Guidance

Grant funding an organisation that isn’t a charity

Find out what trustees need to do before deciding whether to make a grant to an organisation that isn’t a charity.

Introduction

Charities can further their purposes by making grants to other organisations. This guidance explains what you need to do if you are considering a grant to an organisation that isn’t (or may not be) a charity.

The principles in this guidance are relevant to any charitable grant-giving. If you only want to fund other charities, see also the Commission’s guidance: Work with other charities.

Grant-funding an organisation that is not a charity

Grant-funding can create opportunities for charities to further their purposes by reaching individuals or communities that they might not otherwise be able to reach. It can benefit causes or groups which may otherwise struggle to obtain the support they need.

This can include making grants to:

  • other charities with similar or overlapping purposes
  • organisations that aren’t charities including social enterprises, campaigning organisations, commercial companies or public sector bodies
  • organisations based overseas

Making grants to organisations that aren’t charities may present new opportunities to further your charity’s purposes. Grants can be for specific activities or services or, in some cases, to develop the organisation’s capacity to deliver activities or outcomes that will further the charity’s own purposes. Remember though, that organisations which aren’t charities don’t have to deliver public benefit or comply with charitable purposes, and may be unfamiliar with charity law requirements.

So you need to understand the relevant risks and boundaries, as well as the opportunities, before you start. Any grant your charity makes must only be used to further or support your charity’s purposes, and for no other purpose. This means there will always be limits and conditions on what you can fund.

The key steps and considerations

What to consider when deciding to award a grant (infographic)

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Before you decide to make any grants, you should:

  • make sure you understand your own charity’s purposes
  • make sure you understand and follow trustee decision-making principles
  • put in place appropriate systems and procedures for making decisions about grants

Before deciding to make a grant to a particular organisation, you should:

  • consider whether that organisation is a charity or not
  • take reasonable steps to assess risks and carry out appropriate checks on the organisation to ensure that it is suitable for your charity to work with
  • be aware that trustees remain responsible for grant decisions even if decisions are delegated, and understand where extra care may be needed

When giving a grant to another organisation, you should:

  • write appropriate terms and conditions to ensure that the grant can only be used in line with your charity’s purposes, and ensure that the organisation understands and accepts them
  • put appropriate monitoring arrangements in place
  • know what to do if things go wrong

This guidance gives more detail on how you should do this.

Find out more: It’s your decision (CC27) – a guide to trustee decision-making

Understand your charity’s purposes

You and your co-trustees must make sure that everything your charity does helps (or is intended to help) to achieve the purposes for which it is set up, and no other purpose.

A charity’s ‘purpose’ is what it is there to achieve. As trustees, you must ensure that your charity is carrying out its purposes for the public benefit. You must also act in your charity’s best interests and act with reasonable care and skill. These legal duties are relevant to a decision to make a grant to another organisation (whether it is a charity or not). Any grant you make must be for activities or outcomes that will achieve your charity’s purposes.

It is vital to be clear about, and make sure the recipient understands and agrees, what the grant can and can’t be used for.

You should also check that your charity’s governing document doesn’t prevent you from funding organisations that aren’t charities - occasionally there are specific prohibitions.

Find out more: The essential trustee (CC3)

Put appropriate systems and procedures in place

Charities that make grants should have appropriate and proportionate systems and procedures in place to:

  • allow trustees to set priorities for funding (which they can change or depart from at their discretion)
  • require sufficient detail in the grant application, and monitoring procedures, to enable the trustees to identify and assess risks and make informed decisions
  • enable the charity to carry out appropriate due diligence on organisations applying for grants
  • ensure grants are authorised by the trustees, or within a framework of delegation that ensures appropriate oversight and scrutiny

Consider whether the other organisation is a charity or not

Before deciding whether to make a grant to another organisation, you should consider whether it is or is not a charity. Don’t assume that an organisation with similar purposes or activities to your charity is a charity.

If an organisation in England or Wales is a charity it should be able to show that it:

  • is registered with the Commission and has a charity number, or
  • is exempt or excepted from registering with the Commission

Some types of charity don’t have to register with the Commission.

A charity in England or Wales that doesn’t have to register may be able to show that it is recognised as a charity by HMRC. It should have a copy of the letter provided by HMRC to say it is recognised as a charity.

