Education Law – The Charities Act 2006 and Independent Schools

By : David Lawson

The Charities Act 2006 and what it means for Independent Schools.

The Charities Act 2006 (the Act) removes the presumption that there is a public benefit flowing from any apparently charitable activity.  This has been widely interpreted in the context of the charitable status of independent schools.  This note looks at the nature of charitable status (in particular whether charities must benefit, or must only benefit, those who cannot afford to make their own provision) and then at the Charity Commission guidance on the Act.

What is a charity?

The Charitable Uses Act 1601 refers to “the maintenance … of schools of learning, free schools and scholars in universities” as charitable.  Lord Macnaghten’s speech in Pemsel’s case (Income Tax Special Purposes Commissioners v. Pemsel [1891] AC 531) gives four categories of charitable purpose: the relief of poverty, the advancement of education, the advancement of religion and other purposes beneficial to the community.

The Act gives a long list of charitable purposes, including education, but requires that any potential charity shows that it is for the “public benefit”.

Public benefit and poverty

Does the law require that the recipients of charitable services must not be able to afford their own provision?  The answer to this has been a clear no, at least for education and religion before the Act:

“Education and religion … do not require any qualification of poverty to be introduced to give them validity” (Lord Wrenbury in Verge v. Somerville).

In another case it was held:

The proposition, put shortly, was this: that an educational trust or an educational purpose is not charitable, unless it be for the promotion of education for persons who pay less than the full value of the services which they receive.  That seems to me a proposition which might at one time have been acceptable to the courts, but it is several centuries out of date …” (The Abbey Malvern Wells –v- Ministry of Local Government and Planning [1951] 1 Ch 728).

Conversely a charity certainly cannot exclude those of limited means:

“a trust may be charitable though not confined to the poor; but I doubt very much whether a trust would be declared to be charitable which excluded the poor” (Re Macduff [1896] 2 Ch 451).

Changes to the law on public benefit

A rebuttable presumption developed that education was for the public benefit.  The Act removes this presumption as follows:

2 Meaning of “charitable purpose”
(1)     … a charitable purpose is a purpose which—
… [and]
(b)     is for the public benefit.

3 The “public benefit” test
(2)     In determining whether [the requirement of public benefit] is satisfied in relation to any such purpose, it is not to be presumed that a purpose of a particular description is for the public benefit.

The Charity Commission guidance (see below) deals with how to apply these provisions.  It should be noted however that there is no reason why removing a presumption about public benefit will change the cases noted above which conclude that educational charities are, at least generally were, for the public benefit.

Fee charging

Of course, independent schools charge fees.  There are few cases directly on this point (although the Courts have stated that school fees do not prevent a school from being charitable).

Much debate has focussed on In Re: Resch’s Will Trusts [1969] 1 AC 514, a dispute about a large bequest to St Vincent’s Private Hospital.  The hospital provided an overflow facility for the next door public hospital.  It had never been conducted as a profit making body although it had made cash surpluses.  It charged high fees based on the high cost of medical care.  The Privy Council held that this was charitable: there was “no warrant for adding to the condition of sickness that of poverty”.  However “to limit admission to a nursing home to the rich would not be “charitable”.

The Charity Commission accepts that Re: Resch allows high fees to be charged and that indirect benefits (eg to the next door hospital) can be taken into account in assessing public benefit.  However it contends that the case also provides that the operation of a charity cannot be limited to the rich and that indirect benefit cannot alone be sufficient to show public benefit.  The Independent Schools Council states “this reading of Re: Resch is extremely strained”.

The Charity Commission and the Guidance

The Charity Commission has to make the first attempt to apply the new law to the charitable sector.  Pursuant to s.4 of the Act the Charity Commission is required to issue guidance.  They have issued guidance (finalised in December 2008) on charities, education, public benefit and fee-charging.

The guidance explains the importance of the objects stated in the trust deed for assessing activities carried out by the charity.  At its simplest the consequence is that tangential activities such as fund raising at the school will not count towards the assessment of public benefit.  This may also have an impact on whether allowing the community to use the school’s facilities is a relevant factor for public benefit.

The guidance on public benefit accepts that charging high fees is not inevitably blocked but asserts that it can be if they are in effect a barrier to access and provides:

“… people who are unable to pay those 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 …”.

Annex C of the Guidance on Public Benefit and Fee Charging (December 2008) gives a long list of methods of benefiting those who cannot pay fees including (1) subsidised or free places; (2) developing links with grant making trusts so as to provide free services; (3) lending equipment staff or facilities; and (4) allowing state school pupils to attend certain lessons or events.

The ISC response

The Independent Schools’ Council (ISC) represents 1,280 schools of which 1,050 are charities.  Its members educate over 500,000 pupils with 24% paying reduced fees subsidised by the school and 7% having fees subsidised by others.  ISC estimates that there is a saving of about £2.5 billion through the state sector not providing school places for these pupils.
ISC emphasises that the test in the Act is a test of purposes and therefore of trust deeds and not of the delivery of services.  They argue that this assessed not by those able to afford the fees but by those eligible to benefit from the charity.  If 20,000 children meet the admission criteria this is the relevant pool to determine public benefit and not the sub-set who can afford the fees or the sub-set who in fact attend the school.  Clearly there may be points of principle between this view and the Charity Commission view and a need for Court determination.

What will happen next?

The Charity Commission will assess three factors: (1) are the aims charitable; (2) is the charity capable of being operated to meet those aims; and (3) are the trustees in fact meeting those aims.  Three types of charity have been selected for initial study on this basis in 2009: independent schools, fee-charging residential care and charities for the advancement of religion.

A report on pilot organisations is due in spring 2009.  There are two possible outcomes.  One is that the charity is not capable of being operated as a charity in which case it will be removed from the register or restructured.  The other is that the charity could be operated for charitable purposes but that the trustees are not doing so.  The Charity Commission would work with the charity to assist it to become compliant.

The Charity Commission notes “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”.  In the meantime all charities have to report on the public benefit they provide from 31 March 2009.