Features: March 13th, 2009

By Helen Harvie.

All charities must provide a public benefit and it is the job of the Charity Commission to examine whether this benefit is being delivered. Changes in legislation in 2006 firmly placed the spotlight on public schools, which all claim charitable status. Loss of charitable status could have widespread implications for private schools and many would no longer be viable. This article describes the different forms of public benefits and looks forward to the impending publication of test case results.

Public school debate

The debate on public schools and the extent to which they provide a ‘public benefit’ moves on to the next phase with the announcement of the first test cases in England & Wales, to include 5 independent schools. This follows a similar exercise carried out nearly two years ago by the Office of the Scottish Charity Regulator (OSCR). This is part of an extensive programme of consultations initiated by the Charity Commission, using powers conferred by the Charities Act 2006. It is projected that the findings from the current phase will be reported about spring 2009.

The independent school sector faces the prospect of reporting on their public benefit activities in their Annual Report to the Charity Commission, for periods commencing 31 March 2009, although many schools have started already. Although the Charity Commission has published outline guidance, and also a summary of the responses to its consultations issued in July, schools still feel that they have very little feel for what is to be expected of them. They have been grappling with the issue of justifying their charitable tax breaks ever since Charities Act 2006 was first published in draft form in 2004. The Chair of the Charity Commission, Dame Suzi Leather, has acknowledged to the cross-party Public Administration Select Committee (PASC) – currently reviewing the impact of the public benefit test on charities – that this whole subject remains politically charged.

Many schools and associated professional bodies are still opposed to the idea of public benefit tests in principle, particularly for fee charging charities. They believe that the tests are politically motivated and they focus on activities rather than on charitable purposes. However, the majority of schools have already accepted that they must comply if they wish to retain their charitable status. For many the fear is that, should they lose that status, it is not just a case of losing the tax breaks. They may find that they can no longer continue in the same way, but will find themselves compelled to appoint new governors or merge with other schools that are satisfying the requirements. Charity Commission powers in this respect are wide-ranging.

What is public benefit?

The guidance on public benefit for fee-charging charities has tended to focus largely on financial considerations. The guidance states specifically that no charity may exclude anyone who is living in ‘poverty’. This is defined by the Charity Commission as anyone who is living on or below the level of income support or on less than 60% of the national average income. For this reason there has been great focus on means-tested bursaries to ensure that those living in need may have access to a private education. Recent research has suggested that nearly half of independent schools have already extended their means-tested bursaries schemes, with a further one-third considering the idea. Unfortunately there is also evidence of fees being increased to cover the cost of funding this – a point that is understandably not popular with existing parents.

Other changes being made by schools are the introduction of links with local state schools, higher and further education institutions, opening up access to sporting and educational facilities and the provision of additional educational courses and materials to the wider public. Schools are even changing their constitutions to incorporate changes to their objects to enable them to meet the public benefit requirements. Many schools have already significantly altered the way they operate.

Test cases

As far as the test cases are concerned, the list of test cases was announced on 7 October 2008. The list includes charities for the advancements of religion, fee-charging residential care home charities and 5 independent schools. These charities may not have been chosen at random. As with the Scottish experience, charities have been invited to volunteer with a view to developing the criteria in combination with the Charity Commission. Those charities that have volunteered must feel reasonably confident that they have already taken the necessary steps.

In Scotland there were three educational institutions that were chosen. One was a college of further education, one was a university and only one was the equivalent of an independent school, the High School of Dundee. However, the fees charged for this school ranged from around £5,000 pa to £8,000 pa, significantly lower than most of their counterparts in England & Wales. The conclusion of the review was that the school provided a public benefit and the fees were not too far from what is would cost to provide a state education. One of the other Scottish institutions failed the charity test, but on the matter of independence from the State, rather than on public benefit. It is interesting to note that the Scottish regulator has gone on to review a further 30 charities as part of its rolling review, of which 11 are schools. However, this review has already been delayed by 5 months because of difficulties in dealing equitably with affordability of charges and restrictions on access.

It will be fascinating to review the results of the test cases for the 5 schools selected here. The schools are drawn from across the country, being based in Manchester, Preston, Derbyshire, Reading and the New Forest. Size ranges from an annual income of £11m down to £1.3m, with two of the schools being prep schools – the category often considered to be the most at risk from the public benefit changes, as they rarely have the resources to provide any financial assistance.

The Manchester Grammar School is the largest school with 1400 boys aged from 11 to18. The school’s accounts claim that it has carried out a public benefit audit and details are available on request. They claim that in 2006/07 they offered 33 (2.4%) fully funded places and assisted 223 (15.9%) others. They do charge annual fees of around £8,000 per pupil but this is modest when compared with some independent schools in this age bracket. No doubt other schools will look with envy at the fact that they already had a £3m Foundation Bursary Fund for bursaries and have this year received a £3m legacy from an ex-pupil which will be set aside for the same purpose.

The future

Members of the Select Committee did ask Dame Suzi whether the legislation should be amended to deal with the public benefit issue. Her response made it clear that she favours the slower method of working in partnership with the charitable sector to develop criteria and best practice. There is certainly no suggestion of a wholesale removal of independent schools from the register. Schools and their advisors wait with bated breath to see whether they have done enough already to ensure their continued existence as charities, particularly as many schools will be starting to draft their public benefit returns before any final guidance is issued by the Charity Commission.

Helen Harvie is a Partner at Barlow Robbins LLP