Should Private Schools be Charities?

The Editorial in the Small Charities Coalition Newsletter of 16 October 2019 observed:

The suggestion has been made {at the recent Labour Party Conference}
that Private Schools are more like businesses and that their assets should be redistributed.

and followed it with a short on-line questionnaire asking:

What do you think?
Keep Private Schools Charitable
Remove the Charitable Status of Private Schools
Not Sure

Although obviously related, the issues of absorbing current “private schools” into the state system in order that their assets can be re-distributed (presumably throughout the state system) is NOT the same as the issue of removing their charitable status – not least because by no means ALL private schools are registered charities: they are already just “ordinary” commercial businesses.

The Editorial also asks “.... have you developed a partnership with a Private school? “.
And I have to answer “Yes”, and declare a “Conflict of Interest”.

One of our grandsons is currently a pupil at a large and well-respected Nth.London charitable private school, as formerly were our two sons (one of whom is our grandson’s father) previously.   In fact, our family has a long history of association with the school because our grandson’s maternal great uncle and great-grandfather were also pupils at the school – a 4-generation family association going back almost 100 years.   And I also have to say that, because of our personal interests and involvement in charity work, we have been very satisfied with the way that our grandson’s school has endeavoured to fulfil its charitable obligations, both through the provision of scholarships and bursaries to pupils whose families could not afford the fees (including ours) and in making its excellent grounds and facilities accessible to local community activities.

The question also implies (albeit probably unintentionally) that the issue of whether charitable status is warranted, or not, applies only (or, at least, primarily) to public schools – perhaps because of the recent self-interested and distinctly “uncharitable” attitudes of some high-profile public figures who were the “beneficiaries” of a private school education.   But the reality is that the blurring of the distinction between big “charitable” interests and big business interests is a much wider than just private schools, particularly in areas like health, social services and leisure.

The core of the issue is that the definition of “charity”, as applied in the Charities Act differs markedly from the general understanding of that word by the proverbial “person on a Clapham omnibus” – as was eloquently pointed out by none other than Lord Hailsham, who said:

“ … the words ‘charity’ and ‘charitable’ bear, for the purposes of English law and equity, meanings totally different from the senses in which they are used in ordinary educated speech or, for instance, in the Authorised Version of the Bible.”

The HM Revenue & Customs internal guidance manual on charitable status explicitly states:

You should not confuse the way in which a charity fulfils its objects with the charitable nature of the objects.   There is nothing to stop a charity charging a large amount of money for its charitable services.
....see the companion Charity Thought – “What is a Charity?

The issue is exemplified by Nuffield Health, a £900+M mega-charity which, ostensibly, is not a commercial business and so doesn’t make a “profit” to distribute to its “investors or shareholders”, as its 2017 Trustees’ Annual Report is keen to emphasise:

We are a trading charity:
....As a charity, we do not have investors or shareholders to answer to: our customers and patients come first.
We generate income by charging for the services we offer.

Nevertheless, in 2017 it was able to generate enough “surplus” (rather than “profit”) on its income from “charging for the {“charitable”} services it offers” to pay over £14M in “interest” (rather than “dividends”) to its “lenders and bondholders” (rather than to its “investors and shareholders”).   Nor is Nuffield Health a unique example – see the Charity Thought: “Charity Bonds Raise £33M

In short, private schools are not the only group of charities for which charitable status can be seen as a bit of a sham.   Nor are they invariably the worst offenders.
So any review of the charitable status of private schools MUST be within the wider context of what does and does not constitute charitable status across the charity sector as a whole, NOT as a political gimmick to take “pot shots” at contentious political opponents.

One consideration which warrants particular consideration, not least because of its wide-ranging implication for the whole of the charity sector, are the likely consequences of singling out private schools for the removal of their charitable status.   As with all such actions, the “Law of Unintended Consequences” must not be overlooked.

Some private schools, particularly the wealthier ones might simply decide to de-register as charities and become “commercial” schools as a way of avoiding being, effectively, taken over by the state.   They would inevitably have to put up their fees to cover the additional costs of not having charitable status (eg: becoming liable for full, rather than 80+% discount, on business rates).   But for many of their more wealthy clients, such increases in fees would be little more than inconsequential “small change”.   AND the schools would no longer be obliged to offer token bursaries and other such “charitable gestures” to protect a charitable status that they no longer had.

But many smaller private schools might well find that their clients could no longer afford the fees and so their children would have to transfer to the state sector.   That would impose an additional burden, and cost, on the already overstretched and struggling state sector.   After all, it is hardly realistic to expect parents, who are currently saving the state sector money by paying from their own pocket to have their children educated, to pay the state to educate their children instead when other children in the same school are getting their education free.   And that is particularly so when those parents are also contributing to the costs of the state education sector by paying their UK taxes like everyone else.

