New guidance clarifies when UK universities must refuse donations

Many higher education institutions (HEIs) receive substantial funds through donations from alumni or other donors – whether that be for new buildings, the creation of a chair, or scholarships and bursaries. Naturally, there is often internal pressure to maximise those donations, but they can come with significant risks. Even when those risks are properly managed at the outset, circumstances can and do change over time. When things go wrong, the trustees involved can find themselves trying to balance operational considerations, reputational risk and the requirements of charity law, often with no ‘good’ outcome.

The Charity Commission’s new guidance on this subject, while raising as many questions as it answers, does provide a useful prompt to reconsider what the relevant considerations are, and how HEIs can best avoid getting themselves into hot water.

The guidance endeavours to set out circumstances when charity trustees either must, or are likely to need to, refuse or return donations, and factors to take into account when making their decision.

It contains some useful pointers, and provides a helpful summary of the type of considerations that trustees should take into account when deciding whether it is in the charity’s best interests to refuse a donation. However, it should be approached with caution. In particular, it conflates the refusal and return of gifts and does not capture some of the complications and nuances which apply to the return of gifts. It also takes an approach to the question of a charity’s powers to return a donation which is a bit simplistic, and inconsistent with its previous advice, apparently without recognising this inconsistency.

Refusal of donations

The guidance summarises some circumstances in which refusal of a gift may be necessary, including where there is insufficient public benefit or non-incidental private benefit, the burdens outweigh the benefit, or acceptance would prejudice the charity’s independence.

For a HEI, this can be a particular issue in the context of gifts which create endowments, scholarships or other restricted funds to benefit particular groups, which may also require consideration from an Equality Act perspective. It is strongly advisable to include some flexibility around the purpose for which the gift can be applied, where it is possible to agree that with the donor.

There does, in our view, remain an expectation that refusal will only be justified in quite limited circumstances and that, ultimately, accepting the donation would be more detrimental than refusing it and any associated loss of opportunity that arises from that refusal. Potential reputational damage – such as public criticism, stakeholder reaction and impact on beneficiaries or other funders – is certainly a relevant factor in this assessment. However, it is important to be clear as to how any detriment is expected to actually impact upon the achievement of your charitable purposes and delivery of public benefit, rather than basing it on wider moral or ethical considerations which may not be directly relevant. It is also necessary to assess how likely the detriment is to arise.

All of this is, of course, predicated on having in place a robust due diligence process, so that the nature and seriousness of any risks arising from taking the donation, or from association with the donor, are properly identified and understood.

Returning donations

When a donation can properly be returned has long been a problematic question. The fact that the donation has already been accepted introduces additional complications which are not necessarily reflected in the Commission’s guidance, the key point being that it is now a charitable asset, and it can generally only be applied in support of the relevant charitable purposes. The exceptions to this general rule are where the charity has a legal obligation to return the donation – such as under the terms of the gift or in the case of a failed fundraising appeal – or the trustees believe they have a moral obligation to return the donation as an ‘ex gratia’ payment. Ex gratia payments in the context of the guidance are narrowly construed as payments made by a charity where, while the trustees believe they are under a moral obligation to make the payment, they are not under any legal obligation to do so, and cannot justify the payment as being in the interests of the charity.

The first question to determine, before considering the balancing exercise noted above, is whether there is a power to return the money. In the past – for example, in its guidance following the Presidents Club charity scandal, which has since been withdrawn – the Commission indicated that charities may well require its authorisation to return donations in some circumstances, which would be consistent with the need for consent in relation to ‘ex gratia’ payments.

In its latest guidance, however, it appears to suggest that charities can rely on a general ‘sweep up’ power, or a power to dispose of charity property, to authorise the return of a gift, meaning that Commission consent is not required. Whilst this arguably may be the case in certain circumstances, as a general proposition it is somewhat surprising and perhaps a bit simplistic. We would therefore advise caution in relying on it.

Assuming there is a suitable power, it is of course still necessary to determine whether using that power to return the gift would be an appropriate exercise of it. The bar is arguably higher than for a new gift, noting that it isn’t normally possible at this juncture to amend the terms on which the funds are held. Certainly, if the driver for return is the donor becoming unhappy with the use of the gift or problems in applying it for the specified purpose, which are both quite common in our experience, the remedy will generally be to explore means by which the aims could better be achieved, which may involve applying to amend the charitable purposes. In cases involving reputational issues, consideration could be given to other means of managing the risks, such as changes to naming rights, for example.

Ultimately, HEIs which find themselves in this unfortunate situation should consider seeking legal advice to ensure that they act within their powers and protect the institution and its trustees. This is a complex area, and each situation will have its own nuances. It is, in any event, important to ensure that decisions are properly documented and minuted, keeping in mind that, as ever in charity law compliance, demonstrating that the decision was properly made and the relevant considerations were taken into account is at least half the battle.

Co-written by Sinead Corcoran of Pinsent Masons.