of the world’s most disadvantaged communities. Although the freeze is described as “temporary,” and some exemptions for staff costs and urgent humanitarian aid have been granted, trustees should not assume their charity will be exempt as cuts to funding will likely follow once the legal challenges are dealt with.

The loss of this funding could be a critical blow for many charities, potentially depleting reserves, necessitating drastic cost-cutting measures and a reduction in services provided. In the worst case, it could even force some organisations to close. Finding alternative funding sources at short notice will be a monumental challenge in an already challenging funding environment. While mergers may provide some relief, they are unlikely to fully cushion the financial impact and will likely result in the dilution or reduction of service provision to the needy and vulnerable who rely upon the charities.

It is vital that charities both understand and manage their finances during this uncertain time to minimise disruption where possible and preserve the ongoing provision of services. Where there is a concern over the financial standing of the charity the Trustees must consider their responsibilities to all stakeholders.

In these challenging times, trustees must take a proactive approach to governance, ensuring their organisations are financially resilient and prepared for future disruptions.

Callum Carmichael Partner Restructuring Advisory

The role of the Trustee

A trustee is a volunteer who manages and leads a charity. They may also be known by other titles, such as: directors, board members, governors, committee members. Bound by legal and fiduciary duties, trustees are responsible for the charity’s governance, strategy, and ensuring that it operates in the public interest. A trustee’s role is to act in the best interest of the charity with reasonable care and skill, ensuring the work aligns with its goals whilst also protecting and managing resources.

Understanding finances can be complex and charity accounting differs from many other sectors. A trustee must understand and be involved in the setting of budgets such that they can review the finances to ensure funds are effectively used and the charity is performing against its budget. The trustee is also responsible for ensuring the charity meets its financial obligations and manages risks effectively to avoid insolvency where possible.

By regularly monitoring your charity’s finances against budget, a trustee can:

• Identify problems early and consider whether they can take action to improve the situation.
• Understand if the charity is insolvent or at risk of insolvency.
• Recognise that once the charity has reached the stage of insolvency that the primary duty is to the charity’s beneficiaries and all creditors. This may involve prioritising creditor interests to maximize recovery while also considering the impact on beneficiaries and the organisations’ charitable objectives.

Charitable companies both Limited and Limited by Guarantee together with Scottish Charitable Incorporated Organisation’s (“SCIOs”) have a separate legal identity. This means that any debts and liabilities belong to the charity and the trustees are not usually personally liable for them. However, as with all corporate entities, there may be some circumstances when trustees risk personal liability. For example, if the charity continues to trade and enters into new contracts or commitments that the charity cannot fulfil, when the trustees knew or ought to have known that there was no reasonable chance of avoiding insolvency, this is known as wrongful trading.

When the trustees of a charitable company or CIO know, or ought to know, that there is no reasonable prospect of avoiding insolvency they must take every step necessary to minimise the potential loss to the creditors. This includes exploring all available options for restructuring the charity’s affairs to address insolvency, such as debt restructuring, refinancing, asset sales, or entering into insolvency procedures like administration or voluntary liquidation. If the trustees are in any doubt about the situation they should take appropriate independent legal advice.

The goal is to achieve the best possible outcome for creditors while preserving the charity’s mission and assets as far as possible.

Looking ahead: the future of UK charities in a changing funding landscape

Against a backdrop of reduced funding for charities generally the US aid freeze creates further financial uncertainty.  Trustees must take proactive steps to safeguard their charity’s stability but in the current environment this is particularly relevant. Effective financial oversight, strategic planning, and adaptability are essential. Below are key measures trustees should consider in order to create a robust contingency plan:

Diversifying income streams:

Relying heavily on a single funding source increases financial vulnerability. Trustees should explore alternative revenue streams, such as:

• Applying for new grants from domestic and international funders unaffected by the freeze
• Building corporate partnerships to secure sponsorships or strategic alliances
• Developing public fundraising initiatives, such as donation campaigns, membership programs, or crowdfunding
• Exploring social enterprises to create sustainable income through trading activities

By broadening income sources, charities can reduce dependency on external aid and create a more resilient financial model.

Strengthening financial planning:

Trustees must ensure the charity’s finances are managed prudently to withstand funding disruptions. Key actions include:

• Conducting financial stress tests to model different scenarios and prepare contingency plans for worst-case situations.
• Enhancing financial oversight by regularly reviewing budgets and cash flow to make informed decisions
• Reviewing reserves policy to assess whether sufficient funds are available to cover short-term gaps.
• Prioritising expenditure by identifying essential services and areas where costs can be reduced without harming impact.
• Upon identifying any cost reductions or redundancies these should be actioned swiftly as delay will only exacerbate the situation and create uncertainty amongst the staff.

A disciplined approach to financial management will enable charities navigate uncertainty with greater confidence.

Engaging in advocacy:

Trustees can play a critical role in advocating for support from government bodies, regulators, and other funding sources. Steps include:

• Lobbying policymakers to highlight the impact of the aid freeze and push for alternative funding solutions.
• Collaborating with sector organisations to amplify collective concerns and develop joint strategies.
• Strengthening relationships with existing funders by demonstrating transparency and exploring potential adjustments to grant agreements

Advocacy efforts can help shape policy decisions and secure alternative sources of support.

Enhancing transparency and stakeholder engagement:

Maintaining trust is crucial, especially during financial uncertainty. Trustees should focus on clear and open communication with key stakeholders, including:

• Funders and donors, to provide reassurance and demonstrate how the charity is responding to financial challenges.
• Beneficiaries, to manage expectations about potential service changes while ensuring support remains accessible.
• Staff and volunteers, to keep them informed and engaged in finding solutions.

By fostering transparency, trustees can maintain confidence in the charity’s ability to navigate difficult times. Where tough decisions have to be made clear and open communication will ensure all stakeholders understand the position even if they do not necessarily like the outcome.

Next steps

The US aid freeze serves as a stark reminder of the financial uncertainties charities can face. This coupled with the impending increased taxation from national insurance increases will only increase the financial burden for charities.  In these challenging times, trustees must take a proactive approach to governance, ensuring their organisations are financially resilient and prepared for future disruptions.

Trustees do not have to face these challenges alone. Seeking professional advice at an early stage can provide invaluable insights, helping to safeguard financial stability and ensure compliance with regulatory obligations.

Engaging with experienced advisers to identify the financial position before a crisis hits, can make all the difference in securing the long-term future of the charity and countless people that benefit from their services.