The Charities Act 2022: changes in relation to ex-gratia payments out of charity funds

This article is one of a series of articles focusing on some of the more technical changes brought in by the Charities Act 2022 (the Act), which was passed in February 2022. This series is intended to provide a helpful resource in considering these changes and their implications for you and your charity.

In this article we focus solely on one area of reform in the Act: the extension of the ability of charity trustees to make “ex gratia” payments out of charity funds.

Before looking at the changes, their likely impact, and who needs to think about them, we will first look briefly at what ex gratia payments are and the current rules with which charity trustees must comply.

What is an ex gratia payment?

Charity trustees have a duty to use the funds of their charity only for the purpose of pursuing the charity’s charitable purposes.

An ex gratia payment by a charity is, very basically, a payment made by the charity which is not made as part of the charitable work of the charity and which it has no obligation to make but wishes to make. In this context a “payment” includes a waiver by charity trustees of rights to money or property to which the charity is legally entitled but may not yet have received, a payment of money out of the charity’s existing funds, or a transfer of some existing charity property, other than money. In the remainder of this article when we refer to the making of an ex gratia payment we include these variations.

Ex gratia payments most commonly arise in connection with gifts left to charities. For instance, a charity may receive a larger gift in a Will than the testator really intended, which would deprive other beneficiaries of money or property which the testator intended them to have. If the Will has been properly made the charity has no legal obligation to the other beneficiaries but its trustees might consider it would be morally wrong not to make some arrangement with them. Alternatively, a donor might make a lifetime gift to a charity but subsequently find themselves in a financially perilous position and unable to cover their basic living costs. The charity trustees might feel morally obliged to make an ex gratia payment to cover such costs by returning all of part of the donation.

What is the current position in relation to ex gratia payments?

The legal position

In normal circumstances the making of an ex gratia payment would be a breach of trust by the charity’s trustees as it would represent a use of charitable funds for non-charitable purposes. However section 106 of the Charities Act 2011 empowers the Charity Commission to make an order authorising a payment trustees have no authority to make but consider themselves under a moral obligation to do so.

The Commission’s power under section 106 is exercisable under the supervision of the Attorney General.

The decision to apply for authority to make an ex gratia payment needs to be made by the charity trustees; it should not be delegated (even if the charity’s governing document contains broad powers of delegation). This is because the decision to apply for authority is based on the trustees regarding themselves (personally) as being under a moral obligation to make the payment and as such this decision cannot be taken by anyone other than the whole body of trustees (as it imposes a subjective test which relies solely on the internal feelings of the charity trustees).

Applications to the Commission for authority to make an ex gratia payment involve the completion of an online form for which the trustees must provide clear and impartial evidence to explain why they consider they are under a moral obligation to make the ex gratia payment. The charity trustees are also required to upload a (relatively) large body of evidence, which is set out in the Commission’s guidance on ex gratia payments by charities (CC7).

Small ex gratia payments

Although this is the strict legal position, the Commission’s operational guidance (at B4.3) notes that it is unlikely to challenge cases where the amount of money is small (which is suggested to be £1,000 or less) and where the charity trustees feel it would not be “administratively sensible” to apply for the Commission’s authority to make the payment (which is left to the trustees’ discretion, although the trustees’ decision must be reasonable).

However, this stance of the Commission on such small ex gratia payments is a matter of internal regulatory policy, which is not found in their public guidance and for which there is currently no formal statutory grounding.

Statutory charities

A (relatively small) number of charities are statutory charities (ie incorporated or governed by a specific Act of Parliament).

Under the current law, it is likely to be impossible for a statutory charity to make an ex gratia payment (and the courts have previously held as such). This is because:

1. it would contravene a statutory provision setting out permitted dispositions of that charity’s money or property, and
2. the Commission’s section 106 power is based on the Attorney General’s jurisdiction, yet the Attorney General has no power to authorise an ex gratia payment prohibited by statute.

What is changing under the Charities Bill?

The Law Commission made four recommendations in relation to ex gratia payments which are set out in Chapter 10 its report. In summary these are:

1. charity trustees be given a statutory power to make small ex gratia payments without requiring the authorisation of the Commission,
2. charity trustees be able to delegate ex gratia payment decisions,
3. statutory charities be able to make ex gratia payments, and
4. decisions by the Charity Commission not to authorise an ex gratia payment under section 106 of the Charities Act 2011 should be subject to review by the Charity Tribunal.

In its response to the Law Commission’s report the Government accepted all of the Law Commission’s recommendations and the proposed provisions are set out in sections 15 and 16 of the Act (which insert new sections 106(1), (1A) and (1B), and sections 331A and 331B, into the Charities Act 2011).

Looking at each of these changes in turn:

Statutory power for charity trustees to make small ex gratia payments

The Act provides a new statutory power (which will be inserted into the Charities Act 2011 as new section 331A) to allow charity trustees to make small ex gratia payments without prior authorisation where:

1. the value of the ex gratia payment does not exceed “the relevant threshold”,
2. the charity trustees have no power to make the payment / waive the charity’s entitlement to property other than via the new statutory power or by an application under section 106, and
3. in all the circumstances, the charity trustees could reasonably be regarded as being under a moral obligation to take the action.

The Act sets out “the relevant threshold” for ex gratia payments to be made under this new power. Accordingly, the power will apply to ex gratia payments of up to:

• £1,000 for charities with a gross income in its last financial year of up to £25,000,
• £2,500 for charities with a gross income in its last financial year of more than £25,000 and up to £250,000,
• £10,000 for charities with a gross income in its last financial year of more than £250,000 and up to £1 million, and
• £20,000 for charities with a gross income in its last financial year of more than £1 million.

