Mark Greer

Mark Greer

Managing Director, Giving and Impact

Charities Aid Foundation

Can a donor advised fund make a donation to a non-UK charity?

4 February 2021

Money contributed to donor advised funds (DAFs) such as CAF has had UK tax relief, and often Gift Aid, claimed on it and as such has to remain compliant with UK charity law and HMRC guidance that govern how charitable funds may be used.

In short, DAFs can support non-UK charities however, the DAF provider has to carry out due diligence on every payment and the consequences of doing this incorrectly can be severe. The HMRC guidance can be found in Annex ii (see section 9) of their detailed guidance notes for charities.

Many people assume that it is acceptable to make payments to beneficiaries that are registered as charities in their home country, however HMRC states:

“It’s not sufficient for the charity [DAF] to simply establish that the overseas body is a charity under the domestic law of the host country. Nor is it enough to keep records of how things are spent. These are important but for overseas payments trustees must do more”.

One of the big advantages of managing your giving through a DAF is that it is the DAF’s trustees who carry the responsibility of complying with charitable law and regulatory requirements and many DAFs like CAF employ specialist teams to carry out this work.

What does the DAF have to do?

The DAF must demonstrate to HMRC that it has taken reasonable steps to ensure that the payment is used for charitable purposes as defined by UK law.

The guidance states that: 

“Trustees are required to carry out appropriate research in relation to the overseas body, followed by monitoring and evaluation... The charity trustees must be able to describe the steps they take, explain how those steps ensure charitable application of funds, demonstrate that those steps were reasonable and produce evidence that the steps were, in fact, taken.”

DAFs have to be able to provide HMRC with evidence of:

  1. The UK charitable purpose for which each payment was given
  2. How the decision to make the payment was arrived at
  3. Measures taken to ensure the beneficiary was obliged to use the payment for the purpose for which it was given, for example a legally binding grant agreement
  4. An assessment of the financial controls in place at the beneficiary as well as financial records, audit trails and governing documents
  5. Monitoring and oversight that ensured the payment was used for the agreed purpose
  6. An assessment of risks relating to connections between the beneficiary and other organisations
  7. An assessment of risks relating to projects operating in remote areas, if relevant. For example ensuring that payments are held in properly operated bank accounts by authorised persons.

How easy is the process?

Addressing the fundamental question of whether a foreign charity will use a donation in a way that is charitable as defined by UK law is often fairly straightforward due to the UK’s broad definition of charitable purpose. The DAF must carry out and record its assessment in a robust way but this is rarely where issues arise.

Sometimes the practicalities of working with non-UK charities can present a challenge particularly when governing documents and financial records require translation. Many charities are able to provide the required supporting documentation quickly but some smaller organisations are not. This sometimes causes delays that are outside of the DAF’s control.

Point 3 above can present a challenge where the charity could be compliant with its home jurisdiction’s laws but use the DAF’s donation in a way that would not qualify as UK charitable expenditure, this is dealt with by putting in place a legally binding grant agreement. In addition DAFs have to take into account other scenarios for example the beneficiary becoming insolvent. In the event of insolvency most, but not all, jurisdictions have safeguards that ensure a charity’s assets may only be used for charitable purposes but most DAFs will seek to assure themselves that their funding will be protected from non-charitable use in the event of the beneficiary becoming insolvent, usually through an assessment of the beneficiary’s governing document and the domestic law that would govern the insolvency.

Points 6 and 7 above present particular challenges. If the DAF knows that the beneficiary it pays to will pass on funds to other organisations then in order to comply with HMRC guidance most DAFs will perform equivalent due diligence on those other recipients. By its nature a lot of foreign charitable funding goes to groups that work in remote and impoverished areas. It is vital that charitable funding can flow to these areas but HMRC requires that “properly documented systems should be put in place if necessary” to manage the risk associated with funds being used in regions with poor banking systems or where language literacy could be an issue.

What happens if it goes wrong?

If the evidence outlined in points 1-7 above cannot be provided to HMRC then the grant payment would be unlikely to qualify as charitable expenditure. In this event the DAF would be subject to a tax charge of 20% of the value of the grant.

What about repeat payments?

The principle behind the guidance is that each payment should be assessed in its own right. HMRC does allow some flexibility, for example for a grant agreement that has multiple payments all of which are governed by the same legal agreement or where the charity is bound by the laws of its own jurisdiction to use funds in a way that fits the UK definition of charitable purpose. However, HMRC states that:

“trustees should be able to demonstrate that they are making enquiries of a sufficiently searching nature at regular intervals to ensure that the funds are being properly applied for charitable purposes”.

Are there other considerations?

This article focusses mainly on steps DAFs have to take to ensure that any non-UK donations are made in a compliant way. However, DAFs are also subject to anti money laundering and financial crime regulations and must take steps to ensure their funds cannot be used to launder the proceeds of crime, provide funding to terrorist groups or breach international sanctions. This is relevant to all transactions that DAFs make but particularly where cross border payments are made.

What about dual qualified DAFs?

The above outlines the UK government’s requirements for DAFs making donations to non-UK charities. Dual qualified DAFs like the CAF American Donor Fund which qualifies for tax relief in the UK and US must follow both UK and US rules. The USA allows two methods of due diligence for payments to non-US charities these are known as Expenditure Responsibility and Equivalency Determination.