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A          Introduction & Background 

The 2006 Charities Act removes the presumption that there is a public benefit flowing from any apparently charitable activity.

In theory this could have a significant effect on those charities which are fee charging (in particular schools and those providing medical facilities) where fee charging could prevent or restrict the non-rich from enjoying access to those charities. A number of preliminary questions arise:

• Could this be an indirect attempt to undermine independent schools in particular whilst avoiding human rights and other challenges which would follow an outright attempt to abolish or restrict them? Over one third of all charities have objects which refer to education and there are over 2000 schools with charitable status.  
• Is it a genuine attempt to ensure the real benefits of charitable status are properly earned?
• Particularly as the process of consultation and guidance has proceeded, is the Act likely to promise considerably more than it will actually deliver in practice?

One important point to remember is that, although the key 1601 preamble to the Charitable Users Act (the first reference point for a definition of charitable purposes) gave categories of activities which were per se charitable (including the advancement of education and of religion), legal developments over the centuries have indicated a steady growth in the idea that public benefit is an important aspect of charitable activities.  In short the ‘test of public benefit’ is not a new concept.

It should also not be forgotten that many independent schools were created before the modern tax regime came into existence - hence the argument that the original objects of an educational charity might be charitable but do not justify the perceived benefits of that status. This might apply particularly to the important benefit of rate relief - the Rating and Valuation Act 1961 gave relief to charities “wholly or mainly used for charitable purposes”.  There have also been cases over the years which have considered the specific question of whether the concept of charity does in itself require that people with limited means may or must benefit from the charity. 

One feature of these cases has been whether people with limited means must be able to benefit from the charity.  This is important because, if it is confirmed that charities can charge high fees and that the public benefit (a term used in many of these cases) lies in the theoretical availability of such services to the poor, then an indirect public benefit is created.

B         The Charity Commission Approach 

The statutory definition of public benefit in the 2006 Act is very general and it is now the task of the Charity Commissioners to apply the new Law in practice. 

They could proceed in a number of ways:

• No real change
• Certain charities could have their charitable status removed if they do not pass the public benefit test.
• They could enforce in strict terms the charitable obligations of charities as set out in their original charitable deeds or schemes (this might enable some opponents of independent schools and private health care institutions to argue against their various tax reliefs). 

Guidance has already been issued to charities in general and has included a number of “sub principles” to buttress the overarching principle of public benefit.  These have generally been:

• The benefit must be related to the aims of the charity
• The beneficiaries must be appropriate to the aims
• The opportunity to benefit must not be “unreasonably restricted” by the ability to pay fees.
• The assessment of the activities carried out by the charity must relate back to the objects of that charity, e.g., depending on the objects of a particular charity, allowing the community to use independents schools’ facilities may not be allowed as a relevant factor in assessing public benefit.

Already there has been guidance on the charging of fees (“high fees” have been specifically referred to). The guideline says (inter alia) “people who are unable to pay these fees must nevertheless be able to benefit in some material way related to the charity’s aims.  This does not mean that charities have to offer services for free nor does it mean that people who are unable to pay the fees must actually benefit, in the sense that they choose to take up the benefit.  They must not be excluded from the opportunity to benefit, whether or not they actually do so …………….. fee charging charities are encouraged to be positive, innovative and imaginative”

Examples of schools being positive, innovative and imaginative might be:

• Subsidised or free places
• Develop links with grant making charities or trusts to enable schools to provide some free services.
• Lending equipment/staff/facilities.
• Allowing state school pupils to attend certain lessons or events (it is interesting that the guidance suggests that in the latter case state schools might then be charged for these services).

It is perhaps encouraging for independent schools and private health care providers that both the Chairman and the Chief Executive of the Charity Commission have been on record that they are adopting a practical line, e.g., comments such as:

            “culls of the register are not on anyone’s agenda” ; and

            “we absolutely recognise that what any charity can do when it comes to public benefit will depend on its resources.”

The ISC (Independent Schools’ Council) was very much involved in the consultation process and produced a detailed paper.  ISC member schools educate over half a million pupils and that of these 24% pay reduced fees subsidised by the schools and 7% have fees subsidised by others.  ISC estimates that there is a saving of about £2.5billion through the state sector not providing school places for these pupils and these, plus the education these schools provide, are claimed to be “indirect public benefits”.   It should not be forgotten that although rate relief is worth about £100m per annum, schools do pay irrecoverable VAT of about £200m per annum by reason of their VAT exempt charity status.

Another factor during this period has been the Scottish situation.  The 2005 Act relating to Scotland does in fact contain a slightly different definition of the charity test.  In the recent Scottish Charity Regulator’s assessment of a number of Scottish independent schools, four did not meet the public benefit test with the result that each has been given a year to produce a plan to show how they would increase access to the children of people who are not necessarily able to afford fees over a period of three years.  Seven other schools have passed the test however.

The Charity Commission (in England) will assess three main factors in deciding public benefit:

• Whether the aims of the charity are charitable.
• Whether the charity is capable of being operated to meet those aims.
• Whether the trustees are meeting those aims.

A number of Independent schools (along side fee charging residential care charities and charities for the advancement of religion) have been selected for close analysis as a result of some concern that these categories of charities might not meet the public benefit requirement.

The Commissioners’ report is due this Spring and is awaited.

Outcomes could be that a charity is simply not capable of being operated as a charity (in which case it would be removed from the register or restructured) or that it could be operated for charitable purposes but the trustees are not so doing, whereupon the Commission would work with the charity to assist it become compliant.  Another outcome is of course that all is well and the appropriate public benefit is being provided.

The Charity Commissioners are again on record in saying “we have said publicly and in our guidance that we do not expect many charities to have difficulties in showing that they are for the public benefit”.

From 31st March this year all charities will have to report on the public benefit they provide and it is claimed that “the websites of most independent schools now provide a summary of their benefit to the wider community”. 

The changes which come may not be as great as anticipated.  Time will tell.

However, there are already actions which are required:

• re-assessment of charities’ trust deeds or charitable schemes needs to be made. 
• schools need to continue to ensure that the availability of fee assistance is publicised as appropriate
• the degree of public benefit should continue to be audited and reported on.

If more radical changes are required to enable independent schools to comply, it is possible that some might be comfortable with ending their charitable status.

One must take a balanced view of the Act.  Communities could move more closely together as access to independent schools is increased and their social mix improved (this was always regarded as a plus factor in the old Assisted Places Scheme phased out by the 1997 Labour Government).  It is surely in the public interest that the widest possible range of children and young people from all social backgrounds are able to enjoy the benefits of the outstanding education which is obviously provided within the independent sector. The requirement of annual reporting will also focus the attention of charity trustees on the charitable and public benefits they provide. 

We should be clearer on the issue of public benefit when the Charity Commissioners report on those charities chosen for detailed public benefit provision analysis.  Not wanting to create a hostage to fortune, my own prediction is that, of all the outcomes, the third – that the results will show that the Act promised more than it actually delivers in practice – is the most likely.

If you need help and advice in preparing your Charity or informing its trustees of the issue of public benefit contact James Buxton via our contacts link.