Both the Law Commission and the Government are currently of the opinion that these thresholds provide a reasonable and proportionate safeguard to protect charitable assets. However, section 331B enables the thresholds to be varied by secondary legislation.

The new statutory power may be expressly restricted or excluded in a charity’s governing document, in which case charity trustees would need to seek prior authorisation from the Commission before making an ex gratia payment.

It should also be noted that there will be a continuing obligation (under the Statements of Recommended Practice or “SORP”) for charities to report all ex gratia payments (whether or not these required authorisation) in detail in the charity’s accounts.

Proposed power to delegate ex gratia payment decisions

As part of the reformulated test under new section 331A, it will be possible for ex gratia payments to be made when the charity trustees could “reasonably be regarded” as being under a moral obligation to take the action.

This wording makes the test an objective (rather than the existing subjective) one. The relevant question is no longer whether the trustees themselves feel that there is a moral obligation, but whether they could reasonably be regarded as being under a moral obligation. This allows for the decision to be delegated (to any person or team).

Delegation will be possible when an ex gratia payment is to be made without Charity Commission oversight under the proposed new statutory power or with Commission oversight under section 106 of the Charities Act 2011.

Power of statutory charities to make ex gratia payment decisions

The wording of the Act ensures that there will no longer be any difference between statutory and non-statutory charities in relation to ex gratia payments so:

1. they will be able to use the new power to make small ex gratia payments, and
2. as with other charities, they will be able to seek authorisation for larger ex gratia payments from the Charity Commission, the Attorney General, or the court.

Power of the Charity Tribunal to review ex gratia payment decisions

Under Schedule 2, paragraph 26, the Act introduces a new section (which will be section 322(2)(ea) of the Charities Act 2011) which will allow the Charity Tribunal to review a decision by the Charity Commission to not make an order under section 106 (authorising an ex gratia payment). Currently there is no such right of appeal.

This means that there is now consistency between the appeal rights under section 105 (review of a refusal by the Commission to authorise dealings with charity property) and section 106.

What is the likely impact of these proposed changes?

The proposed changes will remove considerable administrative burdens for charities and their trustees when dealing with ex gratia payments.

The new statutory power to make small ex gratia payments will mean that the process for those small payments has been significantly streamlined. This will save charities considerable time and cost, as previously the process of seeking Commission consent for those payments was often disproportionate to the value of the payment itself. Whereas in reality the Commission was minded to overlook cases of very small payments that hadn’t been made in line with the statutory process (and a number of payments were made in this manner), the new power codifies (and significantly extends, depending on the size of the charity) the ability of charities to make such payments with ease.

Although there will be some disappointment that the statutory power has not been extended to all ex gratia payments, the Commission believes that the threshold approach “takes into account that the size of the charity is relevant to the financial damage that would be caused by an inappropriate ex gratia payment” and that the limits provide an appropriate safeguard to protect charitable assets. As we noted above, there will be a power for the thresholds to be varied by secondary legislation and so it is hoped that the thresholds will be reviewed regularly and raised when necessary.

For some charities the ability to delegate ex gratia payment decisions will significantly streamline the process. Such charities often consider decisions about ex gratia payments are not significant enough to warrant trustee involvement and waiting for trustee approval under the current regime only adds to what can already be a lengthy process.

During their work the Law Commission heard that the practice of delegating decisions on ex gratia payment decisions is widespread. As such, this might again be seen as the law catching up to established (but not entirely legal) process.

When the new provisions are in force it’s unlikely that many charities will be asking the Charity Tribunal to review decisions by the Commission not to exercise their section 106 powers to authorise ex gratia payments but the ability to go to the Tribunal should the need arise will likely be universally welcomed by charities.

When will the changes come into force?

Originally, the intention was to implement these changes on 31 October 2022. However, the Government became concerned that the extension of the power to statutory charities (eg the National museums) might result in it being used to effect transfers of property which their governing statutes currently prevent – for example, returning cultural artefacts to their countries of origin on moral grounds. The Government has clearly decided this needs further consideration before it is implemented meaning that the provisions are now in a state of limbo, with the implementation plan saying only that they are “under further consideration prior to commencement”.

What charity trustees need to do

Assuming the new rules will be brought into force at some point, charity trustees will need to:

1. ensure that they understand the new statutory power to make ex gratia payments and in particular the need to remain vigilant in relation to the thresholds relevant to their charity (which may be subject to change either downwards or upwards depending on the charity’s income year on year),
2. consider whether or not they wish to amend their governing documents to exclude the proposed new statutory power, and
3. consider whether or not to delegate decisions about making small ex gratia payments.

For those charities that already delegate decision-making on small ex gratia payments, both the charity trustees and those to whom such decisions are delegated will need to ensure they are correctly operating under the changes, once implemented.

Finally, it’s important for charity trustees to remember that they remain responsible and accountable for the way in which the charity uses its funds and so they will need to keep a close eye on ex gratia payments because if they are made too freely or if the total of all of the payments is very high (even though each is within the permitted threshold for the charity) they might still be regarded as not managing the assets of the charity appropriately. This oversight will be particularly important if trustees decide to delegate to staff the power to make ex gratia payments on their behalf.

If you require further information about anything covered in this briefing, please contact your usual contact at the firm on +44 (0)20 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, December 2022