Feeling the benefit

The long-awaited 116-page judgment by the Charity Tribunal on public benefit (The Independent Schools Council v The Charity Commission [2011] UKUT 421 (TCC) 13 October 2011) provides some clarity to independent schools and may have implications for other fee-charging charities that have to justify their continuing charitable status.

The ISC had challenged the lawfulness of the Charity Commission guidance on public benefit for fee-charging charities and particularly independent schools. This was triggered by two independent schools 'failing' the public benefit review carried out on 12 charities. The ISC believed that the commission had exceeded its remit and attempted to change existing law, rather than interpreting it and providing guidance. The commission's emphasis on means-tested bursaries for those who could not afford the fees was perceived as an attempt to introduce a mandatory element of poverty relief into an educational trust. The indication that only fully-funded fee remission would count appeared to take away the discretion of the governors and the reviews did not even set a benchmark for the level of bursaries, although a lower limit of 2.5 per cent of gross income appeared to have been set by the revised report into St Anselm's School. In the reviews little weight was given to indirect or community benefits.

The Attorney General, who has a responsibility for charities and the development of charity law, had made a separate referral. In this he asked the tribunal to consider several case scenarios for typical independent schools with varying objects clauses, all of which were designed to explore the extent to which fee charging affects charitable status. The questions also focused on whether other factors could be significant, such as a greater involvement in the local community, support for local state schools or academies, specialist teaching and scholarships based on merit rather than income. Two other interveners joined the proceedings, the NCVO and the Education Review Group (ERG), an educational think-tank broadly supporting the view that independent schools cannot justify their charitable status.

The key issues were whether the charging of fees that a significant proportion of the population cannot afford is contrary to the public benefit requirement and whether an institution that is advancing education only to those that can afford it is charitable in any event. The tribunal looked carefully at case law and the position before the Charities Act 2006 and to what extent the 2006 Act did indeed change the public benefit position.

The tribunal considered public benefit in two senses; first, whether running an independent school is a fundamentally charitable purpose, and, second, whether the activities of the school and the potential class of beneficiaries can be described as providing a sufficient benefit to the 'public'. On the first point the tribunal concluded that, although the 2006 Act had removed the presumption that educational trusts are automatically charitable, the assessment should be based upon the objects and constitution of the school rather than its activities and that therefore independent schools are fundamentally charitable in what they do; in other words in providing an education for young persons. As the judges stated, there is a value to society in having an educated populace, and, in principle, charging for services should not affect charitable status.

However, when looking at the second element, the above conclusion had to be qualified. The tribunal concluded that a school that completely excluded the poor would not be charitable and it is then a question of degree as to the level of access that needs to be provided. The concept of poverty in this context can include those of modest means or those who can afford to pay part of the fees but not all of them. What is considered to be reasonable provision is not to be determined by the Charity Commission or the court. However, no single test was possible, and, having ensured that any provision for the 'poor' is more than token, any additional provision must be left to the governors to determine, having taken into account all the factors that are relevant. These might include location of the school, the level of deprivation in the area, the school's size, its financial health, the size of any endowments, its staff salaries, class sizes, facilities and level of fees.

Impossible to ignore

Despite the claims in the press when the judgment was released that the case was a total victory for ISC, governors need to be aware that the issue of public benefit has not gone away. Nor will it be possible to ignore completely the means-tested bursary unless the school is making a significant investment in other ways such as supporting a local academy. It is likely that a range of provisions will need to be considered.

One concept mentioned was that of 'gold-plating' of services, referred to by both ERG and NCVO. The suggestion is that charities that provide a level of service or facilities that exceed the basic requirements are 'gold-plating' the service and will therefore have a much higher threshold for public benefit. This goes contrary to the belief of many schools that they need to invest in improved facilities to compete in today's market conditions. The question of whether this is an appropriate use of charity resources will need to be revisited by governors when considering public benefit.

As far as the commission is concerned, its guidance on public benefit was described by the tribunal as 'obscure' and 'wrong in a number of respects'. In a press release the commission accepted that its guidance would need to be revised and that it would be for charity trustees to determine how their organisation should meet the public benefit requirement. However, it claimed that the tribunal had agreed with its interpretation of the law in key areas, in particular that a charity that excludes the poor cannot be charitable. The commission has since withdrawn sections of its guidance including the whole of 'Public benefit and fee charging' and has advised that it will be revised and republished in summer 2012.

While the tribunal addressed the public benefit issue in great detail and clarified points of law in this area, it did not provide a benchmark or test that would be applicable to all charities. This was quite deliberate on their part. They were very keen not to get involved in political debate upon whether or not independent schools should be charitable or whether they are providing a wider benefit in educating pupils who would otherwise be in the state system. They also indicated that this judgment was directly applicable only to educational charities that charge fees. However, it is clear that any fee-charging charity will have to consider the judgment with great care and address the issues raised.

As far as school governors are concerned, the onus is placed back upon them to consider this issue again in light of the judgment. They cannot afford to ignore the public benefit requirement.

According to the tribunal, the way in which this should be approached is to 'look at what a [governor], acting in the interests of the community as a whole, would do in all the circumstances of the particular school under consideration and ask what provision should be made once the threshold of benefit going beyond the de minimis or token level had been met'.