Alan Eccles: Different rules of ‘charitable’ apply

Schools with charitable status risk losing funding if they fail to comply with charity test. Picture: Ian Rutherford
Schools with charitable status risk losing funding if they fail to comply with charity test. Picture: Ian Rutherford
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SCHOOLS must meet OSCR test or lose funding, says Alan Eccles

The charitable status of Scotland’s independent schools is once again under the spotlight following the recent publication of the latest decisions from the Office of the Scottish Charity Regulator (OSCR).

OSCR has determined that the Focus Schools – Laurieston Campus and Millden Campus, which are affiliated to the Plymouth Brethren Christian Church – do meet the Scottish charity test. These decisions are the latest in OSCR’s “rolling review” of charities, which is examining whether the fees charged by independent schools are restricting access to the public benefit that they provide.

So what do the decisions tell us, what do they mean for the wider notion of “charitable” and what action should charities be taking now to ensure they meet the public benefit test? The impact of a loss of OSCR charitable status would mean a school could no longer class itself as a Scottish charity, resulting in an immediate loss of valuable non-domestic rates relief and loss of the opportunity to secure funding and grants that are only available to charities.

For schools and other charities that are currently being assessed by OSCR or are likely to be part of the “rolling review” there will be a desire to understand both these and other recent decisions, which suggest that the focus, ultimately, must be on the “quantitative” (ie bursaries and similar support) methods of supporting access to a charity’s benefits. The benefit provided by the schools is not in question as such – what is, however, is the presence of (financial) barriers to those benefits. These schools will need to focus on those, rather than softer methods such as opening up access to the schools’ facilities.

Yes, there will be “qualitative” measures undertaken by schools to widen access and inclusion, but it will be the overall quantitative assistance which is likely to be key. It is important to note that OSCR’s school decisions relate to Scottish charitable status and have no direct bearing on the tax status of schools. Apart from rates relief, the benefits of charitable status are regulated by HMRC. It applies a different UK-wide test of “charitable”, based on English law, even if the charities concerned are Scottish. Recent case law in England and interaction with the Charity Commission has been more favourable to private schools. So it is the UK-wide notion of charitable and its tests that are applicable when it comes to charitable tax status.

Notwithstanding that, the schools (and others) will wish to do their best to satisfy OSCR, rather than engage in a potential battle with HMRC on complex tax issues. It should also be noted that charities have no “blanket” exemption from tax.

Of course, the decisions may be an opportunity for schools and other charities that, for example, charge or restrict access through entry criteria, to re-evaluate what they offer and how it is articulated to satisfy the regulator. Indeed, as OSCR’s review of independent schools approaches a close, other charitable organisations will want to consider whether the school decisions raise similar issues for them. The way that entry and selection criteria are articulated will be important as a “qualitative” concept, as will how those criteria further and develop the charity’s purposes. Charities which charge or have forms of “entry criteria” or selection processes will wish to give particular attention to this. Charities need to be proactive in the way that they keep important parts of their operations under review, particularly where OSCR decisions and reports highlight areas which are of particular interest to the regulator.

There is also the need to articulate, whether in an annual trustee report or through carefully managed social media, the way in which the charity’s purposes, its activities in furtherance of those purposes and the ultimate public benefit that it delivers are interlinked.

The importance of this proactive approach must be instilled in trustees through induction, training and ongoing board communication as part of a robust governance process. The recent school decisions, highlight the different rules and notions of “charitable” that apply, particularly the divergence between charitable status and charitable tax recognition.

They also underline the need for charities to address issues proactively and to do so in a way which articulates how activities and policies deliver public benefit. Trustees need to be aware of these issues from the outset and ensure that they continue to keep on top of them.

• Alan Eccles is a partner in the personal and family team of Brodies LLP