How Do I Make Sure My Charity Spending Stays Compliant?

Introduction

Every charity, no matter its size or purpose, has a responsibility to spend its funds properly. Trustees must ensure that every pound donated is used for charitable purposes and in line with the charity’s governing document. Spending that is careless, poorly recorded, or outside a charity’s objectives can lead to compliance issues with the Charity Commission and a loss of public trust.

This article explains how to keep charity spending compliant, what trustees need to consider before approving payments, and how accountants can help maintain proper financial controls.

Understanding Charitable Spending

Charitable spending includes any payment made to achieve the charity’s aims. This can cover a wide range of activities, such as:

• Delivering services or running programmes for beneficiaries

• Paying staff salaries and volunteer expenses

• Purchasing equipment, materials, or premises used for charitable work

• Marketing and fundraising costs

• Governance and administrative expenses

Every payment must relate directly to the charity’s work or the support systems that make that work possible. Spending that benefits individuals personally, or goes beyond what the charity was set up to do, may be considered non-charitable expenditure and could breach regulations.

The Legal Responsibilities of Trustees

Under the Charities Act 2011, trustees have a legal duty to ensure that charity funds are used only for charitable purposes. They must:

• Act within the charity’s governing document and objects

• Ensure spending decisions provide public benefit

• Keep accurate and up-to-date financial records

• Avoid conflicts of interest and personal benefit

• Comply with Charity Commission and HMRC reporting rules

Trustees who fail to oversee spending properly can be held personally responsible for losses, even if mistakes were unintentional.

Step 1: Review the Charity’s Governing Document

The first step in ensuring compliance is to understand what your charity is legally allowed to do. The governing document—such as a constitution, trust deed, or articles of association—sets out the charity’s purposes and powers.

Before approving any major spending, trustees should check:

• Does this expenditure directly support our charitable objectives?

• Are there any restrictions on how funds can be used?

• Are we allowed to purchase or lease assets, or enter contracts?

For example, a charity established to promote education cannot use its funds to provide unrelated leisure activities, even if they seem beneficial.

Step 2: Use Restricted and Unrestricted Funds Correctly

Charities often hold two types of funds:

• Restricted funds, which must be spent on specific projects or purposes chosen by the donor or funder.

• Unrestricted funds, which can be used for general running costs or any purpose that furthers the charity’s work.

Trustees must ensure restricted funds are tracked and recorded separately. Spending restricted money on unrelated activities, even by accident, is a compliance breach and may require repayment to the donor or grant provider.

Clear accounting systems and regular reconciliation between funds help prevent mistakes.

Step 3: Maintain Proper Authorisation Procedures

All payments should go through an agreed approval process. This ensures accountability and prevents unauthorised or inappropriate spending. Good practice includes:

• Requiring at least two authorised signatories for payments

• Setting spending limits that require trustee approval above a certain amount

• Recording all decisions in meeting minutes

• Using purchase orders or invoices to support payments

No single person should have unchecked control over charity funds.

Step 4: Keep Accurate and Transparent Records

Charities must maintain complete financial records showing where money comes from and how it is spent. Records should include:

• Receipts, invoices, and contracts for every transaction

• Bank statements and reconciliations

• Notes explaining spending decisions, particularly for large or unusual items

• Evidence of trustee approval for significant payments

Records must be kept for at least six years. Good record keeping not only ensures compliance but also protects the charity during audits or inspections.

Step 5: Monitor Budgets and Spending Regularly

Trustees should review financial reports frequently to ensure spending aligns with the charity’s plans and income levels. Regular monitoring allows you to:

• Spot overspending or underspending early

• Ensure restricted funds are being used appropriately

• Identify potential fraud or errors

• Make informed decisions about future activities

Monthly or quarterly reviews are recommended for most charities, with detailed analysis at trustee meetings.

Step 6: Avoid Personal Benefit and Conflicts of Interest

Trustees cannot personally profit from their charity unless this is explicitly permitted in the governing document or approved by the Charity Commission. This includes payments to trustees, their relatives, or businesses they are connected to.

If a potential conflict of interest arises, trustees must declare it immediately and withdraw from any related decision-making. Transparent handling of conflicts maintains compliance and public trust.

Step 7: Follow Procurement and Value-for-Money Principles

When spending charity funds, trustees must always act in the charity’s best financial interest. This includes obtaining value for money and ensuring fair competition. Charities should:

• Get multiple quotes for large purchases or contracts

• Evaluate suppliers on cost, quality, and reliability

• Avoid awarding contracts to related individuals or companies unless properly authorised

• Keep written records of the selection process

Demonstrating that spending decisions were fair and reasonable helps prove compliance if the Charity Commission or funders ask for evidence.

Step 8: Prepare and File Annual Accounts

Charities must produce annual accounts and a trustee report that show how funds have been used. These documents provide transparency to regulators, donors, and the public.

Submitting accurate accounts on time also shows that the charity is active and compliant. Failure to file accounts is one of the most common reasons the Charity Commission flags or removes charities from its register.

Example Scenario

Imagine a charity called Health for All UK receives a £20,000 grant to deliver mental health workshops. The trustees approve a budget and create a separate account for the grant. They record all expenses, from venue hire to trainer fees, and ensure each invoice is authorised by two trustees.

At the end of the project, they prepare a report showing how every pound was spent, supported by receipts and financial statements. The grant provider reviews the report, is satisfied with the outcome, and awards additional funding the following year.

Because the charity maintained clear records, respected restrictions, and ensured transparency, it stayed fully compliant and strengthened its reputation.

How an Accountant Can Help

An accountant with experience in charity finance can:

• Set up systems for separating restricted and unrestricted funds

• Create budgets and monitoring reports for trustees

• Ensure expenses are recorded accurately and comply with the Charities SORP

• Review spending policies and approval procedures

• Prepare annual accounts and trustee reports for submission

Working with an accountant reduces risk, ensures compliance with financial regulations, and provides trustees with expert advice on financial management.

Common Mistakes That Lead to Non-Compliance

• Spending restricted funds on general costs

• Poor record keeping or missing receipts

• Failure to seek trustee approval for large payments

• Paying trustees without proper authorisation

• Missing Charity Commission filing deadlines

Avoiding these errors helps maintain compliance and preserves public confidence in the charity’s work.

Conclusion

Keeping charity spending compliant requires clear governance, transparent records, and regular oversight. Trustees must ensure all funds are used to support the charity’s objectives and that spending decisions are authorised, documented, and justifiable.

By following good financial practices and working closely with an accountant, charities can prevent errors, meet legal obligations, and demonstrate accountability to donors and regulators. Responsible spending is not just about compliance — it is the foundation of trust that allows a charity to continue its vital work.