Should you ever reject a donation to your charity? If so, why? And when would it be important to do so?
These are questions that charity finance and trustee teams should be able to answer, especially when considering whether to accept ‘conduit funding’.
Pete Marfleet is a verified ExpensePlus consultant and bookkeeper. In this blog post he explains how ‘conduit funding’ is a source of funding that you need to be aware of and quickly identify. Then you can avoid the potential pitfalls associated with it.
What is ‘conduit funding’
Conduit funding is money that is channelled through a charity but doesn’t actually belong to the charity. Not all money that is deposited into a charity’s bank account legally belongs to the charity.In order for a donation to belong to the charity, the money must be given with the transfer of ownership from the donor to the charity, without the donor receiving anything in return. However, if a donor gives a gift to a charity with instructions dictating what the charity must do with the funds, without giving the trustees any discretion, then the charity does not become the full owner of the funds. The charity simply acts as a conduit to the ultimate recipient.
This is different from restricted donations. These have narrower limits on their use than the charity’s overall purposes, but allow trustees leeway in spending them. If you have restricted income, you must handle it differently to unrestricted gifts, which this blog post explains further.
Examples of different types of donations
To help us understand conduit giving, let’s look at 3 different examples of donations a charity might receive.
Example 1 – unrestricted gift
A church member attends the Sunday service and responds to the normal Sunday offering. They put £10 in the basket that’s passed around. The offering is used for the ongoing work of the charity.
In this example, it is clear that the donor has made a gift without any restrictions. This gives the trustees total freedom to use it for the charitable aims of the church. This is an unrestricted gift to the charity.
Example 2 – restricted gift
A church member attends the Sunday service and responds to a special offering. The member donates £500 towards this special offering. The donations are being collected for a new social action project launched by the church.
In this example, the donation is given as a gift to the charity, but with a restriction. It must be spent on the social action project. Crucially, the trustees still have some flexibility in how they use the gift, although within a narrower scope than an unrestricted gift. This is a restricted gift to the charity.
Example 3 – conduit gift
A church member approaches the church pastor with a £1000 cheque made out to the church. The donor requests that the funds be passed on anonymously to a non church member who attends the social action project as a client. The church member has become aware that this person is in financial difficulty. They need help to replace their broken boiler before winter.
In this example, while a genuine need is identified, the donation is actually a gift from the member to the person in need. The church is acting simply as a conduit for the gift. The trustees do not have any leeway or discretion in how the money is spent. This is a conduit gift.
Implications of conduit funding
Claiming Gift Aid on donations
Conduit funding has several implications and potential pitfalls to be aware of, with the main one being Gift Aid. There are several underlying principles you need to consider when determining whether a donation is eligible for claiming Gift Aid. These principles include:
- The sum of money must have been paid to the charity in such a way that the funds are given to the charity.
- The funds gifted must be used by the charity for its own Charitable Purposes.
If you consider the three examples above, in examples 1 and 2 the funds would be eligible for Gift Aid. Of course, only as long as a Gift Aid declaration was signed by the donor. This is because a gift was given to be used for the charity’s charitable purposes. But in example 3, although ‘relief of poverty’ may be a charitable aim of the church in this case, the donation was not actually given to the charity. Therefore any Gift Aid claimed would have been illegal.
Income and expenditure
In addition to the implications of illegally claiming gift aid, funds received through conduit funding arrangements have year end reporting implications. All conduit funding should be excluded from the charity’s own income or expenditure in the Statement of Financial Activities.
Learn more about what counts as income for your organisation in this blog article.
When is it OK to act as a conduit for donations?
As a general rule, conduit funding should be discouraged. However, there are occasions when a charity may choose to act as a conduit.
For example, a charity may be in a position to raise funds for a particular cause, but another charity is in a better position to use the funds raised. This is often the case when responding to overseas disaster relief. The funds raised are passed on to a charity operating in the country affected.
Conduit funding checklist
Having identified a potential conduit funding situation, the trustees of a charity should only allow it if they are prepared to argue their case if challenged. They should use the following questions to help form a decision on any gift being passed to third parties:
1. Identify Conduit Funding:
When people are giving to a specific project, was the gift in response to an appeal made initially by the charity, or did the idea originate from the donor? If it is in response to a charity appeal, this will be a restricted gift. But if the idea originated from the donor, the charity is likely to be acting as a conduit.
2. Gift Aid:
Is the charity acting as a conduit or do the funds become its own income? If it is acting as a conduit, then Gift Aid must not be claimed.
3. Charity Aims:
Do your charitable aims and objectives extend to allowing you to act as a conduit? Does acting as a conduit in this situation add benefit to you achieving your charitable aims and objectives? If not, then the charity cannot act as a conduit.
4. Identifying other risks:
Is there a risk of money laundering? Trustees should be aware that increasingly charities are being targeted to launder money. The risk of unwittingly being involved should not be overlooked. Trustees should take reasonable steps to make sure they know the identity of the recipient. They should also check that the funds will be spent on the intended charitable purpose of the gift. This is particularly important when charities are sending money to other countries.
If unsure about what to do, trustees should ask for advice. Independent examiners and accountants are there to support their clients with their accounts.
Find out more about conduit funding
This blog only scratches the surface of the subject of conduit funding. It’s not meant to be exclusive or all-embracing. I highly recommend Stewardship’s in-depth article ‘When a charity’s income is not its income’. It’s essential reading for all finance teams and trustees.
Pete Marfleet is a verified ExpensePlus consultant and bookkeeper. He offers a range of cost-effective services, from outsourced bookkeeping and ExpensePlus training, to project managing the migration of your current accounting systems to ExpensePlus. Don’t hesitate to reach out to Pete at www.pdmarfleet.co.uk for more information.