Major gifts and new Charity Commission guidance

It’s rare to find a charity, whether a school, college or university, that is uninterested in receiving major gifts.

Increasingly clients that we work with in fact have people who are dedicated to sourcing these windfalls.  This is specialist work including developing relationships and exploring issues like naming rights over libraries, halls and sports facilities, or perhaps establishing specific bursary funds or other arrangements.

This is a space where there have been several developments in law and practice over the last few years; some positive and some perhaps less so.  For example, it seemed to be the case recently that HMRC had hardened its view about naming rights and would be treating these potentially as a benefit to the donor that might affect the otherwise beneficial tax treatment available when making a major gift.  Fortunately HMRC backed down on this point and revised its guidance under pressure from sector representatives.

This is still an area for a degree of caution, though, given possible issues around sponsorship and trading income and related tax implications that naming rights can create if not approached in the right way. But generally, a mere acknowledgement will continue not to be a problem.

Another area of development has been around institutions looking to extricate themselves from naming arrangements where stories have emerged about a donor that create reputational challenges.  A number of institutions both in the UK and the US have faced real and very well-publicised difficulties in connection with past donations from the Sackler family. The reputational challenges by association arose in those cases due to the family's involvement in Perdue Pharma and the opioid crisis.  Our charity clients have in many cases become much more cautious about agreeing to naming rights without safety mechanisms like time limitations and provisions allowing acknowledgements to be adjusted or removed in the event of these sorts of problems.  This is obviously an area to approach sensitively with donors.

The latest in the series of recent developments around major gifts comes in the form of the Charity Commission's new guidance on accepting and refusing donations. Much of the guidance is reasonably uncontroversial and indeed helpful in directing charities to the sort of issues that they need to think about when accepting donations, such as donor due diligence and whether what has been proposed is actually a donation or more in the way of a contractual arrangement, perhaps with benefit flowing in both directions.  

But the part of the guidance that is more striking is where the Commission suggests effectively that a donation a charity has received can be returned if the charity simply decides that retaining the money would not be in its best interests. This would perhaps most commonly arise in the context of reputational risk or actual reputational harm.   

While the Commission acknowledges that the relevant charity would need to have the legal power to do this (which is a separate issue from deciding whether it would be in the charity's best interests) the new guidance is a major departure from its predecessor in suggesting that charities would generally have this power even if just in the form of a typical 'sweep up' provision in their governing document.   Examples of sweep-up powers that the Commission gives are powers to "do anything which is calculated to further your charity’s purposes or is conducive or incidental to doing so" or to "do any lawful thing that is necessary or desirable for the achievement of the objects".

Previously, the Commission's view was that a sweep up or similar power would usually not be sufficient for a charity to make an application of assets (such as by returning a donation) that is by definition not in direct pursuit of its purposes. Ordinarily in such circumstances a charity would need to obtain an authorising Order from the Commission. This is akin to (though different from) the situation where a charity obtains an authorising Order from the Commission to make an ex gratia or moral payment.

We would urge any charities seeking to rely on the Commission's new guidance on this point to be cautious as in our view in many cases charities would still not have the power to return donations without an Order.

There is also a tax question here, of whether returning a donation (ie deploying charity assets necessarily not in direct furtherance of the charity's objects) would constitute 'non-charitable expenditure' leading to a tax charge.  With the benefit of an Order from the Commission this aspect of risk is also reduced.

Of course, risk is a sliding scale and there's much more cause for concern when we’re talking about major gifts. Potential misapplication of a sum in the millions by returning it to a private individual donor, with a possible corresponding tax charge, may be very uncomfortable.  Particularly when one considers that the charity's trustees might in some circumstances be personally liable to make the good charity's loss. The existence of Charity Commission guidance indicating that this will be possible may provide a degree of comfort but particularly where there is some doubt as to whether the guidance is accurate as a matter of law, this is far from a complete solution.

We will write with further news if there are any developments in this area.