Benefit cheats

At first sight, the judicial review and tribunal reference made by the Attorney General over the Charity Commission's guidance on fee-charging charities may seem a narrow legal issue.

The case before the Upper Tribunal (Tax and Chancery Chamber) comprises a series of hypothetical questions concerning 'nowhere school', in an effort to determine whether the commission's public benefit test is unfairly challenging to private schools.

But the combined hearing of these matters will be of relevance to many charities across the country, finally addressing the hot potato still smouldering in the embers of the Charities Act 2006 of whether independent schools must offer free or discounted places to children from poor backgrounds.

The Act gave the commission the task of 'promoting awareness and understanding' of the public benefit requirement and requires it to issue guidance in pursuance of this 'public benefit objective' which must be grounded in existing case law.

The commission consulted on draft guidance before publishing, in January 2008, general guidance on public benefit and, in December that year, specific guidance on the advancement on education and on public benefit and fee charging.

Many have remarked that in entrusting it with the public benefit objective, the previous administration handed the commission a poisoned chalice by requiring it to decide whether independent schools in particular were doing enough to widen access to children of families who cannot afford their fees.

In its guidance, the commission highlights two key principles: first, that there must be an identifiable benefit or benefits, and, second, the benefit must be to the public or a section of the public. In turn, that second principle breaks down into two sub-principles.

Principle 2b provides that where benefit is to a section of the public, the opportunity to benefit must not be unreasonably restricted by ability to pay any fees charged (or by other restrictions). Principle 2c provides that people in poverty must not be excluded from the opportunity to benefit.

Where a charity charges high fees that many could not afford the trustees must ensure there is sufficient opportunity for people who cannot afford those fees to benefit in a material way that is related to the charity's aims.

The commission acknowledges there are many different ways to provide these opportunities, 'indirect' as well as 'direct', and provides examples in annex C to its fee-charging guidance, covering not just educational charities but also charities for the promotion of the arts, for the advancement of health/ relief of sickness and for the advancement of heritage or environmental protection.

So, indirect ways of providing significant opportunities to benefit for people who cannot afford the fees of an independent school could include allowing pupils from local state schools to use its sports facilities. Or a theatre could offer drama workshops for students. Or a private care home might invite local elderly people who live at home to join residents for meals or on outings.

It is for the charity's trustees to decide what sorts of opportunities to benefit they can provide and the commission expects most charities will need to offer a package of measures.

At the same time, the commission does place emphasis on free or subsidised access, which it regards as an obvious and, in many cases, the simplest way in which charities can provide the required opportunities, but concedes there is no 'one size fits all' percentage of free or subsidised access that fee-charging charities must offer.

The commission doesn't discount the possibility that a charity which offers no free or subsidised access could still nevertheless satisfy the public benefit requirement, but appears to need a lot of convincing of the circumstances in which this would arise, commenting that it is unusual for a charity that charges high fees to offer no free or subsidised access.

Two independent schools failed the public benefit assessments carried out in July 2009 and agreed to work on plans to address this which resulted in a proposed mix of new and additional bursary assistance financed by fundraising together with the educational benefit the schools already provided in the local community.

One of the schools has gone from having none of the pupils supported by bursaries to a planned 6.6 per cent of pupils supported in this way and the other from 0.8 per cent of pupils assisted by bursaries to 3.6 per cent. In July 2010 the commission accepted these plans and confirmed that the schools' trustees were carrying out their duty to administer the charities for public benefit.

Do these figures provide any benchmark for all other schools? Not really, because the commission has to consider what is reasonable and appropriate in each charity's circumstances. The headmaster of one of the schools remarked that dealing with the commission had been hugely time consuming and that he didn't know why his school had failed the 'public benefit exam'.

Lessons learned

Lawyers have commented that the commission has not summarised the existing law in its guidance but has instead provided its own interpretation, in particular its view that an institution cannot be charitable if it excludes the poor and that a charity's activities, not just its purposes, must be for the public benefit.

