In Autumn 2022, the first wave of changes under the Charities Act 2022 are due to come into effect. Amongst these changes will be certain amendments to the ex gratia regime.
What is an ex gratia payment?
An ex gratia payment is a payment that cannot be justified as being in the interests of a charity, but which the trustees of the charity believe they are under a moral obligation to make.
An ex gratia payment is not to be confused with a payment to compromise a legal claim, because this is a payment that trustees of a charity are able to make, provided to do so is in the best interests of the charity and within their powers 1. (It is also not to be confused with a payment made by an employer to an employee where there is no entitlement, or disputed entitlement, to the payment, which is sometimes colloquially referred to as an ‘ex gratia’ payment).
What is the current position?
Under the Charities Act 2011, the moral obligation relating to ex gratia payments rests solely with the charity trustees and cannot be delegated away from them; the charity trustees must ‘regard themselves as being under a moral obligation’2 .
Currently, all ex gratia payments require the authority of Charity Commission, in order for the trustees of the charity to be able to make them. However, the Charity Commission has confirmed in its Operational Guidance that it would not interfere with “de minimis” payments: ‘where the proposed payment is a relatively small amount, say £1,000 or less, and the trustees have made the payment from a sense of moral obligation, but without authority, we are unlikely to challenge their decision’3 . (In practice some larger charities have set a higher de minimis threshold than the £1,000 example given by the Commission, albeit one which still represents a relatively small amount relative to the charity).
What is changing?
Charity Commission consent will no longer be needed for charity trustees to make ex gratia payments below certain thresholds:
- a) if the charity’s gross income in its last financial year did not exceed £25,000, the relevant threshold is £1,000;
- b) if the charity’s gross income in its last financial year exceeded £25,000 but not £250,000, the relevant threshold is £2,500;
- c) if the charity’s gross income in its last financial year exceeded £250,000 but not £1 million, the relevant threshold is £10,000;
- d) if the charity’s gross income in its last financial year exceeded £1 million, the relevant threshold is £20,000.’4
Charity trustees will now be able to delegate decisions relating to ex gratia payments; the moral obligation is being recalibrated to: ‘in all the circumstances [the charity trustees] could reasonably be regarded as being under a moral obligation’5 . This will allow for persons who are not the charity trustees themselves, such as staff within a charity, to consider whether there is a moral obligation for the payment to be made. However, even if decision-making is delegated, charity trustees will continue to hold ultimate accountability for ex gratia payments.
The ability for charity trustees to delegate ex gratia decisions will be a welcome development for most charities. However:
a) despite cutting administrative red tape for the trustees, the change could bring with it a downside in some situations; where totals fall below the new thresholds, charities will no longer be able to point to a need for (unlikely) Charity Commission approval to deflect ex gratia requests which lack merit or evidence; and
b) charity trustees will need to consider what appropriate authority levels and limits should be attached to delegated ex gratia powers. They will also want to ensure there are mechanisms in place to allow them to maintain oversight over delegations, given they themselves retain ultimate responsibility for ex gratia payments.
It is also important to bear in mind what is not changing as a result of the Charities Act 2022:
- ex gratia payments which exceed the prescribed thresholds will still require Charity Commission consent; and
- the ex gratia regime is not being widened so as to capture payments to settle a legal claim. Such payments remain outside of and separate to it, usually only on the basis of legal advice.
For further information, please contact:
Philip Reed, Partner, Withersworldwide
Hugo Walford, Withersworldwide
1. See E4 of the Commission’s Operational Guidance: https://ogs.charitycommission.gov.uk/g539a001.aspx
4. https://www.legislation.gov.uk/ukpga/2022/6/section/15/enacted 5.https://www.legislation.gov.uk/ukpga/2022/6/section/16/enacted