For a grant to a charity, you should still be mindful of the principles in this guidance.

If you are not sure whether an organisation is charitable under the law of England and Wales, you should follow this guidance.

Some organisations, for example community interest companies, are not charities, and you should follow this guidance if making grants to them. Although there are restrictions on how their assets can be used, these restrictions do not guarantee that their assets will only be used compatibly with your charity’s purposes. Find out more:

Risk assessment and assurance

All grant-making involves a degree of measured risk-taking. For example, any grant may fail to deliver the intended outcome.

Before you and your co-trustees commit to making a grant to another organisation, you should carry out an appropriate risk assessment.

You must avoid exposing your charity to undue risk. It’s vital to identify and consider risks in relation to a particular grant proposal and respond to them proportionately, as risks will vary in their significance from case to case. Areas of risk to consider include operational (delivery), reputational and governance risks as well as financial ones including exposure to financial crime or tax liability.

You and your co-trustees are responsible for deciding what level of risk-taking is appropriate, responsible and reasonable for your charity in the circumstances. Use your assessment of the risks to help you make your funding decisions.

Assurance

You should also carry out appropriate checks to assure yourself and your co-trustees that:

  • the organisation is genuine, reliable and competent to carry out the activity being funded
  • the organisation is suitable for your charity to work with and fund
  • you will be able to check and confirm that your charity’s funds have been properly used in line with its purposes
  • you have identified and managed any exposure to risks such as fraud, financial crime, extremism or terrorism
  • in all the circumstances, awarding the grant is in the best interests of your charity

This process is described as due diligence in Commission guidance. It is also known as assurance. You will need to decide what level of assurance or due diligence is appropriate, taking account of the level of risk to your charity’s assets, beneficiaries or reputation. It may include assessing:

  • the ‘mission fit’ or match between the organisation’s aims and your charity’s purposes and interests
  • the organisation’s track record for delivering the activities you are planning to fund
  • its governance and constitutional form
  • its reputation
  • the full scope of its operations and any conflicts with your charity’s purposes, activities, funding, or other interests

You should evaluate the need for due diligence checks, and how extensive those checks are, even if you think you already know an organisation quite well.

You should carry out additional checks during the course of the funding relationship if you identify any risks that are significant or have materially increased.

Deciding to award a grant

Awarding any grant is an important decision.

Follow and apply the principles in the Commission’s guidance on trustee decision-making, which explains that the approach described should be adopted generally when making your decisions, and particularly closely when making significant decisions.

If you and your co-trustees delegate decision-making, you remain responsible for the decision that is made. You should supervise delegated authority through appropriate policies and reporting procedures.

High risk and unusual decisions should not normally be delegated. You should consider carefully whether it is appropriate for your charity (given its size, complexity and nature of its operations) to delegate decisions about funding an organisation that is not a charity. You should set guidelines to help assess what is likely to be high risk or unusual.

Trustees are responsible for deciding what level of scrutiny and discussion are appropriate in the circumstances. The Commission, the charity’s funders, supporters, or beneficiaries may ask you to explain and justify a decision.

Limits on funding organisations that are not charities

A charity can grant fund the support costs of activities, services or outcomes delivered by another organisation that is not a charity, provided these are intended only to further the charity’s own purposes. The charity must not fund any costs which are outside its purposes.

An organisation that isn’t a charity is not restricted by charitable purposes or public benefit. For a charity, which is subject to these restrictions it means that it can only fund activities, services or outcomes of a non-charity that are intended to further the charity’s purposes for the public benefit.

Therefore, when making a decision to grant fund an organisation that is not a charity, you must ensure that:

  • the grant is only for activities, services or outcomes that will further your charity’s purposes for the public benefit
  • any funding of support costs is limited to the specified activities, services or outcomes
  • the terms of the grant require the recipient to comply with these restrictions
  • the grant does not give rise to more than incidental personal benefit
  • you and your co-trustees can justify your decision as being in your charity’s best interests

These principles also apply if you intend to provide a grant to develop an organisation’s capacity. You and your co-trustees must take steps to ensure that the grant is only used to develop capacity to deliver activities, services or outcomes that fall within your charity’s purposes for the public benefit and for no other purpose, and that any personal benefit is incidental.

