Over the coming year, the Charities Act 2022 ("the 2022 Act") is set to come into force in phases, bringing in a number of welcome changes to charity law. The Act implements a large number of the recommendations made by the Law Commission in its 2017 report "Technical Issues in Charity Law". While the Act is not intended to be a major overhaul of charity law, it has the aim of reducing "unnecessary bureaucracy in current processes"[1]. These changes include giving greater flexibility to the use of permanent endowment, adaptations to how charities sell, lease or transfer land, and changes to how charities can amend their governing documents.
This article centres primarily on the changes made to charity trustees' powers to make ex-gratia payments to settle legacy disputes under s.15 and s.16 of the 2022 Act.
Ex-gratia payments are payments made from charity funds which charities wish to make, but for which there is no strict legal basis, and which may not directly support its charitable aims. Payments can include:
These payments are frequently made in legacy disputes, where, for example, a charity receives a legacy but there is a claim that the donor had changed their mind since making their will, such that the gift should not be made. This might lead the charity to feel morally obliged to sacrifice some of its share to resolve the potential dispute.
Presently, the law requires charity trustees to apply a charity’s funds and property only in furtherance of the purposes of the charity, and in ways which are laid down or permitted by the charity’s governing document[2]. This has the effect of restricting a charity's ability to reach a financial settlement with third parties where there is a dispute regarding a legacy left to the charity.
The case of Re Snowden Dec' d [1970] introduced an exception to this rule, with the judge ruling that ex-gratia payments can be made where it could be said that if the charity were an individual it would be morally wrong to refuse to make payment[3]. The court decided that such ex-gratia payments may be made where the authority of the Court or the Attorney General has been given.
The Charities Act 2011 ("the 2011 Act"), extended this principle to allow applications to be made to the Commission also. The Commission confirmed in its Operational Guidance that it would not interfere with “de minimis” payments, stating: ‘where the proposed payment is a relatively small amount, say £1,000 or less, and the trustees have made the payment from a sense of moral obligation, but without authority, we are unlikely to challenge their decision’[4].
Nevertheless, the limits of this authority often have an impact on the charity's ability to act expeditiously in settling legacy disputes. As such, the changes to the existing position are welcome.
"Small" ex-gratia payments (s.15 2022 Act):
Under the 2022 Act, there will be a new power for charities to make 'small' ex-gratia payments without the authority of the Commission. What is deemed to be 'small' depends upon the charity's gross income in its prior financial year. For example:
|
Gross income |
Payment that can be made without prior authorisation |
|
£25,000 |
£1,000 |
|
Between £25,001 to £250,000 |
£2,500 |
|
£250,001 to £1,000,000 |
£10,000 |
|
Over £1,000,000 |
£20,000 |
Though, note that charities will still be obliged to report these payments in detail in their annual accounts in line with the Charities Statement of Recommended Practice and will still be required to request authorisation where payments exceed the permitted amount.
This new statutory power applies to charity trustees of all types of charity, however, a charity's governing document can expressly exclude or restrict the power.
The new "test" for making ex-gratia payments (s.16 2022 Act):
A new test for making ex gratia payments is to be implemented by the 2022 Act to the effect that a payment can be made where charity trustees could "reasonably be regarded as being under a moral obligation to make it"[5].
The provisions permit charity trustees to delegate the function of deciding whether to make such a payment to individuals or groups within the charity. This is advantageous in that decisions on whether to make payment can be made by the teams who manage the process day to day, rather than by the trustees. This reduces unnecessary delay and costs. This ability to delegate the decision making applies regardless of the payment value, so that even where the amount exceeds the threshold in the table set out above, the delegate is able to make the application to the Commission for authority to make payment. It is worth noting, however, that the ultimate accountability for delegated decisions will remain with the trustees.
The changes introduced by the Act give charity trustees greater flexibility and discretion to handle financial settlements in low value legacy disputes. However, the changes do not come without concerns, for example, charities will no longer be able to point to a need for Charity Commission approval to deflect unmeritorious ex-gratia requests where the totals fall below the threshold so the decision on a refusal will demonstrably be their own. It is important that the charity's constitution and operational procedures include suitable mechanisms for dealing with requests.
Further, it is essential that charities attach appropriate authority levels and limits to delegated ex-gratia powers given that trustees retain ultimate responsibility; again suitable procedures should be put in place to maintain oversight.
In spite of the burden of such additional governance issues this long awaited update is positive, and is forecast to promote administrative efficiency and could result in considerable cost savings.
For further information or advice on the above, please contact Kerry Morgan-Gould on 01392 33 4154.
[1] Jamie Lennox, 'Charity trustees’ power over legacy dispute settlements set to change' (Today's Wills and Probate, 12th August) accessed 22 August 2022
[2] Charity commission for England and Wales, 'Ex gratia payments by charities (CC7)' (Gov.uk, 1 May 2014) accessed 22 August 2022
[3] Re Snowden Dec’d [1970] 1 Ch 700; [1969] 3 WLR 273; [1969] 3 All ER 208
[4] The Charity Commission, 'OG539 Ex-gratia payments by charities' (The Charity Commission, 31 October 2019) accessed 22 August 2022
[5] Charities Act 2022, s.16