In short – singling out private schools for the removal of charitable status might have exactly the opposite effect to that intended – increasing, rather than removing, the social divide between those who can afford private education and those who can’t; increasing, rather than reducing, the costs of state education; whilst, at the same time, putting the most substantial private school resources even further beyond the reach of those less wealthy.

So how about a different approach?
Children of parents paying UK taxes (ie: who are entitle to free education in the UK) who are receiving private education are left where they are with the parents continuing to pay the school fees.   But the money that it would have cost the state to take that child back into the state sector is, instead, given to their current school to be used to fund bursaries for other children whose parents couldn’t afford the school fees.   There would, of course, have to be some state oversight of the now hybrid private/state-funded sector.   But since the most common reason for paying for their children to be educated privately is because of the perceived higher standard of private education compared to the state sector, the educational standards should not be a problem.

And in addition to the purely educational benefits, there is also the consequential benefits of the enhanced opportunities for social mobility in private schools providing education for children from more diverse financial/social backgrounds.

There is, of course, still the Law of Unintended Consequences intervening to make the system unworkable – eg: parents complaining that “poor” children (ie: from less wealthy families) are lowering the educational standard of the no-longer entirely private school and either taking their children away or refusing to continue paying and demanding that the state foot the bill as for other children, effectively causing the system to implode financially.

Or how about a different approach at the other end of the spectrum:  as befits the capitalist eutopia of a “low tax high income” economy, why not take education out of the state sector entirely ?   That would enable taxes to be lowered (no schools to be state funded) enabling take-home pay to rise so that parents could pay to have their children educated wherever they wished (and could afford!).   And the UK, being a “generous” nation, would inevitably step in to set up “real charity” schools where the children of low income families could be educated at low or zero fees.

Sounds a bit outrageously radical ?
Of course it is ! – the golden rule of “brainstorming” is NEVER to think that an idea is so unthinkable that it is unthinkable.   Because sometimes constructively thinking the unthinkable makes one realise that it (or something along similar lines) might not be quite so outrageous as it seemed at first

As the grandparents (and, previously, parents) of children who had the benefit of private education we are all too aware of the inherent inequities of the system.   But the emphasis has to be on educational equity for all, NOT educational equality.   In education, as in most other areas, there is no “one size meets all”.   There is as much inequity in an educational system which denies children the environment which is best for their abilities and circumstances to ensure that their achieve their potential simply because their parents can afford it as there is in an educational system which denies children the environment which is best for their abilities and circumstances to ensure that their achieve their potential simply because their parents can’t afford.

The inequalities and inequities of a private education system flourish in environments where there are inequalities and inequities in the distribution of wealth.   Attempting to dismantle an education system because it favours the wealthy is never going to succeed.   Inequality of wealth creates inequalities of power and influence.   And those with great wealth and power are always going to find ways of educating their children to aspire to, and achieve, similar wealth and power.   Breaking the incestuous cycle of education, wealth & power cannot be achieved by breaking just one element of the cycle.   The way to make the private education sector more equitable and equal is to use the “leverage” of the charitable status of many private school to promote greater social mobility – finding way of providing “private” education for more children from families who otherwise would not be able to afford it.

A similar, but slightly less “incestuous” situation occurs in other “charity” sectors where the bulk of the charity’s income comes from “charitable trading” – selling their “charitable” services to those who can afford to pay for it (with just token provision of services for “the poor and those in need” – eg: the health and social care sectors).

So, the answer to the question is “Yes”, some radical review of the “charitable” status of private schools is overdue – but ONLY as just one element of a radical reform of the whole spectrum of “charitable trading”.

After all – most commercial organisations (my local butcher, for example) deliver “public benefit” – if they didn’t they’d go out of business. Organisations like Nuffield Health and private schools meet the Charities Act criteria because their core activities happen to fit neatly within one, or more, of the charitable objects defined by the Charities Act.   I had intended to try to find a legitimate charitable purpose to get my local butcher registered as a charity – but escalating business rates forced him out of business.   Had he become a charity, the 80% discount on business rates that he would have then been entitled to might have saved him.   It is outrageous that Nuffield Health, and other, “charitable” hospitals get the charity 80% discount on their business rates while NHS hospitals do not.

So here’s another outrageous suggestion !
How about modifying the Charities Act to add the criteria that an organisation can only be charitable if either at least half of its income comes from charitable donations (ie: NOT from payments for goods or services from beneficiaries or from “commercial” – including local government – contracts to provide those goods or services) or at least half of its workforce are unpaid volunteers ?   Existing “charitable traders”, eg: Nuffield Health, and many private schools, would have to convert to another not-for-profit structure (eg: Community Interest Company, CIC), or become an ordinary commercial company (like the small local private school that another of our grandsons attends).   But those which remain would, at least, more closely resemble what the “ordinary person on the Clapham omnibus” understands to be “charities”.

