Everyone knows the story of the Trojan Horse: the Trojans accepted a large wooden horse as a gift without realising that enemy soldiers were hiding inside it, ready to cause havoc. If only the Trojans had read the Charity Commission’s latest guidance on internal financial controls for charities. In section 5 (particularly 5.1 and 5.2), the guidance recommends that charities adopt an internal policy on accepting donations. This is because a 'bad' donation can cause serious problems for a charity.

Donations can carry reputational and legal risks. For example, accepting a donation with suspicious origins or from an organisation with questionable motives can harm a charity’s reputation. Charity donations are also vulnerable to criminal schemes involving money laundering or tax evasion. The risks that donations can carry are set out more fully in the Institute of Fundraising’s guidance on accepting, refusing and returning donations, which also highlights the risk of accepting donations from vulnerable donors who may lack capacity to make a donation. (For further examples of these risks, see our May and December charities newsletters).

On the other hand, charities are obviously dependent on donations and trustees have an obligation to act in their charity’s best interests. It is therefore a complex and case-by-case decision whether to accept a donation. Some of the rules involved can be quite complicated – for example, charities should take tax advice on their potential income tax liability when donors try to obtain a financial benefit by making so-called ‘tainted charity donations’ (on which, see the HMRC’s guidance). Charity staff can also run the risk of criminal liability when dealing with cases of money laundering or the proceeds of crime.

This is why both the Charity Commission and the Institute of Fundraising recommend that trustees create an internal policy on donations, setting out the factors to take into consideration when taking decisions about donations and making clear who has the authority to take those decisions. They also give advice about keeping records of how decisions on individual donations are made, and about how to tell a donor if the charity is refusing or rejecting the donation. In the trickiest cases, the Institute of Fundraising guidance highlights that charities can seek directions about accepting donations from the Charity Commission.

In drafting a policy, trustees should also consider the Charity Commission’s guidance and tools on due diligence and monitoring. This emphasizes that trustees of all charities have the same legal duties but explains that they can take a ‘risk-based approach’ to how those duties are fulfilled, meaning that charities must carry out greater checks on donations which are 'more risky'.

The Charity Commission, Institute of Fundraising and HMRC guidance is detailed and trustees would be well-advised to read it in full. In summary, donations should not normally be rejected – a donation can only be rejected if there is a legal reason why it must be rejected (e.g. the donor did not have capacity or the donation is a proceed of crime etc.) or if it is in the best interests of the charity to reject it. Whether it is in the best interests of the charity to reject the donation ultimately depends on the financial and administrative impact that rejecting it will have. For example, a religious charity could not reject a donation simply because the donor does not follow that religion but may be able to do so if it can be shown that accepting the donation would mean that others do not donate or the charity would struggle to find volunteers or employees such that, overall, accepting the donation would make it more difficult for the charity to perform its functions.

Ultimately, decisions about donations are finely balanced so should be well-recorded and well-reasoned, preferably in line with a clear policy.

For further information on this topic, please see the Charity Commission, Institute of Fundraising and HMRC guidance linked above. If you have any concerns about accepting donations or would like assistance with drafting a donations policy, please feel free to contact Edwina Turner, Natalie Barbosa or anyone in the charities team for further advice.