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The Public Benefit Requirement for Charitable Trusts: A Mere Formality?

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About The Author

Suleha Baig (Guest Contributor)

Suleha Baig is an incoming third-year law student at Durham University, aspiring for a career at the commercial Bar. She is passionate about human rights causes and enjoys writing and editing articles for online Blogs across a variety of different subjects. In her spare time she likes to read both classic and contemporary literature as well as do Pilates.

Eton College. Credit: Kazimierz Mendlik

A charitable trust is a form of express trust which provides a benefit to the public. s.1(1) Charities Act 2011 defines a ‘charity’ as an institution which:

(a) is established for charitable purposes only, and

(b) is subject to the control of the High Court in the exercise of its jurisdiction with respect to charities.

These public trusts have many fiscal advantages including - but not limited to - exemption from income tax on investments as well as corporation tax, as well as being exempt from the rule on perpetuities. They are therefore heavily regulated by the Charity Commission, a non-ministerial arm of government, alongside the Charity Tribunal (which hears appeals against the Commission’s decisions) and the High Court (which exercises jurisdiction over charities in England and Wales).

A charitable trust must fulfil particular requirements under the Charities Act 2011 to be considered valid. The first of these, as mentioned above, is that it is ‘established for charitable purposes only’ per s.1(1)(a). The second requirement is that the trust purpose falls under at least one of the thirteen charitable ‘heads,’ listed in s.3(1) of the Act. The third requirement is 'public benefit', enshrined in s.2(1)(b) of the statute. This states that the trust purpose must be for the public benefit in order for it to be a ‘charitable purpose’, which in turn is a requirement for charity status. In practice, this can often be the determining factor in the Charity Commission’s analysis as evidenced by the Charity Commission’s own guidance, which states that:

where the commission decides that the organisation’s purpose is not for the public benefit, this would mean that, in its view, the organisation is not a charity.

Charity trustees must ‘have regard’ to this guidance when exercising any powers or duties to which it is relevant (s.17(5) Charities Act 2011).

While the ‘public benefit’ requirement is in theory one of three (and arguably a sub-requirement of s.1(1)’s ‘charitable purpose’ at that), Matthew Mills argues that there is significant judicial reliance on the public benefit requirement for charitable trusts to conclusively determine charitable validity’, implying that it is a core requirement – and a major test - for charitable trusts. This article will consider whether Mills’ analysis holds up to an examination of the case law, or whether the ‘public benefit’ requirement has been so broadly interpreted as to become a mere formality.

Independent Schools and the Public Benefit Test

The Charities Act 2011 offers no definition of ‘public benefit’, with s. 4(2) clarifying that a presumption of public benefit does not exist under the statute. The matter of defining a ‘public benefit’ is left to the courts. The Charity Tribunal in Independent Schools Council v Charity Commission (2011) UKUT 421 (TCC), when asked to determine how the public benefit requirement applied to education charities, therefore set out a two-part test for the ‘public benefit’:

  1. There must be an identifiable benefit(s) and
  2. The public as a whole or a sufficient section of the public must be benefitted

It could be argued that the mere existence of such a test positions public benefit as a core requirement for trusts to attain charitable status, rather than a mere formality easily passed. This is further supported by elaboration on both requirements in significant detail by the Charity Commission in its guidance as a result of the decision. For example, the Commission states that an identifiable benefit is one which is clear, related to the aims of the trust and balanced against any detriment caused, offering detailed description of each requirement in this manner.

Independent Schools concerned the status of fee-charging schools which, as the Charity Commission submitted, may not always be for the benefit of a sufficient section of the public.’ However the Tribunal held that such schools, despite their preference (if not complete exclusivity for students with the ability to pay fees, do satisfy this requirement. The principle that an organisation charging fees does not mean it cannot be for the benefit of the public was established by Lord Wilberforce in Re Resch’s Will Trusts (1969) 1 AC 514  due to the ‘indirect benefits’ of such institutions, which he argued support public facilities.  The Tribunal in Independent Schools stated at para 217 that it is not possible to be prescriptive about the nature of the benefits which a school must provide to the poor nor the extent of them, and this was instead a matter for the trustees of each charity to determine.

Independent Schools was unusually and directly political. The Respondent Education Review Group (ERG) founded part of their argument – which the court referred to as a ‘manifesto’ - on the basis that independent schools could not be for the ’public benefit’ due to their dis-benefits to the wider public and the education sector (eg. by cherry-picking the best students from state schools and acting as barriers to social mobility). The case also considered whether the group benefitted by the charity (those with the ability to pay fees) was too narrow to be truly ‘public’.

Notably, the political nature of the questions raised in the case meant that the Tribunal felt it was not competent in its judicial role to provide a more thorough decision. It subsequently noted that this was a debate for Parliament, not the courts. In their closing statement, the Tribunal said:

Our Decision will not, we know, give the parties the clarity for which they were hoping. It will satisfy neither side of the political debate. But political debates must have political conclusions, and it should not be expected of the judicial process that it should resolve the conflict between deeply held views. We venture to think, however, that the political issue is not really about whether private schools should be charities as understood in legal terms but whether they should have the benefit of the fiscal advantages which Parliament has seen right to grant to charities. It is for Parliament to grapple with this issue.

This reticence to intervene in politics – often seen in public law cases - provides somewhat of an explanation for the Tribunal’s reservations in its analysis, although it made suggestions of measures that fee-charging organisations can take to meet the public benefit requirement, such as providing bursaries and allowing public use of their facilities. Ultimately though, it left this determination up to the trustees of the individual charity. In isolation, this would suggest that the threshold to establish that a trust is for the public benefit is not high, as despite targeting a particular narrow group within society (those with the ability to pay), fee-charging institutions qualify as having a ‘public benefit’ purpose.

