While charities will usually accept any donation offered, it’s important to understand whether a donation is restricted or unrestricted. If a donation is refused or returned, it’s important to make sure this is done correctly and for the right reasons. This article provides a useful introduction to trustees on these issues.
Identifying the types of funds you accept
There are two types of funds that charities are offered – restricted and unrestricted.
Understanding restricted funds
Restricted funds create a legally enforceable trust and can only be used for the purpose for which they were donated. An example of a restricted fund is a permanent endowment, which may cover land, investments or other assets of the charity.
- Restricted funds must be separately accounted for
- Often, each restricted fund will be registered as a separate charity – each of these specific, smaller, charities will sit within an overarching charity (these are also known as ‘linked charities’)
- If you’re in doubt about restricted funds you should seek advice.
Understanding unrestricted funds
Non-restricted funds can be used for anything within the objectives of the charity. As far as possible, charities should encourage the donation of non-restricted funds.
- If a donor wants to express a wish for a fund to be reserved for a certain use, they can make a ‘designated’ donation, where their wishes do not create a binding obligation.
Why a donation might be refused
Donations should not usually be refused. However, there may be circumstances where this is necessary, for example:
- The donor places unreasonable restrictions on the use of the funds
- There are ethical conflicts with the ethos of the charity
- The donation could be construed as a ‘facilitation payment’: e.g. if you’re an NHS charity and the donation is offered subject to a patient being given priority for a scan.
How to return donations
Any payment made to return a donation is known as an ‘ex gratia payment’. However, you should get Charity Commission approval before returning any donation. The Charity Commission will want to be assured that the trustees are under a ‘moral obligation’ to return the donation.
This article was kindly contributed by Aviva’s international law firm partner DAC Beachcroft’s Charities & Not-for-Profit practice.
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