2011 Article, updated November 2017
Is there a problem?
There are a number of charitable institutions that will not, as a matter of policy, make grants or gifts to entities that are not also recognised or registered as charities. This has always struck me as a possibly “over-the-top” approach, perhaps demonstrating some lack of sophistication in the screening of grant applications. Even if the donee is a registered charity, poor donation decisions can still be made which may cause trouble.
I believe there is nothing inherently wrong if a charity makes a gift, grant or donation to a non-charity as long as that gift, grant or donation is made and used for a charitable purpose. Of course, if the donee is not accepted as having “donee status” by the Inland Revenue Department (see below), the donor may not be able to obtain revenue advantages from the donation.
If a donor charity declines to give to any entity unless it is also charitable, that still begs the question of whether its gifts will actually be used for charitable purposes.
Analysing the issues
Problems can arise because of the uncertainties that arise after any gift, grant or donation is made. It is inescapable that those potential problems still exist even when money is given to a charity; every donee needs to be taken on trust that they will use the gift, grant or donation for the intended charitable purpose. In Audits or Review of Accounts I referred to the inherent limitations in any audit or verification process – “no auditor is able to supervise every transaction to ensure that money received does get banked, or to verify that goods and services referred to in an invoice have been provided.” Similarly, few donors will be present to verify that their donation is actually used for the intended charitable purpose, although some accountability report (as discussed below) may provide some reassurance.
Even if the gift is not used for a charitable purpose as a donor intended, does that mean that the donor is tainted by the failure to use the gift as intended? As discussed in an early article (Lessons from a Polytechnic), charities are, regrettably, regularly defrauded by those that govern them and by their employees but those frauds do not mean that the activities of the donee charity are any less charitable or that donors (including other charities) to those donee charities should be penalised!
Protecting the charitable donor
I believe there are some basic due diligence measures that can be taken by charitable donors, whether or not a potential or actual donee is a charity:
- First, the donor must assure itself that the intended charitable use falls within the charitable purposes of the donor’s constitution and charitable purposes. If not, the donor’s action (and the actions of its governance body) are vulnerable to criticism from the donor’s auditor, by the Charities Board, and (if the gift, grant or donation was challenged) by a Court. If the Board concluded that the actions in making the donation constituted “serious wrongdoing” (as defined in s 4(1), Charities Act 2005 – including “an unlawful or a corrupt use of the funds or resources,” “a serious risk to the public interest in the orderly and appropriate conduct of the affairs of the entity,” and “an act, omission, or course of conduct … that is … grossly negligent, or that constitutes gross mismanagement”) the donor’s charitable status could be in peril (by being removed from the Charities Register under s. 32).
- Second, the donor needs robust processes to verify that the intended gift, grant or donation will be used for the intended charitable purposes. Requiring that a detailed application form be completed and including in it a statutory declaration from a responsible officer of the donee is a good start. Then there needs to be a robust and properly documented assessment of applications, using some form of standard evaluation which includes some evaluation of the intended gift, grant or donation against the charitable purposes of the donor’s constitution.
- Third, there should be some form of accountability requirement with the donee or its auditor confirming that the gift, grant or donation has actually been used for the intended charitable purposes, with a detailed project completion form filled out and including a statutory declaration from a responsible officer of the donee.
For those governing the charitable donor, the ultimate test is whether a trustee has done enough (by exercising reasonable care and undertaking appropriate due diligence) to ensure that the gift would be and has been used for charitable purposes.
Donee status for revenue purposes
The Inland Revenue Department administers donee status, and a charity need not be registered with the Charities Board to obtain donee status. Individuals are entitled to tax rebates for donations to charities with donee status, while companies can claim a deduction for such donations.
Grants, gifts and donations may be made to charitable and non-charitable entities for charitable purposes, but:
- The IRD donee or registered charity status of the recipient alone should not be determinative of whether a contribution should be made, unless deductibility is important to the donor or the donor has adopted a policy of only making grants to registered charities because that policy affords it some protection from complaints or criticism,
- The charitable or non-charitable status of the donee is not relevant to whether a grant, gift or donation will actually be used for charitable purposes,
- Donor charities need to be satisfied that the recipient of their generosity will use their contribution for charitable purposes if that is the purpose of making the contribution, and
- Donors should insist on proper accountability reporting to ensure that any contribution made for charitable purposes is actually properly used for those purposes.