Restricting the Public Benefit Test: Baddeley and Oppenheim

Pre-Charities Act case law does limit the scope of the ‘public benefit’ in several ways, which – as these limitations are still good law - implies that the requirement is not always readily satisfied, and thus is more than a formality despite the court's approach in Independent Schools.

The ‘class within a class’ rule from IRC v Baddeley [1955] UKHL 1 is an example where the public benefit requirement is not satisfied – in this case where the section of the public benefitting is effectively a ‘class within a class’ and the benefit is therefore too restrictive. In Baddeley, a trust for the ‘promotion of the religious, social and physical well-being of members of the Methodist Church in West Ham and Leyton’ was found to be too limited to constitute being for the public benefit.

Furthermore, Lord Simmonds developed the ‘personal nexus’ test in Oppenheim v Tobacco Securities Trust Co Ltd (1951) AC 297, which acts as another limitation on the scope of the public benefit requirement. The principle here is that a class of persons will not be regarded as a ‘section of the community’ where the quality which distinguishes them is a personal relationship, either between the donor and beneficiaries or the beneficiaries themselves. This is a private class and thus the benefit is not strictly for the ‘public’ or a section of it. This rule illustrates again how significant consideration has been given in practice to whether a trust is for the benefit of the public or a large enough section of it.

Lord MacDermott’s dissent in Oppenheim is notable as he criticised the test as arbitrary, observing that there is:

...much difficulty in dividing the qualities or attributes, which may serve to bind human beings into classes, into two mutually exclusive groups, the one involving individual status and purely personal, the other disregarding such status and quite impersonal.

Lord MacDermott instead proposed an approach which focused on a general survey of the circumstances and considerations regarded as relevant rather than of making a single, conclusive test.’ This is strikingly similar to the Charity Tribunal’s conclusion, almost sixty years later in Independent Schools, that ‘it is not possible to be prescriptive’ about this topic due to its inherent complexity.

Exceptions to the Personal Nexus rule: Poverty and Preference Clauses

It is important to note that the Oppenheim rule does not apply to trusts for the relief of poverty. In Re Scarisbrick (1951) 1 All ER 822 CA a trust for ‘my poor relations’ was held to be a valid charitable trust despite its personal element ('my relations'). This is part of a wider principle whereby trusts for the relief of poverty are exempt from the ‘public benefit’ requirement, needing only to satisfy the requirement of an ‘identifiable benefit’ (the first part of the test laid out in Independent Schools). It could be argued that this principle undermines the usefulness of the public benefit requirement.

The reasoning given for this principle by the Charity Commission’s guidance is that the relief of poverty, for however small or restricted a group, is in its nature calculated to benefit the whole of society and it is beneficial to promote such relief of poverty in society. However, Andreas Rahmatian argues that a privileged position of the relief of poverty cases with a personal connection restricting the public is no longer acceptable today as support is now being provided to the poor by way of our welfare system. Ultimately this is a narrow exception to the general applicability of the personal nexus test, which remains valid for every other head of charity.

Another potential exception to the personal nexus rule is through the employment of preference clauses. In Re Koettgen’s Will Trusts (1954) Ch 252,  a trust for the education of British persons with a stipulation that the trustees were to give preference to the families of employees was held to be a valid charitable trust. The personal connection was seemingly overlooked in favour of the preference clause.

However, Re Koettgen was subsequently considered by the Privy Council in Caffoor v Commissioner of Income Tax, Colombo (1961) AC 584 which dealt with another education trust with a preference – in this case, for members of the grantor’s family. Lord Radcliffe appeared to argue around Re Koettgen, not outright disagreeing with the prior court’s decision but arguing that it ‘edges very near to being inconsistent with Oppenheim’s case’ and turned on the construction of that particular trust – in some ways vindicating Lord MacDermott’s dissenting argument that case by case consideration is the only way to properly determine this question. In Caffoor, the Privy Council distinguished Re Koettgen and instead applied the Oppenhem rule, finding that the trust was not a charitable one. The same thing occurred in IRC v Educational-Grants Association Ltd [1967] 3 WLR 341, distinguishing the Re Koettgen exception and applying the narrower interpretation of public benefit given by Oppenheim.

Conclusion

The law of charities in general – and the ‘public benefit’ requirement in particular – is extremely complex, has developed incrementally over time, and is often contradictory. The public benefit requirement has existed in one form or another for well over a century and was more recently preserved and codified by multiple Charities Acts. The development of principles such as the ‘class within a class’ rule and the personal nexus rule in Baddeley and Oppenheim respectively - which operate to this day - ensure that the requirement is only satisfied where the trust, in fact, is for the benefit of a ‘sufficient section of the public’ and is not a mere formality for any trust claiming to be for the public good. Likewise, the general statutory position of the non-existence of a presumption of public benefit (s4(2) Charities Act 2011) means that there will essentially always be judicial deference to the public benefit requirement, and courts will always have to consider it closely.

The decision in Independent Schools appears on the surface to open up ‘public benefit’ by its application to fee-earning schools, and its refusal to set (or allow the Charity Commission to set) prescriptive guidelines, instead leaving the judgment to trustees. However, a closer reading of the judgment shows that Independent Schools is narrowly applied to trusts for education, is consistent with older case law and attempts to elaborate some kind of objective test for the public benefit requirement. The relative weakness of the decision can be attributed to the Tribunal’s refusal to intervene in a political matter which they saw as a question for Parliament, rather than a true relaxation of the rules on public benefit.

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Tagged: Equity, Judicial Review, Trusts

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