A bit rich?
June 2008
Simon Weil examines the legal foundation for the Commission's draft guidance on fee-charging charities...
The presumption of public benefit enjoyed by charities established for the relief of poverty, advancement of education and advancement of religion was removed by Charities Act 2006 and all charities will now have to show that their objects are for the public benefit, both at the point of registration and going forward (see Jonathan Burchfield article, Public benefit?). The term ‘public benefit’ is not however defined in the Act.
Section 2(1)(b) of the Act prescribes that all charitable purposes set out in the Act must be for the public benefit if any of them are to be defined as a charitable purpose. Otherwise the organisation concerned cannot be a charity. The Commission’s draft guidance on public benefit was published in March 2007, triggering a three-month consultation period. The main features of the draft guidance were encapsulated in four stated principles, namely:
1. There must be an identifiable benefit.
2. The benefit must be to the public, or a section of the public.
3. People on low incomes must be able to benefit.
4. Any private benefit must be incidental.
In general terms, the draft guidance stressed the need for a ‘modern approach’ and advocated ‘developing the law in the light of modern circumstances’. It also emphasised the part which public opinion could properly play in informing the Commission of ‘modern views’ and it emphasised the need for charities to report on the public benefit they provided.
The Charity Commission’s general public benefit guidance
This was published in its final form in January 2008 and is important because charity trustees are required by the Act to take it on board when exercising any powers or duties to which the guidance is relevant.
The removal of the public benefit presumption for poverty, education and religious charities should, in principle, make little difference because the presumption was rebuttable; in other words, it was always open to the Commission to ask for evidence that a body’s purposes were for the public benefit if, as regulator, it was in any doubt. For all other charities, the so-called ‘fourth head’ charities (charities established to advance any other charitable purpose apart from the relief of poverty, the advancement of education and the advancement of religion) for the benefit of the community, including the many that charge fees, there has been no presumption of public benefit (the burden of proof was upon them rather than any objector), that is, the law does not change for them.
Two principles are stated in the Commission’s general guidance:
- There must be an identifiable benefit or benefits.
- Benefit must be to the public, or a section of the public.
On the face of it, this discards Principle 3: ‘People on low incomes must be able to benefit’, which was regarded as controversial in the draft guidance. However, on close inspection, it appears that the change may be more one of form than of substance, something which appears to be the view of Charity Commission chair, Dame Suzi Leather, who has stated that this change ‘is purely for greater clarity and simplicity and does not imply any shift of emphasis’. Indeed, much of the substance re-emerges in the Commission’s emphasis on the restrictions arising in cases where charities charge fees, thereby limiting the class of beneficiaries to those able to pay them.
While the guidance makes it clear that charities can charge for the services or facilities which they provide and they can charge more than cost for those services or facilities, provided that the charges are reasonable and necessary in order to carry out the charity’s purposes, it states that, where ‘in practice the charging restricts the benefits to only those who can afford to pay the fees charged, this may result in the benefits not being available to a sufficient section of the public’.
This leads to a further sub-principle set out in the guidance relating to Principle 2: ‘People in poverty must not be excluded from the opportunity to benefit’. The Commission derives this sub-principle from one legal case, Re Resch, which related to a fee-charging private hospital in Australia in the 1960s. The case has traditionally been taken as authority for the principle that ‘the poor must not be entirely excluded from benefit’. The Commission’s interpretation, extending the non-exclusion to the opportunity to benefit, is potentially much wider than the accepted interpretation and is seen by many as being a simple rewording of ‘People on low incomes must be able to benefit’, i.e. the controversial Principle 3 from the draft guidance.
If the fees are set at such a level that people in poverty might be excluded from the opportunity to benefit, the Commission will expect benefit also to be available in some other way. However, such benefit cannot be ‘token’ or a benefit which occurs merely by chance. The Commission will expect people unable to pay the fees to be able to benefit ‘in some material way related to the charity’s aims’ and regards indirect benefit such as relief of public funds (for example by relieving the state of the burden of educating pupils attending independent schools) as not ‘sufficient’.
Draft sub-sector guidance on fee-charging charities
In March 2008 the Commission published its draft guidance for fee-charging charities, which is open for public consultation until 11 July 2008 (see News review from April 2008).
The document is based upon the principles and sub-principles set out in the general guidance but aspects of the sub-principles go further than established case law allows. The general guidance is not however technically open for consultation.
The draft itself goes straight into the Commission’s approach to assessing public benefit and fee-charging.
- The difficulty here, as with the draft guidance as a whole, is that the Commission continually considers the question of fee-charging in the context of the activities, rather than the purposes.
- Rather curiously, the draft guidance also splits the concept of benefit into ‘direct’ benefit and ‘other’ benefit, with an apparent assumption that direct benefit should somehow carry more weight. This is confusing as the question for fee-charging charities, as for all charities, should be whether the purposes are for the ‘public benefit’. It is not clear why the benefit should need to be broken down into direct or indirect benefit or why the Commission should have any special ability to determine how much weight should be ascribed to different sorts of benefit. This is not helpful for charity trustees, who need clarity and certainty.
- The draft guidance, while accepting that charities can charge for services or facilities, also appears to assume that charities which charge should, and should be able to, enable access to their services/facilities ‘in a material way’ across the full income range. This is couched as a legal obligation, although the law does not actually require it. The Commission is not altogether clear on how charities are supposed to fund such access; charities which charge do, after all, charge for a reason.
- The draft guidance does not make it clear where legal obligation ends and suggestions for best practice begin. This appears to be due to the apparent confusion between purposes, which are relevant for the public benefit requirement, and activities, which are relevant for best practice.
