Bursaries
In public service
The Charities Act 2006 is the most recent iteration of the debate on independent schools and charitable status. Sam Macdonald reviews the measures that will impact across the range of schools’ operations
Long before the 2006 Act received Royal Assent, rumblings of disquiet were felt across the charity sector. These were caused – at least ostensibly – by the obvious disparity between charities established for the advancement of education or religion, or the relief of poverty, which were presumed to provide public benefit, and all other charities, which were not. It was felt that all charities should be treated the same and all, therefore, should have to demonstrate that they provided public benefit.
Not far beneath the surface, however, there was a clear agenda to require certain types of charities to be more transparent and, specifically, to justify their entitlement to the favourable tax treatment that their status afforded them. Top of this list, of course, were independent schools, along with private hospitals and religious organisations.
In the end, the existing law on what is charitable has been reinforced (rather than altered) by the Act and the common law definition of public benefit is preserved.
The presumption that certain charities (schools included) deliver public benefit has, however, been removed. In addition, the Charity Commission has been given a more active role in monitoring the public benefit of charities.
It has recently conducted a consultation on its draft Public Benefit Guidance and will shortly be publishing a final version.
Fees under the microscope
One of the key areas of the public benefit debate has been the impact of fee-charging. The traditional view is that a charity may charge fees for its mainstream charitable services. However, the cost to the consumer-beneficiary is relevant when considering whether or not the charity’s services are available to a sufficient section of the public (as the law requires). A charity charging relatively high fees may need to provide access to its services – through appropriate means – at a lower or no cost and therefore to a broader cross-section of the community.
The Commission’s view, as expressed in its draft Guidance, appears to diverge somewhat from this approach: according to the Commission, there is a “standalone” requirement that people on low incomes should be able to benefit. While this may appear to be a distinction without a difference, a detailed analysis of the law reveals discrepancies and inconsistencies that could cause problems. For this reason alone, the final version of the Commission’s Guidance will be revealing.
Closer scrutiny
In any event, there is no doubt that charitable independent schools will now be more closely scrutinised when it comes to public benefit. It is expected that school fees will – as a rule – be regarded as “high” for the purposes of public benefit assessment and that schools will therefore be required to demonstrate how they make their services available to those who cannot afford to pay fees at the full rate. It is hoped that the Commission will recognise the variety to be found in the sector and will accept that what works for one school may not work for another. It should be accepted that a range of initiatives, designed to broaden access to the charitable services delivered by a school, should be taken into account. It should also be accepted that a school has an integral role within a community and offers opportunities far beyond those delivered in a classroom and to other groups as well as their core pupil contingent.
Value vs public benefit
There is an inevitable economic tension between the need to provide adequate public benefit and the need to provide value for money to fee-paying parents. While the expense of delivering public benefit can be described as the cost of preserving the advantages of charitable status, those advantages – at least in financial terms – are not as great as is often thought. For parents paying twice for their children’s education, the additional costs of public benefit can be hard to appreciate.
This, of course, means that voluntary funding becomes all the more important. If schools are able to say that they are providing for bursaries exclusively from endowment funds, then the tension with fee-paying parents will be relieved. While bursaries will not be a public benefit panacea – and for some schools will neither be efficient nor effective – it is clear that extending means-tested assistance with fees will be an important tool for many schools.
When cost matters
Bursaries are expensive, particularly where there is a strong demand for places (and a full fee-paying place is therefore taken up). A sustainable, long-term bursary programme requires a reliable source of income and realistically this is only going to be delivered by a well invested endowment. Happily, the renewed importance of endowment funds comes at a moment when the UK is beginning to embrace philanthropy and voluntary funding with something approaching the longestablished enthusiasm of North Americans.
Schools are becoming more sophisticated in how they run their development offices, linking marketing and alumni relations with fundraising in a way that is second nature in the US and Canada. Approaches to prospects are more focussed and strategic, with more care being taken towards the donor community. This all bodes well for schools embarking on major endowment campaigns and it is hoped responses will be positive.
Call to fundraisers
A lawyer given the opportunity to appear in print should sing for his supper and, with this in mind, here follow two legal tips and an early warning of a change that may be of great importance to fundraisers in schools.
First, when considering how to structure a development function within a school’s constitution, think hard about the potential pitfalls – as well as the advantages – inherent in a separately established fundraising charity or foundation. Well managed relations between governors and foundation trustees allow the separation to work positively, but if those relations sour, the damage can be difficult to repair. Consider establishing the fundraising board as a committee of the main governing body or otherwise setting the foundation up as a subsidiary corporate charity.
Secondly, think very carefully about appeal terms and what is said in its literature. Typically, these representations will become binding on funds raised in an appeal. The wish to provide clarity and certainty in communications with potential donors needs to be tempered by the need for appropriate flexibility in the use of the funds. Be especially mindful of statements that might imply the fund is to be held in perpetuity, with only income being spent, as permanent endowment funds that arise unintentionally can be burdensome.
Finally, watch out for lifetime legacies. A campaign has been lobbying HM Revenue & Customs and the Treasury for the last few years on the merits of charitable remainder trusts (as they are known in the US). These trusts, in their simplest form, enable a donor to settle an asset on terms that entitle him or her to the income from it (or to live in it, for example) for a period before the asset passes to a named charity.
At present, the tax treatment of these trusts rules them out of any planned giving or estate planning strategy. On the other hand, because the charitable element is recognised by the tax system there, they represent a fundamental part of the armoury of any school or college fundraiser in the US. Early signs of the campaign’s success were discouraging, but the idea has recently been taken up by the Conservative party in its study of the third sector1 and has already been included in a report on funding of higher education2. So lifetime legacies (as they are becoming known here) may yet be available as schools build their endowments.
1Breakthrough Britain – Ending the Costs of Social Breakdown: Vol. VI Third Sector
2The Thomas Report – Increasing Voluntary Giving to High Education
Sam Macdonald is a partner at Farrer & Co LLP. Sam can be contacted on shm@farrer.co.uk
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