Charities can often find themselves in situations where they feel a strong moral duty to make a payment or give up an interest, even when there is no legal requirement to do so and the action cannot strictly be justified as being in the charity’s best financial interests. Such actions are known as ex gratia payments.
Charities Act 2022 – changes to ex gratia payments
Enhanced trustee powers
The new provisions significantly enhance the power of charity trustees, allowing them to proceed with certain ex gratia payments without seeking prior consent from the Charity Commission, the court, or the Attorney General, provided specific legal tests are met. This change applies to small ex gratia payments. The maximum amount a charity can pay without consent is now determined by its gross income from the last financial year (GAI):
- GAI of £25,000 or less: £1,000 maximum single ex gratia payment
- GAI of over £25k but not over £250k: £2,500 maximum single ex gratia payment
- GAI of over £250k but not over £1m: £10,000 maximum single ex gratia payment
- GAI of over £1m: £20,000 maximum single ex gratia payment
The limits apply per payment, not as an annual cap, theoretically allowing a charity to make multiple separate payments up to the maximum single limit to different recipients. Any payment exceeding the maximum limit set for the charity's income category will still require the consent of the Charity Commission.
Delegation possible, but responsibility rests with the trustees
Beyond the financial limits, a key administrative enhancement is the revision of the test for making these payments. Under the previous rules, the decision could not be delegated, as the trustees themselves were required to feel the moral obligation.
The Charities Act 2022 introduces an objective test for moral obligation. This change means that trustees can now delegate the decision-making regarding ex gratia payments to staff or sub-committees, easing administrative burdens, particularly in areas like legacy administration. While the decision can be delegated, the charity trustees will remain ultimately responsible for those decisions. Section 16 of the Act also formally codifies the powers of the Charity Commission, the court, and the Attorney General to authorise ex gratia payments, placing these powers on a statutory footing.
If decisions are delegated, internal documentation is crucial for demonstrating sound governance. Charities will need to update their schemes of delegation for areas such as legacy administration to reflect these new powers. As trustees remain ultimately responsible, records must clearly show that the delegated authority was correctly applied and that the objective moral test was met before the payment was made. Guidance from the Charity Commission about these changes is expected, so look out for further direction.
Exclusion of certain museums and galleries
While these relaxations apply broadly across the charity sector in England and Wales, the commencement of Sections 15 and 16 excludes certain statutory institutions.
Specifically, this exclusion was necessary because concerns were raised with the government regarding the likely impact the changes would have on the scope for cultural artifacts to be returned by museums and galleries.
Many of these institutions have existing legislation that strictly prevents them from disposing of items from their collections except in very limited circumstances. Consequently, certain property held by these relevant statutory institutions is outside the scope of the new ex gratia provisions.
These new powers represent a welcome simplification, turning the complex previous requirement of needing Commission consent for even small ex gratia payments into a simpler process.
