The UK charity sector and local authorities have spent the past decade in parallel difficulty. Charities have absorbed rising costs, falling donations, and growing demand, with the Charity Commission's 2025 risk assessment finding that 42.6% of charities reported an operating deficit in their 2023 annual returns. Local authorities have faced their own well-documented financial pressures, with section 114 notices, capitalisation directions, and reductions in real-terms grant funding shaping the operating environment. The government recognises that one possible response is closer collaboration between the two, drawing on the strengths of each to deliver outcomes neither could achieve alone.
The Civil Society Covenant, launched by the Prime Minister in July 2025, is the headline policy expression of that ambition. It replaces the 2010 Compact, which had broadly similar aims but lost momentum after 2014 and effectively lapsed. The covenant will apply across UK government departments, English local authorities, NHS organisations and the wider public sector. A Joint Civil Society Covenant Council has been established to oversee implementation, alongside a developing VCSE-HM Treasury forum for direct engagement on financial issues affecting the sector.
The most concrete step announced so far is the Local Covenant Partnerships (LCP) Fund which provides £11.59 million to support local areas in developing and implementing new local covenant partnership agreements by March 2029. The fund will target areas most affected by the cost of living and is intended to embed the Covenant's principles in genuine, place-based partnership working between councils, charities and other public service providers.
It is worth maintaining some healthy scepticism about whether this represents a fundamental shift. The Compact failed because political will receded and The Covenant is explicitly non-statutory, which means it confers no new legal powers on either local authorities or charities. What it does provide is political legitimacy, a small but symbolic pot of money, and a stated direction of travel toward longer-term, more strategic partnerships and away from short-term transactional contracting.
Existing tools and powers: what is and isn't actually new
To understand where the Covenant might lead, it helps to be clear about what councils and charities can already do together.
Local authorities have wide-ranging powers to work with charities. Under the General Power of Competence, councils can broadly do anything an individual could do, including lending money, investing, providing grants, and entering into joint arrangements, subject to the constraints of subsidy control and their own treasury management strategies. Additionally, Councils can act as charity trustees themselves or can co-commission services with charities, enter into outcomes-based contracts, lend, and pool treasury management resources with related entities.
Charities have a parallel set of tools, though more constrained. A charity's power to borrow comes from its governing document supplemented by general law and The Charities (Protection and Social Investment) Act 2016 gave charities an explicit power to make social investments. Trustees retain fiduciary duties over reserves, investment decisions, and counterparty exposure throughout.
In other words, the legal architecture for charity-local authority financial collaboration already exists. What the Covenant aims to add is the political environment in which that architecture is more likely to be used.
What the Covenant pushes toward and what it means financially
Three specific shifts emerge from the Covenant and its supporting documents that have direct treasury management implications, regardless of whether the political reset endures:
1. The shift to outcomes-based commissioning. The Covenant's engagement findings explicitly endorse outcomes-based contracts as a model that "reduces the financial risk on public bodies, thereby encouraging investment in innovative and flexible programmes." This is good news for councils but is more complicated for charities. Under an outcomes-based contract, a charity finances service delivery from its own resources and is paid only when defined outcomes are achieved which can be months or years later. A charity moving from grant funding to outcomes-based contracting is, in treasury terms, taking on working capital risk it has not previously had to manage.
A charity entering this kind of arrangement needs to model the cashflow gap between expenditure and outcomes payments under realistic and stressed scenarios, understand how long its reserves can sustain delivery if outcomes payments are delayed or contested, and consider whether it needs working capital facilities, social investment, or restructured reserves to manage the risk. It may also need a new treasury policy that explicitly addresses the new risk profile. Arlingclose advises both councils on commissioning treasury implications and charities on the working capital and liquidity considerations of accepting outcomes-based contracts.
2. The shift to longer-term partnership agreements. The Covenant pushes toward multi-year partnerships rather than annual grant cycles. For charities, this is genuinely positive but changes the treasury context substantially. A charity with confidence in three to five years of partnership income can potentially place longer-term deposits with better returns, plan capital expenditure with reduced refinancing risk, set reserves policy against a more stable income base, and consider matching investment durations to its actual liability profile. This is the territory where Arlingclose's experience advising on liquidity tiering, deposit strategy, and reserves policy may prove beneficial.
3. The shift to deeper financial relationships requiring counterparty assessment. As local authorities consider longer contracts, joint ventures, or lending arrangements with charity partners, the question of how to assess and monitor charity financial resilience becomes a live treasury question. A council entering a five-year partnership with a charity that has limited reserves, unclear treasury policy, and concentrated exposures is taking on counterparty risk that may not be immediately visible but is real nonetheless. Equally, charities receiving and onward-distributing public funds, as the eventual LCP Fund grant recipients will, need to think about counterparty diversification, restricted fund segregation, and deposit strategy in ways that may be unfamiliar territory. This is more tangential to the Covenant's core ambitions, but it is where Arlingclose's experience of counterparty due diligence and credit risk assessment is directly applicable.
The Covenant is a welcome statement of intent but not, in itself, a solution. Its success will depend on whether central government, local authorities and charities follow through over the years that lie ahead. What it does do, however, is open a window in which deeper financial collaboration between the two sectors becomes more possible than it has been for some time. Whether that window translates into durable, well-structured partnerships will depend in significant part on whether the financial structure underneath those partnerships is built thoughtfully or assumed to take care of itself.
For both councils and charities, the practical implication is the same: the ambition the Covenant articulates is only as deliverable as the financial thinking that supports it. As independent advisers to both local authorities and charities, Arlingclose is well placed to help organisations on either side of these emerging partnerships think through the treasury implications and build the financial foundations that make collaboration sustainable.
For more information, please get in touch with fwatson@arlingclose.com.
06/05/2026
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