Explain And Comment Upon The Function And Meaning Of The “Public Benefit” Requirement In Determining Whether Or Not A Trust Is Charitable, In The Light Of Both Decided Case Law And Provision Of The Charities Act 2006.
“To be a charity in England and Wales, an organisation must have charitable aims that are for the public benefit”.
The Charities Act 2006 (“the Act”) came into force on 1 April 2008. Sections 1-5 of the Act deal with the public benefit requirement. After a period of consulation, the Charity Commission published statutory guidance and analysis of the law on the public benefit requirement in January 2008. This essay summarises the current law in relation to the public benefit requirement, and focuses on the following points of interest that have arisen from the new legislation.
- The requirement for trusts who have objectives for the advancement of education, religion, or the relief of poverty to show that there is a public benefit as contained in section 3(2) of the Act.
- The “poor relations” and “poor employees” cases.
- How the new legislation affects fee-charging charities.
Under section 1 of the Act, in order for an institution to be classed as a charity, it must have charitable purposes. Accordingly, it must pass a two strand test which is set out in section 2(1) of the Act. The first part of the test is that the proposed charity must have a purpose that is listed in section 2(2) of the Act. The second part is that it must be for the public benefit. Section 3(1) of the Charities Act 2006 states “a purpose…must be for the public benefit if it is to be a charitable purpose”. Although the Act outlines a purpose test (ie the objectives must be charitable), the Commission has made it clear that it will also look at the proposed activities of the institution before it awards it charitable status.
There is no presumption that any of the purposes listed in section 2(2) pass the public benefit test. Section 3(2) states “it is not to be presumed that a purpose of a particular description is for the public benefit”. This section is discussed in greater detail below.
Before the Act, common law principles applied to charity law. Section 3(3) of the Act preserves the common law. The section states that a “reference to the public benefit is reference to the public benefit as that term is understood for the purposes of the law relating to charities in England and Wales”.
The Charity Commission guidance sets out two Principles in relation to the public benefit test. The first Principle is that the benefit must be identifiable. The second Principle is that the benefit must be for the public or a section of the public.
Principle One requires the following:
- It must be clear what the benefits are. The organisation may be asked to provide evidence to illustrate that their aims would provide a benefit. This is well established in case law. Sometimes it is so clear what the benefits are that evidence is not needed.
- The benefit must be related to the aim. For example, if the aim is for example to advance religion, an incidental benefit, not connected to advancing religion, will not be counted when assessing whether the charity meets the public benefit test. This was shown in the case of Oppenheim v Tobacco Securities where it was claimed that there were wider benefits and it was held that these would not be counted when assessing charitable purposes. This principle follows from section 3(2) which states that the requirement is to be satisfied to “any such purpose”. As charities look for more innovative ways to reach charitable status, this principle may be too restrictive and this is discussed in greater detail below.
- The benefit must be balanced against any detriment or harm. If the harm outweighs the benefit then the organisation will not be considered charitable. For example in National Anti-vivisection society v IRC Ch 31 the trust was not held to be charitable because of a balancing exercise with the effects of vivisection. Both the benefit and detriment may be very difficult to quantify, rendering a balancing exercise near impossible.
Principle Two is that the benefit must be to the public, or a section of the public and requires the following:
- The beneficiaries must be appropriate to the aims. The number of people who can potentially benefit from the charities aims must be large enough section of the community
- When the benefit relates to a section of the public, the opportunity to benefit must not be unreasonably restricted. The restriction can be either in the objects of the charity or in the way that the aims are proposed to be carried out in practice. Restrictions can be put in place as long as they are reasonable.
- People in poverty must not be excluded from the opportunity to benefit. This is discussed in greater detail below.
- Any private benefits must be incidental. The Commission Guidance give the example of a vetinary surgeon receiving fees paid.
The Removal Of The Presumption Of Public Benefit
Essentially the two strand test described above set out in section 2(1) is a codification of the previous case law. However, one of the areas that sparked the most debate is the apparent removal of the presumption of public benefit for trusts with purposes to advance religion or education, or to relieve poverty. This contained in section 3(2) of the Act. Gerry Morrison calls it “one of the most controversial amendments introduced by the Charities Act 2006”. Previously, trusts with these objectives were considered charitable, and this is set out in the case of Pemsel. Trusts with these purposes where always considered charitable. Lord McNaughten stated that “trusts for the relief of poverty; trusts for the advancement of education; trusts for the advancement of religion” were prima facie charitable.
Kenneth Dibble, in his article for the Solicitor’s Journal argues that “this is the correct legal position and treats all charities equally”.
Hackney questions whether the Act has actually changed the law in any way. He states “since there has never been a presumption of benefit, this provision, if it means anything, may be taken to be no more than a restatement of the old law”. He further makes the point that, because section 3(3) references the law of charities to determine public benefit, the law has not actually been altered in any way, the old case law will still be used in determining what is charitable and whether there is a public benefit requirement. It is yet to be seen whether the insertion of section 3(3) has a detrimental affect on those charities that would not have previously had to prove public benefit.
Poor Relations Trusts And Employee Benevolent Funds.
Trusts for the relief of poverty did not only enjoy a presumption of public benefit, they also enjoyed an exemption from the general rule that there should not be a personal connection between the intended beneficiaries. Generally, they must not be employed by the same company or have family ties.
