Posted: 23/06/2025
Educational institutions in the UK operate in a highly regulated environment, and when financial distress looms, engaging with the Charity Commission is not just a regulatory requirement – it is an opportunity to safeguard the institution’s future.
This article outlines how educational institutions which are registered charities should approach this challenging period and work constructively with the Commission by addressing key considerations.
Whether it is dwindling income, rising liabilities, or unforeseen expenditures, early recognition of financial strain is essential. Educational institutions will of course, for example, be aware of the recent decision by the government to impose a 20% VAT charge on private school fees. This has significant financial implications for the fee payers as well as for the schools, and governing bodies must adapt accordingly before they find themselves in a crisis management situation.
By continually monitoring financial performance and preparing regular cash flow forecasts, educational charities will be in a far stronger position to catch difficulties before they escalate. An early diagnosis allows for proactive engagement with the Charity Commission, rather than leaving the regulator to intervene unexpectedly, having been alerted by a disgruntled parent body.
Trustees have a duty always to act in the best interests of their charity. This includes ensuring transparency and accountability in financial matters. When financial difficulties arise, trustees are legally obliged to take action and disclose material challenges to the Charity Commission.
Understanding these responsibilities is paramount, not only to comply with legal frameworks, but also to protect the charity’s reputation. Trustees should review and follow the Commission's guidance and regularly refresh their knowledge on regulatory expectations. The principle of collective responsibility on the board of governors can be brought into sharp focus and it is vital to manage this constructively, particularly with reference to the Commission's guidance on best practice decision making.
It is particularly important to follow governing documents and not allow the stress of the situation to lead to bad or high-risk decisions. Charity assets must only be used for charitable purposes and therefore trustees must remain well informed about their objects and the administrative provisions which underpin the running of their charity.
If a charity's objects need to be broadened in scope – for example to extend a class of beneficiaries or area of benefit – prior consent of the Commission must be sought, and this is not usually a quick process. Again, being alert and proactive can help enormously in anticipating best next steps.
A key point in managing financial distress is approaching the Charity Commission with honesty and openness. Rather than waiting for an external audit or investigation, charities should contact the Commission as soon as significant financial difficulties are identified. This may involve submitting a 'serious incident report' to the Commission. A serious incident is defined as an adverse event, whether actual or alleged, that results in or risks significant harm to the charity's beneficiaries, staff, volunteers, or others, and can involve significant loss of the charity's money or assets. The Commission publishes online guidance outlining when and how to report.
Reporting serious incidents is not an admission of fault or wrongdoing, nor are such reports made public. Instead, it demonstrates that the trustees have identified the issues and are taking steps to address them. The Charity Commission views transparency in reporting as a sign of good governance and compliance. Educational institutions that fail to report may be deemed riskier than those that do, and it is often best to take a pre-emptive approach.
Transparency is not only about timely communication – it also calls for robust documentation. Charities should ensure that their financial records are in order, the latest annual returns and accounts are available and filed on time, and interim financial reports are prepared if needed. The Charity Commission states that charities which default on their statutory filing obligations twice or more within a five year period will be deemed 'double defaulters' and subject to final warnings and/or an inquiry into possible governance failings.
Detailed financial reporting helps the Charity Commission understand the severity and specifics of the situation. Often, it can also uncover underlying operational issues that, once addressed, might turn the tide of financial uncertainty. This clarity reassures the regulator that the charity is managing its affairs responsibly.
Once financial distress has been identified, trustees should work, ideally alongside senior management and professional advisers, to develop a comprehensive action plan. This remediation plan should detail:
Presenting such a plan to the Charity Commission, especially where it is clear that insolvency advice has been sought, shows that the charity is not passively awaiting intervention but is actively steering the organisation back to a sustainable path. This plan will often be a critical factor in determining the Commission’s level of involvement or any necessary formal guidance.
Once initial contact has been made, dialogue with the Charity Commission may need to be ongoing. When a serious incident report has been submitted, the charity is provided with a reference number, enabling them to follow up and provide up to date information as the matter progresses.
Trustees must be prepared to:
This ongoing dialogue helps ensure that the charity remains on track and that regulatory oversight is constructive rather than punitive. A cooperative approach can ease the distress period and may lead to a more favourable regulatory context as the charity regains stability.
Financial distress is as much a governance challenge as it is a numerical one. Trustees should use this period as a learning opportunity to review internal controls, risk management processes, and strategic decision-making. Regularly updating governance frameworks and arranging appropriate training, ensuring there are contingency plans, and sustaining open lines of communication can improve future resilience.
Charities in distress can benefit greatly from early professional expertise. Engaging financial and legal advisors, auditors, or turnaround specialists helps validate the remediation plan and ensures that all risks have been appropriately considered. Additionally, professional advice can guide trustees on compliance issues or best practices for restructuring. Demonstrating a willingness to seek and implement external expertise further reinforces the charity’s commitment to transparency and accountability and should evidence good governance to the Commission.
Engaging with the Charity Commission during financial distress requires honesty and preparedness. For charities, the steps, from early recognition through careful, detailed reporting to the ongoing collaborative relationship with the Commission are not merely about mitigating risk, but about reinforcing a culture of good governance and stewardship. In facing challenges head-on, charities not only comply with regulatory mandates but also fortify the trust of those they serve, ensuring that the mission continues with integrity and accountability.
Charities might also consider establishing routine financial audits or setting up an internal committee tasked with financial oversight to intervene before distress reaches crisis levels. Moreover, learning from charities that have successfully navigated financial turmoil can provide valuable blueprints for setting up crisis-resistant organisational practices.
Our charities team works closely with other members of the firm's specialist education teams to provide seamless cross-disciplinary support to schools facing financial distress. Our education team includes lawyers with expertise in restructuring and insolvency, employment, governance, real estate, data protection and reputation management.
In particular, we can provide advice and support around:
Our cross-disciplinary approach and extensive experience enable us to pre-empt the issues that schools commonly encounter when faced with financial uncertainty, provide early and constructive advice, and minimise our clients' regulatory exposure.
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