The Law Commission published a Report on 14 September 2017 on various technical issues in charity law, focussing on areas where there is inappropriate regulation of charities and any unnecessary legal complexity and inconsistency. It aims to remove or adjust the legal and regulatory burden on charities, whilst still safeguarding the public interest in ensuring that charities are properly run. (It does not also address high profile issues such as the law of public benefit, the charitable status of independent schools, or fundraising practices.)
The Report proposes a number of important changes to charity law. The draft Bill appended to the Report, when enacted, will bring those changes into effect. We have reviewed the Report and set out below a summary of those of its recommendations likely to be of interest to small and medium sized charities. For details of those recommendations, please see the Report (or a summary of it) on the Law Commission’s website.
Making it Easier to Make Ex Gratia Payments
The Report considers ex gratia payments out of charity funds. As we explain in our Guidance Note, Ex Gratia Payments by a Charity, an “ex gratia” payment is one which the trustees of a charity feel morally obliged to make, but which they have no legal power to make. For example, it might be clear from the circumstances that a testator intended to include in his Will a legacy to a family member but did not live long enough to amend his Will. In such a case, the charity’s legal entitlement to the residue under the Will would be greater than intended, and the trustees might therefore wish to pay such a legacy on a voluntary basis. The Guidance Note also details various other circumstances in which trustees might wish to make an ex gratia payment. (“Payment” for present purposes, includes a transfer, waiver or release of any property or rights.)
Charity trustees can currently ask the Charity Commission to authorise an ex gratia payment but if it is a small ex gratia payment, the costs of obtaining authorisation and the resulting delay before making the payment may be disproportionate to its value. The Report proposes amending the law to give trustees the power to make ex gratia payments that are small relative to the income of the charity without their having to obtain Charity Commission authorisation. Any payment is deemed “small” for this purpose under the Bill if it is no more than a certain amount and its gross income in its last financial year is no more than a certain amount, as follows:
- ● £1,000, where gross income is up to £25,000;
- ● £2,500, where gross income is more than £25,000 and up to £250,000;
- ● £10,000, where gross income is more than £250,000 and up to £1 million; and
- ● £20,000, where gross income is more than £1 million.
Trustees currently must personally take any particular decision to make an ex gratia payment, and they must only make a payment if they personally “regard themselves as being under a moral obligation” to do so; a subjective test. The Report proposes an objective test instead, namely that an ex gratia payment may be made if trustees “could reasonably be regarded as being under a moral obligation” to make the payment.
The Report proposes that, to ensure efficiency in charity administration, trustees should in future have power to delegate any decision to make an ex gratia payment wherever they wish to do so. With that power, they could then decide to make all such decisions personally or delegate any or all such decisions. Where any officer of the charity (e.g. the chief executive or a legacy officer) is delegated to make any such decision, the officer could then decide on behalf of the trustees if the objective test has been met. Where the test is met in any case, the trustees will have power (but not a duty) to make a payment.
For further guidance about ex gratia payments, see our Guidance Note, Ex Gratia Payments by a Charity.
Our Guidance Note, Fundraising Appeals By Charities – Suitable Wording for Appeals explains the current legal position where too much, or too little, money is raised by a charity in response to a fundraising appeal.
At present, where too much is raised, the Charity Commission can direct that the surplus is applied cy-près (“Cy-près” means “as near as possible”.); when too little is raised, the funds cannot usually be applied cy-près and the trustees must try to contact donors to offer a refund.
For small donations, the cost of contacting donors will often be disproportionate to the value of the donations. Where too little is raised, there needs to be a balance between protecting donors’ wishes and the administrative inconvenience and expense of contacting donors. The Report recommends reduction of that expense by amending current law such that the law does not require trustees to offer a refund of any donation of £120 or less in a year, and such that such donations can be applied cy-près. Trustees would only then have to try to contact a donor if he requested that when making the donation.
When funds raised are to be applied cy-près (because too much or too little has been raised by the appeal), trustees can currently ask the Charity Commission to make a scheme authorising the funds to be used for other similar purposes. In the case of small amounts, the charity’s and the Commission’s associated costs may be disproportionate to the amount in question. The Report therefore recommends amending the law so that, if a fund does not exceed £1,000, the trustees may apply it to new purposes without Charity Commission consent, provided that they first consider the desirability of securing that the fund is used for similar purposes.
Changing Purposes, Amending Governing Documents
The Report notes the importance of the ability to make changes to a charity’s governing document quickly and efficiently, whilst retaining safeguards so that any such changes are in the best interests of the charity and its beneficiaries. It concludes that greater alignment of the procedures currently available to corporate and unincorporated charities when altering their governing documents would be beneficial to create legal simplicity and consistency. It consequently recommends new powers for unincorporated charities to be able to make changes to their governing documents so that those powers are brought into line with those of charitable companies and CIOs. The Report also recommends that the same requirements for Charity Commission consent should apply to all charities, whatever their legal form, when they alter their purposes.
Will any of these proposed reforms be relevant to your charity? Do you think they will be beneficial for your charity or for other charities? As ever, we would like to hear from you.