Charity financial controls and governance | England and Wales
Moving money from a project bank account into the main account does not change the purposes for which it can lawfully be used. Equally, an account labelled 'project reserve' does not, by its name alone, prove that every pound in it is legally restricted.
Before approving expenditure, trustees need to establish the source and terms of the money, identify which fund should bear the cost and confirm the authority for the decision. A transfer authorisation should show both the permitted purpose and the person entitled to approve it.
This article addresses spending permission and fund records. A separate assessment is needed to determine whether the charity can meet all its obligations when they fall due. A payment can be within a fund's purpose and still be unaffordable.
Begin with the evidence of the restriction
Review the grant agreement, appeal wording, donor correspondence, governing document or other instrument that created the fund. Identify the permitted purpose, any conditions and the evidence supporting the classification.
Restricted funds are subject to a narrower purpose than the charity's general purposes. Designated funds are unrestricted funds that trustees have earmarked for a particular use. A trustee designation can normally be reconsidered through a valid decision, but that does not override an existing contract, commitment or a restriction imposed from outside the board. [1]
Where the terms are unclear, mark the classification as unresolved and obtain clarification or advice before approving a different use. Do not use an accountant's ledger label as a substitute for understanding the underlying terms.
Check the cost against the purpose
A charity may receive funding for a particular programme without a simple answer to whether central administration, premises or staff supervision can be charged to it. Read the terms and agree a supportable cost-allocation method.
Do not move costs to a fund simply because that fund has money left. Nor should eligible support costs be excluded automatically if the agreement permits them. The decision should reflect the funded activity and evidence, not the desired appearance of the unrestricted result.
Illustrative example. A funder awards £80,000 for an accessible transport programme. The agreement permits vehicle hire, driver costs and specified coordination costs. The charity has £20,000 remaining in the fund and proposes using it for an unrelated building repair. The unused balance does not make that repair an allowable cost. Trustees need to follow the agreement and obtain any legally effective variation or other authority required; the internal transfer itself provides none.
Keep fund accounting separate from cash location
A fund balance is an accounting record of resources and obligations attributed to a purpose. A bank balance is money held in a particular account. They will not necessarily match.
A restricted fund may include unpaid amounts due from a funder, bills already incurred or assets acquired for the activity. Several funds may share a bank account, provided that the terms and any legal requirements permit this and records keep them properly distinct. Conversely, one bank account can contain both restricted and unrestricted money.
Ask finance for a fund movement schedule: opening balance, income, expenditure, permitted transfers and closing balance, with an explanation of material assets and liabilities. Reconcile it with the accounts and relevant agreements. Avoid treating the difference between two bank balances as a fund transfer without establishing what it represents. [2]
Authorise the decision as well as the transfer
There are two checks. Is the proposed use permitted? Has the person approving it got the authority to do so?
Banking access is not spending authority. An individual may be able to initiate a transfer without being entitled to decide the purpose of the expenditure. Set appropriate approval limits, require an explanation for unusual transfers and retain the supporting decision before the payment is made.
Where a transfer has already occurred without the required approval, reconstruct the facts promptly. Identify the source of the money, its terms, the destination and actual use. Preserve the records and obtain advice where necessary. An approval given afterwards does not automatically cure an unlawful use.
A documentation failure is not, by itself, proof that restricted funds have been misused. The conclusion must follow the evidence. The board should still address the weakness in authorisation even if the expenditure turns out to have been permitted.
Avoid treating reserves as a spending pot
The Charity Commission's reserves guidance distinguishes unrestricted funds freely available for general purposes from resources tied up in operational assets, commitments and other items. Restricted funds are outside that definition of reserves. [1]
A reported unrestricted fund balance therefore is not automatically a budget for new expenditure. Trustees also need to consider existing obligations, cash timing and the resilience their charity requires. There is no universal level of reserves that suits every charity.
Keep the fund-permission decision and the affordability decision visible in the approval paper. Combining them into a single unexplained 'cash available' number makes it harder for trustees to challenge either.
Deal properly with a purpose that changes
Projects may finish early, become impractical or leave money unused. The correct response depends on how the restriction arose and the relevant terms and law. It may involve the funder, donors, a legal power or Charity Commission authority.
Do not assume that emailing a donor, changing an internal budget or voting at a trustee meeting is sufficient in every case. Explain the proposed change, obtain appropriate advice and keep evidence of the valid route used. Until the position is resolved, make the uncertainty visible rather than quietly reclassifying the balance.
For the next material spending proposal, require a short funding statement identifying the fund, evidence of permitted use, remaining commitments and person authorised to approve the expenditure. Attach the relevant extract from the agreement or appeal and record the finance review; a fund code alone is insufficient. That one addition can prevent a board from approving a project on a mistaken assumption about which resources it can use.
Sources and further reading
Official guidance checked on 21 October 2026.
[1] Charity Commission, Charity reserves: building resilience (CC19)
[2] Charity Commission, Internal financial controls for charities (CC8)
Frequently asked questions
Does a separate bank account make money restricted?
No. The source and legal terms determine whether funds are restricted. A separate account may help administration or be required by the terms, but its name does not determine the legal position.
Can trustees remove a designation?
They can normally reconsider a designation of unrestricted funds through a valid decision. They still need to consider existing obligations, their duties and the reasons the funds were set aside. A donor restriction is different.
Can restricted money pay a share of overheads?
Potentially, where the funding terms and purpose permit it and the allocation is supportable. Do not assume either that all overheads are eligible or that none are.
Can we temporarily use restricted money for general bills and replace it later?
Do not assume this is permitted. Assess the restriction and obtain advice before using the money differently. An intention to repay does not itself give authority.
Is a fund transfer without approval proof of misuse?
No. It is a control concern requiring investigation. Establish the applicable terms, authority and actual use before reaching a conclusion, and address any reporting or corrective action required by the facts.