The law on public benefit
If an organisation is to demonstrate that it has been formed primarily to provide public benefit, it must be able to establish that ‘a sufficient section of the public’ should be capable of benefiting and overall effects should not be harmful. The law has interpreted this ‘sufficient section’ in the context of public benefit differently, according to the charitable purpose involved. Generally, it was held in 1951 that an express restriction to millionaires was too narrow. As regards relief of poverty, a charity to assist the poor relations of the settlor was held to be charitable. By contrast, a sufficient section of the public was interpreted more stringently for the advancement of education. For example, in the British Nuclear Fuels case, it was held that a charity formed to educate the employees of that particular company constituted too narrow a class to satisfy the public benefit test. Interestingly, however, if the charity had been established to educate employees in the nuclear industry, it would have succeeded, despite the fact that British Nuclear Fuels probably employed the vast majority of such people at the relevant time. On the other hand, charities formed ‘to educate the sons of gentlemen’ have, to date, always been regarded as charitable, i.e. pupils whose parents are in a position to afford school fees constitute a sufficient section of the public to pass the public benefit test as it has evolved under common law to date. Equally, a charity formed to advance religion, which confined itself to the employees of a single company, was found to have passed the public benefit test.
As the Charity Commission’s own analysis of the law underpinning public benefit and fee-charging itself acknowledges, Lord Macnagton, in the leading case of Commissioners for Special Purposes of the Income Tax v Pemsel (1891), stated that: ‘the trusts last referred to are not less charitable in the eyes of the law, because incidentally they benefit rich as well as poor, as, indeed every charity that deserves the name must do either directly or indirectly’. It follows that the common law accords equal weight to direct and indirect benefit, which may be in the alternative. This conflicts with the Commission’s guidance, which indicates that there must be a sufficient measure of direct benefit because indirect benefit on its own is insufficient.
In their evidence to the Committee in 2004 the Commission appeared at that time to differ from the Home Office, both on the legal position on public benefit and on the effect of removing the presumption of public benefit. This apparent impasse was ultimately resolved in the form of the Concordat, under which both the Commission and the Home Office concurred that the removal of the presumption of public benefit would provide a basis for further development of the law and that, in determining public benefit henceforward, the broad principles in the case of Re Resch (1969), referred to above, should apply, namely:
- both direct and indirect benefits to the public or a sufficient section of the public may be taken into account;
- the fact that services would be charged for does not necessarily mean that the organisation does not operate for the public benefit; and
- an organisation which wholly excluded poor people would not be a charity.
Interestingly, this case concerned a hospital run by nuns in Australia, one part of which was open to the public free of charge and the other, with superior amenities, charged fees. Andrew Philips has commented that a judge of ‘minimal ingenuity’ could use this case to reach whatever conclusion he wished to reach. It should however be noted that, commenting on the conclusion he reached in the case, Lord Wilberforce explained that he was not saying (and nor were the cases which he had considered in reaching a judgment) that facilities could not be charitable ‘merely because by reason of expense they could only be made use of by persons of some means’. It is difficult to understand how the Commission can square these dicta with the proposition that Re Resch is authority for the view that ‘a charity’s purposes and its operation of those purposes must not be so as to help only those who by reason of their wealth are able to afford the fees’, resulting in the Commission’s conclusion that ‘if an organisation was limited to benefit only those who could afford the fees, then those people would not be a sufficient section of the public’.
Outlook for fee-charging charities
To satisfy the test, ‘a sufficiently large section’ of the public needs to be capable of benefiting from the relevant charity and case law applies different tests according to the charitable object concerned. Given this, we can be confident that the courts would not subscribe to the view that one case fits all i.e. that the principles of Re Resch should be universally applicable.
Debate continues to rage concerning ‘charities which charge high fees’, notably in relation to independent schools and private hospitals. David Unwin QC, Hubert Picarda QC and Professor Luxton would take the view that the removal of the presumption would have as little consequence for independent schools as for charities formed to relieve poverty or to advance religion on the premise that those able to afford to pay school fees constitute a sufficient section of the public to satisfy the test. By extension, fee-charging charities, which never enjoyed the benefit of the presumption, the fees of which are reasonable, ought not, on this view, to be at risk.
Implementation of the general guidance and, in its current form, of the draft sub-sector guidance on fee-charging charities could however well lead to challenges to charities which charge fees as primary purpose traders on the ground that charitable status may only continue to be accorded if greater direct public benefit is provided. Such challenges could of course themselves be challenged in the forum of the new Tribunal established by the Act. Ultimately the courts could decide the issue if a relevant charity were to appeal against an adverse decision by the Tribunal.
At worst, charities, unable to satisfy what would, in practice, amount to a new test of public benefit, could lose their charitable status. Under the law as it applies today, their assets would have to be applied cy-près i.e. transferred to an organisation with similar objects but which satisfied all relevant tests and remained exclusively charitable.
The practical impact
In general, the draft guidance on fee-charging will be of little assistance to charity trustees in carrying out their duties. On the contrary, it may instead cause confusion, or worse, cause trustees to divert scarce resources from lawful activities which they consider to be in the best interests of the charity in order to enable access to a small minority in the mistaken belief that the law requires them to do so.
The fact remains that, when the Charities Bill was proceeding through Parliament, the decision was made only to effect one minor change to the law of public benefit, namely to remove a rebuttable presumption of public benefit from three heads of charity. The direction to the Commission to produce guidance on the requirement that to be a charitable purpose a purpose must be for the public benefit should not have become a stick with which to beat fee-charging charities.
Author: Simon Weil
Simon Weil heads up Bircham Dyson Bell's Individuals Group.
He has lectured on charity trusteeship and charities in the context of taxplanning.
He also sits on the Executive Committee of the Charity Law Association and is a member of the Association of Contentious Trust and Probate practioners
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