Many UK faith-based charities are both supporting and supported by individuals and organisations whose work and philanthropy crosses borders. For example, a UK donor wishes to direct their donation to support a project in Ukraine run by a French charity.
By donating directly to the French charity, there are challenges over tax efficiency of the donation; for example, an inability to conduct due diligence over the project or charity, and reduced ability to have influence over the use of the funds. The UK donor is looking to work with a UK charity they trust to collaborate over funding projects abroad in a meaningful and tax-efficient way.
Some charities have offered donors the ability to structure their donation as donor-advised funds (DAFs). This gives the donor the right to have influence over the use of the funds but at the same time enables the charity to potentially benefit from gift aid and to work closely with donors to enable the charity to meet its strategic objectives through the projects supported.
The model works well provided the donations are of an appropriate scale and both donor and charity share a common understanding of the intended use of the funds.
There are a number of factors to consider. Although this form of donating is rapidly growing and is very effective, recipient charities must ensure compliance with the Charities Act and relevant HMRC regulations.
Key considerations
Charity law
The donation (be it cash or other assets) is still a donation from a UK donor to a UK charity and therefore the policies and procedures to accept a donation need to be followed and include:
- Knowing your donor and performing anti-money laundering and source-of-funds checks.
- Checking for conflicts of interest that may occur between the donor and the charity or the donor and the final project.
- Consideration as to whether the donor’s expectations can be met.
In many respects, this form of donating is no different to restricted fund donations, however the time horizon for the use of such funds might be more protracted and the instructions over use might be more influenced over such time by the donor.
While the charity will cultivate a relationship with the donor, it should maintain an appropriate degree of separation to safeguard compliance and preserve the integrity of the relationship.
HMRC
Tax regulations stipulate that for a charity to be exempt from tax on its income, that income must be used for relevant, appropriate charitable purposes and evidence of this must be retained.
The relevance of this to DAFs is that to enjoy the exemptions and reliefs available to charities, the projects funded need to be in line with the charity’s legal objects. I would extend this to being consistent with the strategy of the charity.
If projects selected are outside of the charity’s strategy but still in line with the legal objects of the charity, the trustees will need to record the reasons as to why this is in the best interests of the charity.
Many overseas projects that are funded from DAFs are often connected to emergency appeals. This can make normal due diligence and adherence to policies over matters such as procurement more challenging.
Consideration needs to be made as to whether the charity is positioned to adhere to its own policies through partners before accepting DAFs. Flexibility can be made for specific circumstances and constraints but the basic checks over whether or not the amounts granted to partners are used in a way that achieves the project’s documented objectives are imperative.
I am very much a fan of DAFs as a fundraising strategy as it brings the donor closer to the project and is attractive to donors from both a tax and philanthropic perspective.
What is crucial is that the charity remains close to both the donor and the funded projects/NGOs. Breaches resulting from the inappropriate use of charitable funds can have serious consequences.
Therefore, strong governance, well-defined procedures, thorough documentation with both donors and funding recipients, and appropriate due diligence are essential.
Many charities take advice prior to accepting DAFs. Internal audit is a good resource both in the UK and overseas to ensure risks are managed and compliance ensured.
Adam Halsey is partner, head of care, community and housing at HaysMac