Representing over 1,200 schools across the UK the Independent Schools Council (ISC) has been a vocal critic of the commission's approach, highlighting that if less well-endowed schools are compelled to provide or increase bursaries and free places then that may mean increased fees for the majority '“ putting private education out of the reach of even more pupils '“ or cutting back on capital investment.

In February 2010 the ISC sought permission to judicially review the commission's guidance on fee charging on the basis that it didn't reflect the law, in particular by placing undue emphasis on the provision of free or subsidised places. The Administrative Court has recently given the ISC permission to pursue its application for judicial review of the existing guidance, which the ISC hopes the courts will quash.

In a separate development, days before the ICS's permission hearing, the Attorney General made a reference to the Charity Tribunal '“ or, more accurately, the First-tier Tribunal (Charity) '“ to clarify how charity law should operate in relation to fee-charging independent schools, because he considers there is 'uncertainty' in the operation of the law.

The Attorney General's reference is the exercise of a novel power: rather than being negative in challenging the means by which the commission's guidance was produced, it should provide certainty by inviting legally-binding answers to specific, hypothetical, questions in various scenarios, including whether an independent school can be charitable where it charges fees which cannot be afforded by a significant proportion of the population and where it provides no indirect' benefits.

The tribunal's answers to these questions will hopefully provide specific guidance and benchmarking which it might otherwise take decades (or, on past experience, centuries) of decided case law to establish. One of the main reasons the Charity Tribunal was set up was to provide clarity in an area of the law where there has traditionally been limited litigation: trustees have (rightly) focused on pursuing their charity's objectives for the sake of their beneficiaries rather than seeking the answers to interesting legal points.

What next?

The Upper Tribunal will address both the reference from the Attorney General and the ISC's application for judicial review: on making his reference to the First-tier Tribunal the Attorney General asked for it to be considered by the Upper Tribunal, which is a superior court of record capable of setting binding precedents.

Similar directions have been ordered for both sets of proceedings so that they can proceed together. There is provision for sequential service of evidence of fact, first by the ISC, then by the commission and finally by the Attorney General, leading to preliminary hearings on 18 April next year and final hearings which are to commence on 17 May and to be concluded by 27 May.

The commission argued that the judicial review application should not proceed because the Attorney General's reference would clarify the legal position. However, Mr Justice Sales considered that the principle-based approach of a judicial review claim could assist the tribunal's consideration of the specific questions posed by the Attorney General and he transferred the judicial review proceedings to the Upper Tribunal to enable the judicial review claim and the reference to be heard together.

While the ISC has been joined as an interested party to the reference and the Attorney General has been permitted to submit evidence and to make representations in the judicial review proceedings, both sets of directions also provide for any otherperson to apply by 20 December this year to be permitted to submit evidence or to make written submissions, on the basis that they are 'directly affected' either by the reference or by the judicial review claim.

In accordance with section 73 of the Act, before November 2011 the government has to arrange for a review of the operation of the Act. Subject to any appeals, that review should be conducted with the benefit of the Upper Tribunal's decisions on the reference and judicial review claim.

If as a result of the judicial review the Upper Tribunal quashes the existing guidance on fee-charging charities, and if the answers it gives to the questions posed by the Attorney General are not consistent with that guidance, then the commission will need to rewrite that guidance and possibly all the rest of its guidance on public benefit. But at least there will have been an authoritative review of that guidance.

So far, the First-tier Tribunal (Charity) has considered a limited number of cases. This matter is going to raise the tribunal's profile and maybe as a result in future more charities will see possibilities in using it not just to challenge decisions of the sector's regulator but to prompt the Attorney General into making further references or perhaps to seek to intervene in those references on issues which are of direct concern to them and to the charity sector as a whole.

The combined reference/judicial review is one piece of litigation which will be welcomed by many in 2011.