All your grant-making decisions must be made solely in your charity’s best interests. You should be able to explain and justify your funding decisions.

Setting the terms of the grant

You should explain to the non-charity in writing how the grant can be spent, which must be in line with your charity’s purposes. The written statement should also set out the time period for the delivery of the activities, services or outcomes that you are funding.

And you should cover other terms and conditions that you and your co-trustees decide are appropriate depending on the value of the grant and your assessment of the risks, such as:

  • your requirements for receiving reports from the recipient organisation on how they have spent the grant; whether this is a single report at the end of the grant period or whether you will need interim reports
  • what records you need to see regarding the use of the grant, for example invoices
  • what independent monitoring arrangements you intend to put in place (see the next section)
  • what will happen (for example, if you will enforce repayment) if the terms and conditions are breached
  • what will happen if the organisation can no longer carry out the terms of the grant
  • whether your terms should include appropriate protection of your charity’s intellectual property rights and reputation

In the case of a small grant where you are satisfied that the risks are low, a letter or short agreement may be sufficient. In other cases, you may need a more detailed agreement: you should consider whether you need to take professional advice on preparing the document.

Monitoring

You and your co-trustees need to consider what monitoring arrangements are appropriate and proportionate depending on the value of the grant and your assessment of the risks.

For example, will you carry out your own independent monitoring or rely only on reports from the recipient?

There should be an appropriate level of monitoring for every grant, even if it seems obvious that it will further your charity’s purposes. The recipient may carry out other activities that your charity can’t support. It may have a limited understanding of charitable purposes or what activities your charity can and can’t fund.

You need to be satisfied that your charity’s funds were actually used for the purposes given.

Find out more: due diligence and monitoring

Situations where extra care and scrutiny are needed

Charitable purposes

Trustees must satisfy themselves that the activities or services they fund are proper ways of furthering their charity’s purpose for the public benefit.

Many charities have purposes which can be carried out by other organisations in ways that are not for the public benefit. It’s not always easy to identify whether activities meet public benefit requirements, for example, community development or promoting human rights. If you are planning to fund activities to advance these purposes in particular, read the Commission’s guidance and take advice as appropriate:

For guidance on other charitable purposes, see Reviews of the register

Activities

Some activities, such as political campaigning, are only permissible within certain limits for charities. Find out more: Campaigning and political activity guidance for charities (CC9)

Activities taking place overseas and in particular parts of the world involve specific risks.

Find out more: How to manage risks when working internationally.

You also need to be aware of HMRC rules about charitable and non-charitable expenditure. HMRC would consider the following (for example) to be non-charitable expenditure, which might affect your charity’s exemption from tax:

  • expenditure which isn’t incurred for charitable purposes only
  • any payment to an overseas body where the charity hasn’t taken reasonable steps to ensure the payment will be applied for charitable purposes
  • any investment or loan made by the charity which isn’t a qualifying investment or loan

Some grants will be taxable, even if they are received from a charity and a non-charitable recipient may be liable to pay tax on the grant.

Find out more: HMRC guidance on non-charitable expenditure

If things go wrong

It is impossible to eliminate all risk.

Some grants will not work out as planned and may not deliver the planned outcomes. You and your co-trustees need to be able to explain and justify decisions that you have made.

If something goes wrong, take appropriate action to minimise any financial loss or harm to the charity’s beneficiaries or assets, including its reputation. This may include suspending or withdrawing funding or requiring repayment under the terms and conditions of the grant. Depending on what has gone wrong, plan how you will respond to questions from your staff, volunteers, members, donors, the public or the media.

If it is a serious incident (or you think it is a serious incident), you also need to report the incident to the Commission. A serious incident is an adverse event, whether actual or alleged, which results in or risks significant:

  • loss of your charity’s money or assets
  • damage to your charity’s property
  • harm to your charity’s work, beneficiaries or reputation

If a serious incident takes place, you need to report to the Commission what happened and explain how you are dealing with it.

Find out more: How to report a serious incident in your charity

You may find the following material helpful in explaining, in further detail, guidance mentioned here:

Published 17 February 2016
Last updated 11 August 2017 + show all updates
  1. This guidance has been updated to help you decide whether to make a grant to an organisation that isn’t a charity.
  2. First published.