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March 05, 2024

Accepting or returning donations and the ex-gratia regime

Accepting or returning donations and the ex-gratia regime

Date updated:

We have seen an increase in queries from charities on accepting or returning donations and the ex-gratia regime and, as the Charity Commission published new guidance on just this topic on 4 March 2024, now is the perfect time to share some useful FAQs to help charities understand the guidance and what it means for them.

The new guidance on ‘Accepting, refusing and returning donations to your charity’ does not change the law, but provides additional guidance to trustees. We consider the checklist, “Example relevant factors to consider and balance when deciding whether to refuse or return a donation” in the guidance will be particularly useful to trustees faced with this issue. 

Donations should only be refused or returned in very limited or exceptional circumstances. 

There may be circumstances where a donation needs to be refused or returned, for instance where it is unlawful to retain it (e.g. certain criminal proceeds), in which case, this will override other considerations. There may also be a need to settle a claim or conditions which are unworkable or cannot be met, for instance under a grant agreement. 

Where such specific circumstances do not exist, however, the board must consider whether returning it would be in the best interests of advancing the charity’s objects for the public benefit. 

The trustees need to weigh any issues around the source of the funds (which may include reputational concerns) against the financial impact on the charity of turning the donation down. As part of this, the trustees should consider all relevant factors, which might include:

  • The detailed circumstances

  • The governing document and any relevant prohibitions;

  • Whether the benefit of retaining the donation (and supporting the advancement of a charity’s objects) would outweigh the detriment (e.g. reputational damage)

  • What might be the impact of retaining the donation, on other donors, on volunteers, staff or other stakeholders? 

  • Might the return put the charity in breach of any third-party legal obligations, for instance, has it already acted upon receiving the funds (more likely once the charity is already entitled to the funds)? 

It will be helpful if these points can be quantified as objectively as possible, and trustees should be sufficiently challenging in their approach. Given the standard legal position that trustees should be seeking to maximise income, trustees must be able to justify any refusal/return of a donation and have clear documentation to show the process they took to reach a decision. Helpfully, the guidance expressly flags that trustees must “not allow yours or others’ personal motives, opinions, or interests to affect your decision”.

Although the basic principles could be said to be the same whether the charity is considering accepting a new donation (or pledge) or returning a donation (or maintaining a pledge), the issues are, clearly, more heightened from once the charity has the donation or a legal entitlement to it. Additionally, although a charity should check whether it has the power to refuse or return a donation in any case (and seek legal advice if it is not sure), it is generally more difficult to return a donation following receipt (or a legally binding pledge) and an Order of the Charity Commission may be required if there is a not such a power.

There may also be other considerations upon charities operating within particular sectors, or guidance from other relevant regulators or umbrella bodies to consider. The new guidance also flags additional legal rules which may arise depending on the donation in question, for instance, if it is land, property in a special trust or which is permanent endowment, part of a compromise agreement or given pursuant to a grant agreement (in which case the terms may need to be checked). 

The new Commission’s guidance also helpfully reminds trustees, irrespective of what decision is taken, to take steps to mitigate the risk, for instance by developing a public explanation of a decision, if needed.

The Charity Commission does not ask about the existence of an acceptance and refusal of donations policy as part of the information it seeks in the annual return. Nonetheless, charities are expected to do appropriate and proportionate due diligence on donations and should consider having such a policy alongside that. This has become the norm in certain sectors now, such as in higher education. If a charity is regularly fundraising from organisations (such as companies or charities) or seeking larger donations from individuals, we would recommend it.

Note that any such policy might also cover anonymous donations, which a charity may accept. However, do remember that any anonymous donation over £25,000 is reportable to the Commission as a serious incident. 

The ex-gratia rules cover particular circumstances (set out below) where the trustees feel under a moral obligation to make a payment, but are not relevant where other circumstances require a particular payment to be made because there is a legal obligation to do so, or if the trustees conclude it is in the best interests of the charity. 

These different points and approaches, however, might all be considered by a board where it needs to decide whether to return a donation or not and is reviewing the range of options.

Any such decision must be taken with detailed consideration. 

The current rules can be summarised as follows:

     a. An ex-gratia payment is a payment that a charity makes where there is no legal obligation to do so, and the payment is not in the interests of the charity. Instead the charity trustees believe they have a moral obligation to make the payment. A common example is where a charity stands to benefit under a Will but the payment is larger than the deceased intended, for example because there was an oversight in the drafting;

     b. The trustees cannot delegate their decision to make an ex-gratia payment because it depends solely on their subjective views;

     c. The Commission is unlikely to interfere in decisions to make ex-gratia payments where the amount is small (amount not defined, but perhaps £1,000 or less);

     d. Otherwise, all ex-gratia payments must be approved by the Commission under section 106 of the Charities Act 2011, otherwise the payment would be a breach of trust by the trustees because they would be using charity money for non-charitable purposes;

     e. Certain charities known as “statutory charities” are effectively prohibited from making ex-gratia payments (for example the British Museum) because it would contravene a statutory provision.

The new Charity Commission guidance only makes reference to the ex-gratia rules; the Commission has separate existing guidance on that topic called ‘Ex gratia payments by charities (CC7)’.

     a. Allow charity trustees to make “small” ex-gratia payments without authorisation. The size of the permitted payment will depend on the gross income of the charity and ranges from £1,000 for charities with a gross income of up to £25,000, up to £20,000 for a charity with a gross income of more than £1 million;

     b. Enable charity trustees to delegate the decisions to make ex-gratia payments;

     c. Permit statutory charities to make ex-gratia payments.

It appears that the government had not realised that one of the consequences of the proposed 

reforms would permit the restitution of objects by all charities, including statutory charities. This is 

a highly charged topic because, for example, it could allow the British Museum to return the

Parthenon Sculptures to Greece. As such, the DCMS has issued guidance to make it clear that specific national galleries and museums will be excluded from the implementation of the controversial provisions of the reforms (sections 15 and 16 of the Charities Act 2022). 

In addition, it will not be possible for any charity to make an ex-gratia payment to recipients based outside the UK.

These unintended consequences were not referred to by the Law Commission or debated by Parliament during the passage of the bill.

It is the current government’s policy that national galleries and museums will continue to be bound by the legislation that governs them, which generally prevents the restitution of objects from their collections.

Due to the controversy, none of the proposed reforms to ex-gratia payments have been brought into force and as such charities must continue to operate under the existing law unless and until the reforms are brought into force, which could still be later this year.

We would be very pleased to assist your charity in working through these issues. Do contact Partner and Head of Charity and Social Enterprise Team, Hannah Kubie, or Partner and Head of Charity Legacy, Luke Watson, for further information and help.