The Charity Commission has published this guidance as a draft to give charities and their advisers the opportunity to comment and inform the final version. This is not a formal consultation. The content draws from existing commission guidance, and does not represent any new regulatory requirement.
Please send any comments or suggestions on this guidance to firstname.lastname@example.org by 8 April 2016. The commission will finalise the guidance once it has considered this feedback.
What this guidance is about
Charities can further their purposes by funding other charities, or in some cases organisations that aren’t charities, to carry out charitable work or projects. Grant funding can benefit causes or groups which otherwise struggle to obtain the support they need.
This guidance explains what you need to do if you are considering a grant to an organisation that isn’t a charity. Some parts of it are relevant to any charitable grant giving, but if you only want to fund other charities, see the commission’s separate guidance Work with other charities.
Making grants to organisations that aren’t charities may present new opportunities to further your charity’s purposes. Remember, organisations that aren’t charities don’t have to deliver public benefit or stick to charitable objectives. So you need to understand the risks and boundaries before you start. Any grant your charity makes must only be used for activities that are within your charity’s purposes. This means there are limits on what you can fund.
- confirm that the organisation you are considering giving a grant to is not a charity
- make sure you understand your own charity’s purposes
- have appropriate governance systems and procedures in place for making decisions about grants
- take reasonable steps to assess risks and carry out an appropriate process of assurance (or due diligence) on the organisation
- ensure that the organisation receiving the grant understands your charity’s purposes and their boundaries (part of the due diligence process); a charity can only make grants for activities that in principle it could carry out itself
- be aware that trustees remain responsible for grant decisions even if decisions are delegated, and understand where extra care may be needed
- set appropriate grant conditions and ensure that the organisation understands and accepts them
- put appropriate monitoring arrangements in place
- know what to do if things go wrong
This guidance gives more detail on this process.
Establish whether another organisation is or is not a charity
You can’t assume that an organisation undertaking similar activities to your charity is a charity. If there is any doubt, you should assume that it’s not a charity. An organisation can only be a charity if it has exclusively charitable purposes.
If an organisation in England and Wales is a charity it should be able to either show that it:
is registered with the commission and has a charity number
A charity that doesn’t have to register may be able to show that it is recognised as a charity by HMRC.
A charity based in Scotland or Northern Ireland must register with the charity regulator in that country.
Different legal frameworks apply to charities in other countries. You may need advice about clarifying their status.
If the organisation you want to grant fund is in fact a charity, see the commission’s guidance Work with other charities.
Understand your charity’s purposes
You and your co-trustees must make sure that everything your charity does helps (or is intended to help) to achieve the purposes for which it is set up, and no other purpose. You need to understand your charity’s objects – the description of your charity’s purposes in its governing document. You need to know their scope and limits.
You must be able to show that any grant to another organisation (whether it’s a charity or not) is clearly in line with your charity’s purposes. A charity can only make grants for activities that in principle it could carry out itself. You must also comply with the powers and any restrictions in your governing document. It’s vital to be clear about, and make sure the recipient understands and agrees:
- the aim of the grant, and how this is expected to further your charity’s purposes
- what the grant can and can’t be used for
Find out more: ensuring your charity is carrying out its purposes.
Systems and procedures
Charities that regularly make grants should have appropriate systems and procedures in place to:
- allow trustees to set priorities for funding (which they can change or depart from at their discretion)
- require sufficient detail in the grant application, and monitoring procedures, to enable the trustees to identify and assess risks and make informed decisions
- ensure grants are authorised by the trustees, or within a framework of delegation that ensures appropriate oversight and scrutiny by the trustees
Risk assessment and assurance
Before you commit to making a grant to an organisation that isn’t a charity, you should carry out an appropriate level of risk assessment.
You must avoid exposing your charity’s resources, its reputation or the well-being of its beneficiaries to inappropriate risk. It’s vital to identify and consider risks in relation to a particular grant proposal and respond to them proportionately, as risks will vary in their significance from case to case. You and your co-trustees are responsible for deciding what level of risk-taking is appropriate for your charity, responsible and reasonable in the circumstances. Use your assessment of the risks to inform your decision making.
You should also carry out appropriate checks to assure yourself and your co-trustees that:
- the organisation is reliable and competent to carry out the activity being funded
- the organisation is suitable for your charity to work with and fund
- you will be able to check and confirm that your charity’s funds have been properly used in line with its purposes
- you have identified and managed any potential exposure to risks such as fraud, financial crime, extremism or terrorism
This process is described as due diligence in commission guidance. It’s also known as assurance. It involves assessing:
- the ‘mission fit’ or match between the organisation’s aims and your charity’s purposes and interests
- the organisation’s track record for delivering the activities you are planning to fund
- its governance
- its reputation
- the full scope of its business and any conflicts with your charity’s purposes or interests
You will need to decide what level of assurance or due diligence is appropriate, taking account of the level of risk to your charity’s assets, beneficiaries or reputation.
