Sorry, no refunds: when can a charity return a donation?

Charitable donations are usually a win-win – the donor can feel positive about supporting a worthy cause, and the charity can put the money to good use. While this is true in most circumstances, there may be situations in which it is necessary or desirable to return the funds to the donor.

We have previously explored the circumstances where a charity must refuse a donation. Once a charity has accepted a donation – can they refund it?

The short answer is: not easily. Earlier this month, the Charity Commission issued long-awaited guidance on accepting, refusing and returning donations. This guidance makes clear that the starting point is to accept or keep donations so that you can use them to further your charity’s purposes. This ‘starting point’ should only be deviated from in limited circumstances dictated by charity law. We explore these below.

Donations which must be returned

The guidance sets out the circumstances in which a donation must be returned, including donations:

1. From illegal sources.
2. From donors who lack capacity.
3. Which cannot legally be given e.g. where the donor doesn’t own the donation.
4. Which require a return in certain circumstances, and these circumstances have been met.

Ideally, such donations should be turned down before they are ever accepted. However, if accepted, trustees should ensure they follow the correct returns process (particularly concerning donations from illegal sources) and seek advice if unsure.

Fundraising appeals which raise too little money

Charities may launch a fundraising appeal with a specific aim – for example, a soup kitchen may launch an appeal to buy a new oven. Where a charity fails to achieve this aim, the trustees will need to offer donors their money back. There are exceptions where: 

• The donations are received from a cash collection, such as a collection box.
• The donations are the proceeds of a lottery, competition or other similar fundraising activity.
• Any individual donor has contributed £120 or less in total for the appeal.

Outside of these exceptions, the starting point is that donors are entitled to a return of their donation. The charity must seek written authorisation from the Charity Commission, setting out their plan to contact the donors to return their donations. The plan should be reasonable and realistic in the circumstances, considering the donation amount, type and timing (the charity will not be expected to move mountains to return a small amount). The charity must then enact the plan to return the donations.

If the charity is unable to find or identify donors after taking the authorised actions, or if the charity trustees consider it unreasonable in the circumstances to return certain donations, they can ask for Commission consent to use these donations for a new purpose, considering:

• If it is possible to use the excess funds for a similar purpose (the soup kitchen above might be able to buy other kitchen items).
• Whether the new purpose is suitable and effective in the current socio-economic circumstances.

Updated Charity Commission guidance on this topic also highlights the need to record any information or evidence used to reach these decisions. The Commission may also require the charity to advertise their proposals before they will authorise any decision.

Failing to achieve a particular fundraising goal can be doubly frustrating for charities, which, as well as falling short of their target, must jump through hoops to return their hard-earned donations. However, this frustration can be avoided. When launching an appeal, charities should include a statement setting out the purpose of the appeal. The statement can be drafted to include a ‘secondary purpose’ that sets out how donations will be used where too little is raised. This could be a catch-all which states that, in the event of a shortfall, the funds can be put towards the charity’s other projects. Including this ‘secondary purpose’ allows charities to retain and apply the money elsewhere, avoiding the need to return funds.

‘Ex gratia’ payment to the donor

In this context, an ex gratia payment is a “moral payment” made by a charity that is not intended to further the charity’s purpose but that the trustees feel morally obliged to make.

The law requires trustees to apply the charity’s funds to further the charity’s purpose. Ex-gratia payments are not made to further the charity’s purpose, so they breach this legal duty. However, the Charity Commission has the power to authorise ex gratia payments where it could be said to be “morally wrong” to refuse to make the payment.

This might arise when money is left to the charity in a will, but the individual changes their mind and dies before a new will is executed, leaving the trustees feeling morally obliged to return the gift.

Ex gratia payments cannot be made without the consent of the Charity Commission (however, the Commission’s guidance suggests that it is unlikely to challenge cases where the amount of money is relatively small).

Trustees must apply to the Charity Commission with evidence that the ex gratia payment is justified. Given the default position that charitable funds should go to charitable purposes, this is a high bar to reach. Ex-gratia payments put pressure on trustees’ moral duties – they must be sure that returning the money constitutes a moral obligation.

This is a difficult decision to make. We saw in 2018 that Great Ormond Street Hospital considered, but ultimately decided against, returning a £530,000 donation from the Presidents Club Charitable Trust after allegations were made of sexual harassment against female hostesses at its men-only fundraising galas. While GOSH’s trustees were wary of the source of the donation, they decided the threshold of moral obligation to return the funds was not met.

Changes to ex gratia payments are due to be introduced under the Charities Act 2022. The proposed changes will allow charities to make small ex gratia payments without consent up to various thresholds (based on the charity’s gross income) and to delegate the decision from the trustees. These provisions are expected to come into force later this year, subject to an exclusion for relevant national museums and galleries.

Donations not in the charity’s best interests

The Charity Commission’s new guidance clarifies that trustees may return donations where this is in the charity's best interests. These returns should be grounded in objective, reliable reasoning (rather than moral obligation).

When making this decision, trustees must establish that they have the power to return the donation (i.e. ensure the charity’s governing document doesn’t prohibit returns). If they have the power, trustees must consider what is in the charity’s best interests in light of their trustee duties and the starting point that donations should be kept.

This will involve an exercise carefully balancing the risks and impact of returning vs. keeping the donation. The guidance makes clear that trustees have autonomy in this decision; it is not black and white, and the decision reached may vary between charities. What is important is that the decision is informed and reasonable. Trustees should keep a careful record of how any decision to return a donation is reached and be able to justify this if challenged.

Final thoughts

The Charity Commission’s new guidance suggests a widening autonomy for trustees to return donations where this is considered in the charity’s best interests. However, the guidance makes clear that the starting point is to keep donations, and any deviation from this must be rooted in objective, reliable reasoning rather than opinion and emotion. Decisions based on morality continue to require Charity Commission consent via the ex gratia regime. It will be interesting to see how trustees apply the new guidance in their decision-making, and we anticipate seeing more and more charities adopting a Gift Acceptance Policy or equivalent to allow them to deal with tricky situations.

For assistance in developing your donations policy or in considering whether or not you need to return a donation, please contact Samantha Pritchard [email protected] or 0191 211 7905.