This is the third in our series of articles designed to provide you with practical guidance on the key changes under the Charities Act 2022 and, crucially, how they will affect you in practice.
In this article, we focus on changes to the new powers available to charity trustees to apply funds from failed appeals towards other charitable purposes.
For a general introduction to the Act, please see our article Charities Act 2022: a practical introduction for charity trustees.
What is a failed appeal?
A failed appeal is a fundraising appeal for a specific project or purpose where either:
- you have not raised enough for the intended project or purpose (an appeal failure); or
- you have raised more than you needed (surplus funds).
Whilst it might seem counterintuitive to think about raising more than you need as ‘failure’, both of the above scenarios give rise to some legal issues, because the result is that you are holding funds that were donated for a specific purpose but cannot be used for that purpose. In those circumstances, the legal question that arises is: what can you do with the funds?
Why is a change in law needed?
The current legal position is complex and is intended to protect the wishes of donors. The basic principle is that if funds are given to charity for a specific charitable purpose, they should be used for that purpose. So, there are very strict rules about the circumstances in which the funds may be used for some other purpose. These are known as ‘cy près’ occasions (the term cy près simply means that funds are applied “as near as possible to the donor’s intentions”).
In cases of appeal failures, it is necessary to establish a “general charitable intention” on the part of the donor in order for a cy près occasion to arise. Unless the fundraising “ask” makes it clear that the funds will be used for other purposes if the appeal fails, it can be very difficult to satisfy this requirement. In practice it is very common for fundraising appeals to relate solely to a specific project, as many donors like to know that their donations will all go towards a purpose they wish to support (the lack of willing donors towards charities’ core costs is a recognised issue within the sector).
Where a general charitable intention cannot be established, the charity trustees may only apply to the Charity Commission for a scheme to permit the funds to be used for other similar purposes in specific circumstances (see the table below for details of the current rules).
In contrast, it is not necessary to establish a “general charitable intention” in respect of surplus funds. It does not matter whether or not the fundraising ask made it clear that surplus funds would be used for other purposes in order for a cy près occasion to arise.
In respect of both appeal failure and surplus funds, it is necessary to apply to the Charity Commission for a scheme before the funds in question may be applied for some other purpose. This results in an administrative burden both for charities and for the Charity Commission.
What has changed?
The rule requiring the establishment of a general charitable intention in respect of appeal failures has not been removed, as it was felt that this would go too far in overriding donors’ wishes. However, two key changes are made under the Charities Act 2022:
- The circumstances that apply in cases of appeal failure have been simplified.
- A new statutory procedure has been introduced to avoid the need to apply for a Charity Commission scheme in respect of funds arising from both appeal failures and surplus fund situations.
Initial failure
Under the new rules, it will be possible to apply funds for other similar purposes in four specific circumstances, and the following table illustrates the changes to the current regime:
Key Contacts
| Current Rule | What is changing under the new rules? |
|---|---|
| Where the donors of funds cannot be identified or found after a period of three months has elapsed after prescribed adverts are published and inquiries are made (subject to a right for the donor to claim the funds within six months of the date of the scheme) | Replaced with new rule: Where reasonable steps, as agreed in advance with the Charity Commission, have been taken to contact donors to offer to return funds, and donors cannot be identified or found |
| In certain circumstances where donors disclaim their right to receive the funds back | Deleted – no longer applicable |
| Where funds have been donated using a method where it is impossible to distinguish individual donations, such as cash collections, proceeds of lotteries, or similar activities | Unchanged – remains as per current position |
| Where the court or the Charity Commission considers that it would be unreasonable, having regard to the amounts likely to be returned to donors, to incur expense with a view to returning them, or that it would be unreasonable (having regard to the nature, circumstances and amounts of gifts and to the lapse of time) for the donors to expect the funds to be returned | Unchanged – remains as per current position |
| N/A | New rule which applies unless at the time of giving the gift the donor states in writing that the gift must be returned if the specific charitable purposes fail: Where the donation is small (£120 or less) and the charity trustees reasonably believe that during that financial year the total amount given by the donor to the charity for the specific charitable purposes is £120 or less |
New statutory procedure
Under the new rules, where one of the four new circumstances applies in cases where insufficient funds are raised (i.e. initial failure), or where there are surplus funds (in cases of subsequent failure), it will no longer be necessary to apply to the Charity Commission for a scheme before the funds may be applied for another purpose. Instead, the Charities Act 2022 introduces a new power for charity trustees to pass a resolution by simple majority to apply the funds for another purpose.
In exercising the power, charity trustees must have regard to the following:
- The desirability of securing that the purposes for which the funds are applied are, so far as reasonably practicable, similar to the specific charitable purposes for which the funds were originally given.
- The need for the purposes to be suitable and effective in the light of current social and economic circumstances.
The above considerations are the same as the new “similarity considerations” that the Charity Commission will apply under the new procedure for amending charitable objects in governing documents (see our article on this topic for further details).
In respect of funds (of £1000 or less) the resolution will be immediately effective. In all other cases, it will be necessary to submit a copy of the resolution to the Charity Commission and wait for written consent before the resolution takes effect.
What does this mean in practice?
In practice, the new rules should streamline and simplify the process by which proceeds from failed appeals may be applied for other purposes. The key points to remember are as follows:
- In respect of any fundraising appeals where you informed donors at the time of their donation that if insufficient or surplus funds were raised, the funds would be applied for other purposes, you may do so without the need to take any other steps.
- In all other cases, the following applies:
- If your fundraising appeal has not raised sufficient funds for the intended purpose (initial failure):
- You need to identify any small individual donations (£120 or less) and any donations from cash collections, lotteries or other means where it is impossible to distinguish individual donations. You do not need to take any steps to try to contact the donors in respect of these funds.
- In respect of all other donations, you need to agree specific steps with the Charity Commission and then take those steps to try to identify individual donors to offer them their funds back, or request that the Commission makes an order that it would be unreasonable for you to do so.
- If your fundraising appeal has made surplus funds (subsequent failure) then you do not need to take any steps to contact donors to offer the funds back.
- Once you have identified the funds available from a failed appeal to be applied for other purposes, the charity trustees may pass a majority resolution to apply those funds for other purposes, having regard to the importance of applying the funds for similar purposes whilst taking into account prevailing social and economic circumstances.
- In respect of funds from failed appeals amounting to £1000 or less, you may immediately apply the funds for the new purpose once the resolution has been passed. In all other cases, you need to file the resolution with the Charity Commission and wait for written consent before you may use the funds for the new purpose.
- If your fundraising appeal has not raised sufficient funds for the intended purpose (initial failure):
It is not possible at this stage to provide any further practical guidance on the process, given the involvement of the Charity Commission in two key stages: agreeing the steps to be taken to identify donors and providing written consent to resolutions in respect of larger funds. We will need to await new guidance from the Charity Commission regarding the processes and policies to be implemented to give effect to these new rules.
At Birketts, our dedicated Charities Team is available to support you in complying with the rules regarding failed appeals, both under the current rules and once the changes under the Charities Act 2022 come into force. Please get in touch with Liz Brownsell (Partner and Head of Charities) or another member of the Birketts Charities Team to discuss your requirements.
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at April 2022.