For richer, for poorer

The decision by the Charity Tribunal last month that benevolent funds with a restricted beneficiary class '“ typically, poverty relief charities for the benefit of former employees or members '“ are still 'charitable' has come as a huge relief to the sector.

The question arose following the adoption of the Charities Act 2006 after it was suggested that, under the new law, the section of the public they served was so narrow as to take them out of scope of the 'public benefit' presumption.

Before the 2006 Act came into force, charities for the relief of poverty were one of the three 'special' classes in which there was a presumption that they were for the public benefit '“ the others being charities established for the advancement of education and the advancement of religion. Charities for the relief of poverty were also anomalous in the fact that the 'sufficient section' of the public test was met even in cases where there was a small beneficiary class that was in some way linked by a common nexus not relevant to the objects. This meant that benevolent associations, which are commonly linked to employment within both the public and private sectors, could be charitable, whereas a charity for the advancement of education of the same employees would likely not be.

The question before the tribunal was essentially whether the 2006 Act '“ which removes the presumption of public benefit from the 'special' categories leaving all charities on a level playing field '“ also changed the law to such an extent that benevolent funds could no longer establish public benefit because of the restrictions on the class of potential beneficiaries.

In January 2011, the Attorney General took the view that there was sufficient uncertainty surrounding the issue to serve a notice of reference on the tribunal requesting a ruling on the matter. However, by the time the case came be to be heard in November, the parties were largely in agreement that the 2006 Act had not changed the legal position, and benevolent funds remained charitable. The Charity Commission took a neutral stance in the proceedings, and presented the alternative argument so that the tribunal had all the relevant information before it to make a ruling.

Filling the case law gap

Given that almost all the parties were in agreement before the hearing, the case, Attorney General v Charity Commission and ten others FTC/84/2011, attracted much criticism. However, as lawyers, we welcome certainty, and particularly in the area of charity law and public benefit, where there is little recent case law. Much usually turns on the facts of individual cases, which can vary hugely, and so consistency is almost impossible. The variety of benevolent funds involved in this decision highlights this point '“ some serve hundreds of thousands of potential beneficiaries, and some only hundreds, and each has different criteria both for the applicants' eligibility and also the type of assistance that is offered, but each is providing an invaluable service to those who find themselves in need.

So, what was the certainty that the tribunal provided? In relation to the test for public benefit, the tribunal was able to reiterate the findings from the Independent Schools Council case (see solicitorsjournal.com, 'Tribunal ruling fails to provide clarity over public benefit', 14 October 2011), in that there are two elements to the test '“ benefit to the community, and a sufficient section of the community being able to benefit.

In relation to the first test, the tribunal re-stated its view that the existence of the presumption of public benefit before section 3 of the Charities Act 2006 came into force did not automatically mean that the 'special' classes of charity were automatically charitable. It has always been possible to have an organisation established for one of these purposes that is not charitable because it is not established for the benefit of the community generally, and thus fails the first element of the test. The classic example given by the tribunal in both cases is the imaginary 'Fagin' school established to train pickpockets. Undoubtedly, the school would be advancing education, but the potential harm caused by this particular education outweighs the general public benefit inherent in education, and it is therefore not charitable '“ whether or not

the presumption is in force. This is relevant in the case of benevolent funds because it rules out any argument that the charitable nature of benevolent funds somehow hinged on the presumption. Clearly, if it was possible for an organisation established for the relief of poverty not to be charitable when the presumption was in existence, then anything considered charitable before the 2006 Act should still be so, despite its removal.

Indirect benefit

However, it was the second element of the test '“ whether a sufficient section of the public can benefit '“ that was at the heart of this case. The tribunal reviewed the case law on charities for the relief of poverty in some detail, and found a clear line of cases that excepted poverty charities from the need to benefit a sufficient section of the population in the sense generally understood, although the reason for this was unclear. It could be simply that a small class of persons is still a significant class of individuals for the purposes of poverty cases, or it has also been argued that the indirect benefit to the community in general of relieving one person's poverty would be sufficient to establish public benefit to the community as a whole.

The tribunal felt that it was unable to take a view on which of the above reasons explained the poverty beneficial class anomaly, which is a real shame. Although practically it has little importance to trustees attempting to set up and run their charities, legally it would be useful to know on what basis the exemption operates, and it could assist in running arguments for other types of charities on an analogous basis. For example, it is generally accepted that there is no direct benefit to people in the traditional sense in the advancement of animal welfare. However, this has been accepted as a charitable purpose on the basis that the indirect benefit to society generally in taking care of animals is sufficient to establish public benefit. If it was also the case that the indirect benefit to society of the relief of poverty is sufficient to justify a small beneficiary class, it may also be possible to run an indirect benefit argument in other cases.

Prevention and relief

There were other useful pronouncements in the judgment. The tribunal specifically considered charities that deal with the prevention of poverty, as well as relief. The 2006 Act refers to the charitable purpose of 'prevention and relief of poverty', whereas the case law pre-2006 generally only deals with charities for the relief of poverty.

All were in agreement that charities with objects for the prevention and relief of poverty would still be able to have a small or linked beneficiary class to be charitable. However, the tribunal also looked at whether a charity that was set up only for the prevention of poverty could still be charitable with a restricted beneficiary class, and found that it could. This accords with the Charity Commission guidance on public benefit in charities for the prevention and relief of poverty. The nature of charities working to prevent poverty means that beneficiary classes are not likely to be restricted in practice, but it is useful to have authority for the fact that this anomaly does apply.

Strong link

Another interesting element in the decision concerned the pronouncement by the tribunal that public benefit principles must be assessed in light of the purpose being considered, rather than applying a one-size-fits-all approach. This is nothing new or novel, and is part of the reason why the law surrounding public benefit is so complicated, but this hopefully makes it clear that, when looking at public benefit, regard must be had in the first instance to the type of charity. Trustees who are trying to demonstrate public benefit in their annual reports should be looking first at their objects '“ and therefore the context in which they are operating '“ and frame their report in such a way that the link between the work they are doing and their charitable objects is clear.

The frustration expressed by the charities in relation to this case is, I think, justified in that there will have been a great deal of time and money spent on a case that simply confirmed the parties' understanding and their agreement. However, legally, there was an uncertainty as to whether the 2006 Act had changed the law. This has now been resolved, which on this ground alone justifies the judgment.