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Farrer & Co | Charity Commission guidance: "Grant funding an organisation that isn't a charity"

The Charity Commission has issued a revised (and now presumably final) version of its guidance on Grant funding an organisation that isn't a charity.

The previous draft of the guidance was issued in February last year amid public concerns regarding the funding by a number of charities of CAGE, a non-charitable advocacy group which it later transpired had been associated with Mohammed Emwazi (aka "Jihadi John"). At the time, the guidance was seen as something of a knee-jerk reaction to an embarrassing episode for the Commission, and was met with criticism from sector bodies, particularly around restrictions on the funding of core costs – the implication being that by funding core costs charities may inadvertently be funding non-charitable (and potentially dangerous) activity.

Broadly speaking, the revised version of the guidance is an improvement on the previous one, and will be a helpful starting point for trustees of grant-making charities wishing to understand how to approach supporting organisations which do not fall squarely within the charitable envelope.

One of the challenges inherent in issuing guidance of this kind is the sheer range of organisations and activity to which it is potentially relevant – from small grant-makers with no paid staff, to international charities with complex operations spread across multiple jurisdictions. Perhaps unsurprisingly, the guidance is geared towards more high-risk scenarios, and it is important to note that there will be many situations where the risk of funds being misapplied is appreciably lower – for example, where grants are made to non-charities such as the NHS or non-charitable state maintained schools, or overseas bodies which are subject to very similar (though not identical) regulatory regimes as charities established in England and Wales.

The guidance sets out the following "key steps" for grant-makers, which broadly correspond to the sections of the guidance:

  1. Know your charity's purposes
  2. Systems to consider grant applications
  3. Is the other organisation a charity?
  4. Risk assessment / due diligence
  5. Limits on funding non-charities
  6. Setting the terms and conditions
  7. Monitoring spending of the grant

These are then broken down further into headings setting out key considerations: (a) before you decide to make any grants; (b) before deciding to make a grant to a particular organisation; and (c) when giving a grant to another organisation, including what to do "when things go wrong". There are helpful signposts to the Commission's guidance on decision-making, and HMRC's guidance on payments to overseas bodies, which is generally regarded as striking a sensible balance when it comes to monitoring and reporting.

The guidance contains welcome recognition of the importance of proportionality in determining the extent of the due diligence it is necessary to undertake in relation to a potential grantee, and the systems and procedures which it is advisable to have in place in relation to grant-making, monitoring and reporting, and is generally much less prescriptive than the previous version. There are however some hangovers from the previous draft – for example, the implication under the heading "Deciding to award a grant" that grant funding a non-charity may be a "high risk [or] unusual decision": in some cases it will, but in many it won't.

There are also likely to remain some concerns regarding sections setting out restrictions relating to funding core costs of non-charities, in particular that it is insufficiently clear that in certain circumstances trustees may entirely properly conclude that all of a non-charitable organisation's activities further their charity's purposes, and that the charity could therefore fund its core costs in full. A slightly orphaned section headed "Situations where extra care and scrutiny are needed" is also problematic, suggesting that there are particular charitable purposes and activities which should ring alarm bells as a matter of course: in fact, there are any number of areas in which the law is currently developing, and where the difference between being charitable and of broader social or community benefit is less clear. (In addition, the guidance linked to is now rather elderly, and was mainly written before the Charities Act 2006 came into force.)

In summary, the guidance is a helpful reference point for trustees of charities which engage in grant-making and wish to understand the kinds of considerations which they should have in mind, both generally and more particularly when considering funding organisations which are not charities themselves. However, it has its limitations, and it should not discourage trustees from exercising proper judgement and discretion when it comes to decisions of this kind.

If you require further information on anything covered in this briefing please contact Laetitia Ransley at the firm on 020 3375 7000.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, October 2017

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