This article refers to the legal requirements and regulatory guidance for charities registered in England and Wales. Charities registered in other jurisdictions should refer to guidance from their regulator.

‘Ex gratia’ is a Latin term that translates as ‘by favour’ and does not have an exact legal meaning. The Charity Commission’s guidance uses the term to refer to a sum of money paid voluntarily, or a transfer of property other than money, without a legal obligation but where the trustees believe that they are morally obliged to do so. It can also involve a charity waiving its right to money (or property) when the transfer hasn’t yet taken place. Ex gratia payments arise where the charity trustees believe they have a moral obligation to make a payment, cannot justify the payment as being in the charity’s interest and do not have the power or a legal obligation to make such a payment.

Ex gratia payments are subject to strict conditions and procedures. That’s because charity trustees are required by law to apply a charity’s funds and property solely in pursuit of the charity’s purposes and are bound by the requirements of the charity's governing document.

Section 106 of the Charities Act 2011 enables the Charity Commission to authorise charity trustees to make a payment (or waive their entitlement to property) where the trustees regard themselves as being under a moral obligation to do so and where they would otherwise have no power to make the payment.

Other payments may also require authorisation from the Commission, for example when the trustees lack the power and a legal obligation to payments that they consider to be in the charity’s best interests. This could be a reward beyond a contractual entitlement to a retiring employee whose service to the charity was exceptional, or a payment made as a compromise to avoid a legal claim against the charity. The Charities Act 2011 allows the Commission to authorise such payments if the trustees believe that the payment will result in benefits to the charity.

These decisions should always be taken with due diligence. Charity Commission guidance, Ex Gratia Payments by Charities (CC7), sets out the procedures which charity trustees must follow when they want to make an ex gratia payment from the charity’s funds. This involves the trustees using an online form to apply for approval from the Charity Commission for such payments. In some cases, the Commission will refer applications to the Attorney General (AG). If the Commission refuses to make an order, trustees can make a new application directly to the AG or apply to the court for such an order.

It is essential to differentiate ex gratia payments from regular contractual payments or payments that are made in the charity’s best interest. CC7 advises trustees to seek professional advice if they are unsure whether or not a particular proposed payment (or waiver of the charity’s rights to money or property) is an ex gratia payment. There may be other financial consequences to consider as tax relief could be restricted where a charity incurs non-charitable expenditure.

The Commission’s guidance notes that generally, where authorisation for ex gratia payments is not granted, this is usually because the commission takes the view that the trustees have the power to make the payment without its intervention. In many cases where the Commission declined an application, a legal basis existed for the charity to make the payments.

In the charity sector, ex gratia payments most frequently relate to bequests. In the Charity Commission’s case studies for ex gratia payments, all the examples of successful applications relate to legacies. This could be where the legator made a solemn but not legally binding promise for a bequest to someone else. However, CC7 warns that ‘it will rarely be appropriate for trustees to make an ex gratia payment where a testator fully intended to leave his or her property to a charity, but where relatives feel he or she was not morally justified in leaving it to a charity rather than to them.’

Cases of ex gratia payments that are not connected to wills are less common. For example, trustees may feel morally obliged to return all or part of a donation where it resulted in a donor’s inability to cover their own basic living costs.

The Charities SORP (FRS 102) describes two distinct types of ex gratia payments in its glossary. Firstly, those described above, which do not further the charity’s aims but that the trustees believe should be made because of a moral obligation. Secondly, it describes ex gratia payments that are in furtherance of the charitable aims. Both types require disclosure as described below.

Charity Commission guidance CC7 requires trustees to consider whether a moral obligation exists for the charity to make a payment before they contact the Commission for authority. This includes asking: ‘if the charity were an individual, would it be morally wrong of them to refuse making the payment?’

If the trustees believe that they are morally obliged to make the payment, they must currently apply to the Charity Commission for authority. They can do this by completing an online form and providing relevant information and impartial evidence. This includes a copy of the minutes of the meeting where they discussed that a moral obligation existed and that a payment should be made, and a copy of any legal advice that the trustees may have sought before they made the decision.

The Commission may ask for additional information or evidence before it makes a decision. If authority for the payment is given, this will be by order. The order needs to be preserved as evidence that authority had been granted, for example for the charity’s auditor or independent examiner.

The Charities Act 2022 introduces several changes aimed at simplifying the process and clarifying the circumstances under which ex gratia payments can be made by charities. Implementation of the provisions related to ex gratia payments has been delayed and the changes are now expected to come into force later in 2024.

The delays arose because of the unintended consequences that the implementation of the Act would have had for national museums and galleries whose governing legislation precludes the restitution of any objects in their collections. Relevant national museums and galleries will be excluded from the changes of the Act and DCMS is in contact with those organisations falling within scope of this exclusion. There will be a further exclusion to ensure that Charity Commission approval will continue to be required for decisions made by charities concerning ex gratia payments to recipients outside the UK. The Charity Commission’s implementation plan for the Charities Act 2022 is regularly updated on the regulator’s website.

One significant update is the expanded power granted to trustees to make ex gratia payments without seeking permission from the Charity Commission, provided the payment does not exceed a specified threshold and a moral obligation exists. However, if the charity’s governing document expressly restricts the new statutory power, approval from the Charity Commission will still be required.

The Act also includes an amendment to the test, allowing ex gratia payments to be made when trustees could ‘reasonably be regarded’ as having a moral obligation to make the payment. This makes the test more objective and removes the reliance on the trustees’ personal perceptions. The new legislation also allows ex gratia decisions to be delegated.

Prior to the Charities Act 2022, charities incorporated or governed by a specific Act of Parliament (statutory charities) were not able to make ex gratia payments. The new Act empowers statutory charities to make ex gratia payments, applying the same tests and procedures as other types of charities.

Finally, the Act confers a new power to the charity tribunal, allowing it to review decisions by the Charity Commission to not authorise an ex gratia payment.

Under the Charities SORP (FRS 102), there is a duty for charity trustees to disclose ex gratia payments in their financial statements. This includes details of all ex gratia payments made except occasional gifts of small and inexpensive items (e.g. flowers or chocolates). It’s important to note that not all gifts are ex gratia payments as described in CC7.

The disclosure requirements include those where the charity has obtained the authority of the Court, the Attorney General or the charity regulator to sanction the payment or waiver. Payments of a similar nature may be aggregated but only if this does not impact the understanding of the arrangement. The note to the accounts must explain the nature of each ex gratia payment (or aggregate), the reason or legal authority for making the payment (or waiver) and the amount.

Trustees should disclose the details of any ex gratia payments to their auditor or independent examiner. They should explain the rationale behind the payment and show evidence of the decision-making process, including any legal advice or guidance sought in relation to the payment.

Once the changes brought by the Charities Act 2022 are implemented, trustees will gain greater flexibility in making these payments. However, it remains crucial for trustees to ensure that they consider each ex gratia payment carefully, take legal advice where necessary, follow the right procedure and disclose ex gratia payments as required by the Charities SORP.

Please also join our webinar on 26 September where we will discuss ex gratia payments and people-related disclosure requirements, and ask:

• Can NDAs trump charities’ disclosure requirements?