You should regularly review the sufficiency of your due diligence. You should carry out additional checks during the course of the funding relationship if you identify that the risks are significant.
Making the decision to award a grant
Awarding any grant is an important decision. If you and your co-trustees delegate decision making, you remain responsible for the decision that is made. You should therefore supervise delegated authority through an appropriate policy framework and reporting procedures. High risk and unusual decisions should not be delegated, and you should consider carefully whether it is appropriate to delegate decisions about funding an organisation that is not a charity. You should set guidelines to help assess what is likely to be high risk or unusual.
Follow and apply the principles in the commission’s guidance on trustee decision making. Trustees are responsible for deciding what level of scrutiny and discussion are appropriate in the circumstances. The commission may ask you to explain and justify a decision.
Limits on funding organisations that aren’t charities
An organisation that isn’t a charity is not restricted by charitable purposes or public benefit. A charity can only fund charitable activity that is intended to further its purposes. It follows that:
- a charity can’t give an unrestricted grant to a non-charity
- a charity can only allow a grant to cover costs that are directly connected to carrying out the activities it has agreed to fund
- beyond that, a charity can’t fund the ‘core’ costs (or overheads) of a non-charity
This is to avoid the charity’s funds being applied for activities that are outside its purposes or not charitable in law.
It will also help you to comply with the rule that any private (ie non-charitable) benefit must be ‘incidental’ to carrying out your charity’s purposes. Private benefit is incidental where (in terms of both its nature and the amount) it’s a necessary result or by-product of carrying out the purpose. A non-incidental private benefit would be a misuse of charity funds.
Any funding of the organisation’s ‘core’ costs, such as office or staff costs, must therefore be limited to the proportion of those costs that is directly linked to delivering the grant activities. You should be able to explain and justify your decision in the charity’s interests.
Setting the terms of the grant
You should put in place a written agreement that sets out the terms and conditions of the grant. These terms and conditions should ensure that:
- the grant is spent in accordance with your charity’s objects and powers
- the organisation that receives the grant reports to you how the funds have been spent and how the work has progressed, with interim reports for grants for timescales over one year
- where appropriate, you can carry out your own independent monitoring or assessment of the work and use of the grant
- you can insist on repayment if the terms and conditions are breached
Decide what kind of agreement and terms and conditions are appropriate in the circumstances. In the case of a small grant where you are satisfied that the risks to your charity’s funds and reputation are low, a letter or other informal agreement may be sufficient. In other cases, you may need a more formal legal document. You should consider taking appropriate advice on preparing the document.
You will need to check that the organisation you are funding uses your charity’s funds only for your charity’s purposes and in accordance with the funding agreement.
You should put in place monitoring arrangements that are proportionate to the value of the funding and your assessment of the risks. This is important even if the funded activities clearly further charitable purposes. The recipient may carry out other activities that your charity can’t support. It may have a limited understanding of charitable purposes or what activities your charity can fund.
For anything more than a small one-off grant, you should obtain regular written updates and financial reports from the organisation during the grant period. These should set out progress on the work being carried out and details of spending within the reporting period. You should always obtain a report when the grant activity is completed.
You should also consider whether to carry out your own monitoring checks. These could include site visits, scrutiny of published information (such as annual accounts and the organisation’s website), and interviews with the organisation’s governing body.
Find out more: due diligence and monitoring.
Situations where extra care and scrutiny are needed
Some charitable purposes, such as community development or promoting human rights, are only charitable within certain legal boundaries. These boundaries are not always straightforward. If you are planning to fund activities to advance these purposes, read the commission’s guidance and take appropriate advice:
Guidance on other charitable purposes – Reviews of the register
Some activities such as political campaigning, are only permissible within certain limits for charities:
Where a project that you are funding will generate intellectual property (for example in the case of research by higher education institutions), you will need to take steps to protect the charity’s share, as this can be a valuable asset.
If things go wrong
It’s impossible to eliminate all risk. Some grants will not work out as planned and may not deliver the planned outcomes. You and your co-trustees need to be able to explain and justify decisions that you have made.
If something more serious goes wrong, take action to minimise any financial loss or harm to the charity’s beneficiaries or assets, including its reputation. This may include suspending or withdrawing funding, or requiring repayment of the grant under the terms of the funding agreement. Plan how you will respond to questions from your staff, volunteers, members, donors, the public or the media.
You should report serious incidents (or suspected serious incidents) to the commission as soon as you are aware of them. You should use your own judgement to assess the risk to your charity. There are no hard and fast rules, but an incident can be considered serious if it results in, or risks, significant:
- loss of your charity’s money or assets (eg through fraud or theft)
- harm to your charity’s work, beneficiaries or reputation, including suspicions, allegations or incidents of:
- abuse of vulnerable beneficiaries
- links to terrorism or to a ‘proscribed’ (banned) organisation or any individual or entity that’s ‘designated’ due to terrorist links or activity
- other criminal activity such as an attempt to use your charity for money laundering
Find out more: How to report a serious incident in your charity