Ex gratia payments: understanding your responsibilities and the changes expected from the Charities Act 2022 implementation

Trustees may encounter situations where they believe it is in the charity’s best interests to make payments without a legal obligation to do so.

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.

Current procedure

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 discusses 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 charity’s auditor or independent examiner.

Charities Act 2022 – When will the changes be implemented?

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 delated and the changes are now expected to come into force later in 2024.

Charities Act 2022 – what changes will be made to the ex gratia regime?

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.

What are the disclosure requirements?

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.