In the case of Oppenheim v Tobacco Securiteis a proposed trust for the education of children of employees or former employees of the British American Tobacco Company was not considered charitable because of the personal link between donor and beneficiaries. The exception to general rule that there must be no personal connection is found in poor relations trusts and employee benevolent funds. The principle for poor relations trusts was established in Scarisbrick and followed in Dingle v Turner. In both of these cases, intended beneficiaries had a personal relationship to the donor. Both trusts were allowed as charitable as their aim was the relief of poverty.
The Commission makes it clear in its guidance that poor relations and employee benevolent funds can still be considered charitable “because the courts have accepted that there is such a public element inherent in the relief of poverty that even a very narrowly defined group of people in poverty could constitute a ‘section of the public’. Clearly, the Commission are following the principle set out in section 3(3) of the Act. Andreas Rahmatian, however, suggests that the courts still have the power to overrule these kind of cases and suggests that support is now being provided to the poor by way of our welfare system “One may argue that…a privileged position of the relief of poverty cases with a personal connection restricting the public is no longer acceptable today”. The social changes since Scarisbrick was decided in 1951 possibly render these types of trusts less necessary as they once were.
Fee Paying Charities
Charities may charge for their services or facilities, and this has long been established in case law. The principles outlined in the guidance that (i) where the benefit is for a section of the public, the opportunity to benefit must not be unreasonably restricted and (ii) people in poverty must not be excluded from the opportunity to benefit has sparked commentary in relation to fee paying charities. It follows that when fees are charged, more evidence will have to be produced to show that people in poverty have the opportunity to benefit.
Press interested heightened when the Commission produced a report in July 2009, which included a report on five independent schools and three residential care organisations. Two of the schools did not meet the public benefit requirement. Shelia Lawler commented in the Guardian “why is the Commission reinterpreting the law and being allowed to get away with it”.
This seems to be an unjust criticism, the Commission are not being heavy handed on the requirement. The wording was watered down from “people on low incomes must be able to benefit” to “people in poverty must not be excluded from the opportunity to benefit” after the consulation. The Commission are also keen to downplay the concern over the principle. Kenneth Dibble assures that “the Commission has not said, at any point, that there now is a relief of poverty aim”. The Commission has also produced extensive guidance for fee charging charities on how they can meet the requirement.
The type of activities that a charity can do to make sure that it does not fall foul of this requirement are many and varied. The most obvious ways is to make sure that those in poverty have direct access to services or facilities. For example, independent paying schools should make sure there is access to bursaries, and also funding arrangements. Indirect benefits will also be taken into account. However, trustees should make sure that all benefits are directly related to charities objects otherwise they may fall foul of the principle that the benefit must be related to the aim. One of the care homes assessed by the Commission was found not to be meeting the public benefit requirement because the benefits they were offering was not within the objects of the charity.
In conclusion, the public benefit requirement has its origins in case law. The Charities Act 2006 codified the requirement, but as section 3(3) clearly states, existing case law still has authority. The principles that a benefit must be identifiable and that it must be for the public or a section of the public are made clear by the Charity Commission and have their origins in case law. It has been suggested by commentators that both the Act and the Commission’s guidance (which isn’t binding) have altered the law. This essays has shown that essentially the law has stayed the same, and simply been codified. For example, the case law in relation to trusts for the advancement of religion, education or the relief in poverty stays the same. The “poor relations” and “poor employees” cases remain, and even the bar in relation to fee-charging charities (despite the negative press) appears to have remained constant.
Leglislation And Guidance
Charities Act 2006
Charity Commission Analysis of the law underpinning Charities and Public Benefit
“Charities and Public Benefit” The Charity Commission
Butterworths charity law handbook [2nd] Michael Scott (ed); WETHERED
“Reassessing ‘public benefit’ Alice Hold 29 January 2008, Solicitors Journal
“For Your benefit” Michael King 16 February 2010, Solicitors Journal
“Public benefit; the principles and the practice” Brigit Hanwell May 2008, Trusts and Estates Law Journal
“Who benefits?” Gerry Morrison Summer 2009 Charities Appeals Supplement
“Meeting the public benefit requirement” Alice Holt 17 June 2008 Solicitors Journal
“The continued relevance of the “poor relations” and “poor employees” cases under the Charities Act 2006″ Andreas Rahmatian 2009, Conveyancer and Property Lawyer
“Charities and Public benefit” Jeffrey Hackney 2008 Law Quarterly Review
“No faith in the Charity Commission” Sheila Lawler Wednesday 15 July 2009 The Guardian
“More ways than one” 6 October 2009, Kenneth Dibble, director of legal services at the Charity Commission
Scottish Burial Reform and Cermation Society Limited v Glasgow Corporation  AC 138
Pemsel’s Case (Commissioner for the Special Purposes of the Income Tax v Pemsel  1 AC 531
Oppenheim v Tobacco Securities Trust Co Ltd AC 297
Re Scarisbrook  Ch 22
Re Pinion Decd Westminister Bank Ltd v Pinion and another  Ch 85 Re Coats’ Trust v Gilmour  AC 426
Incorporated Council of Law Reporting for England and Wales v AG  Ch 73
Verge v Somerville  AC 496