 

Note: This Charity Thought represents the personal views of one of the Trustees of Small Charity Support.   But all the Trustees have authorised its inclusion on the Small Charity Support website.

How Small is Small ?

A recent newsletter from the Small Charities Coalition asked the interesting questions “How small is small?   ....can {SCC members} think of other names to describe smaller charities?"

"Small" is a comparative adjective.
Smaller than what?
If you said of a person, or a car, or a box of chocolates, or anything - that they were "small", what would that mean?
In everyday speech that would mean that they were smaller than the norm, the typical, the average, ie: they were smaller than expected for that kind of thing.   And "micro" would mean "even more so".

Tallest man 1If the vast majority (more than 82% according to the Charity Commission's latest figures) of charities have incomes less than £100K then charities with an income less than £100K are NOT small - they are just "ordinary" - they are the norm.
So they should NOT be called "small charities" at all - they are just "charities" - the normal every-day standard-sized charity.

A person who is 5'10" (1.78m) isn't "small" just because there are a few people who are taller than 7' (2.13m)

If it is necessary to distinguish charities on the basis of their size (ie: in terms of their annual incomes) the comparators should be reserved for the minority which have significantly higher incomes than the majority of "ordinary" charities - eg: there could be "charities", "rich charities" and "wealthy charities" (which would also put a better focus on why, and the implication, they need to be identified as different from "ordinary" charities).

I was tempted to say that there could be charities, fat charities and obese charities, but that might be a step too far  .
But it does illustrate a rather more subtle, and therefore less obvious, point about the use of terms like "small" and "micro" to describe what are actually "normal" charities.

Words SmallAndLargelike "small" and "micro" tend to carry with them a pejorative implication - of being a bit "less good than...", or "inferior to...", the norm.
The classical example of that is the dispensation, granted by the Charity Commission, to allow "small" charities to use Receipts & Payments accounts rather than accruals accounts.   But R&P accounting is widely regarded (particularly by "professional" accountants) as being an inferior cut-down accounting system, not least because it is not capable of giving a "true and fair view" of the charity's financial situation (overlooking the fact that full "true and fair view" accruals accounts didn't do much to prevent the financial debacle of the collapse of the Kids Company - one of the "rich" charities).

And by the same argument:  has Small Charity Support got its name wrong?
Shouldn't we be just "Charity Support"?

 

Eighteen top 100 charities pay trustees, finds research

 

Eighteen of the UK’s top 100 charities pay one or more of their trustees, according to research published today in Charity Finance magazine.   The figures are drawn from an analysis carried out by Helena Wilkinson, partner and head of charities and not-for-profit at Price Bailey.

The analysis examined the accounts of the charities that feature in the haysmacintyre / Charity Finance 100 Index – a list of the largest charities in the UK which excludes public sector bodies, and is based on a three-year rolling average of income.   To be able to pay trustees, charities need to obtain permission from the Charity Commission. It is unknown how many charities overall pay their trustees, though William Shawcross, {the then} chair of the Charity Commission, has said the regulator looks sympathetically on requests.

 

The above are extracts from an article published in “Civil Society News” on 2-Oct-17
https://www.civilsociety.co.uk/news/eighteen-top-100-charities-pay-trustees-finds-research.html
The following is a comment to the article posted on Facebook.

 

Yes, and it happens lower down the financial scale, too.
I know of leisure centres whose paid CEO / Operations Manager is also a Trustee.

It's a disgrace that the Charity Commission keeps no official records on remunerated trustees (as various FoI requests have revealed).

Working on a HelpLine for small charities I regularly get asked why people wanting to set up a charity but, having a family to support, can't take a reasonable remuneration from it (ie: rather than employing someone else to do the same job).

It's very distressing having to tell them that it's unlikely that the Charity Commission will allow that on the clearly hypocritical grounds that "Trustees are supposed to be voluntary" whilst knowing that there are some charity trustees who have been given dispensation to be remunerated (often at annual salaries which are higher than the annual turnovers of most small charities - indeed higher than the national average salary).

 

Leaflets2Guidance Leaflets

Small Charity Support produces numerous (more than 40 at the last count) free-to-download-and-use guidance leaflets covering most of the issues encountered by the trustees of small charities.   Some of the leaflets appear in more than one section.

Click on a leaflet title to open a downloadable version (PDF).
Or on a section heading to go to another web-page with fuller details.

For a downloadable/printable list of all the leaflets available click HERE

 

The Roles & Responsibilities of Small Charity Trustees 

SmallCharityTrusteesThe Roles & Responsibilities of ALL Trustees

Typical Roles & Responsibilities of the Chair
     {Including managing meetings}

Typical Roles & Responsibilities of the Treasurer
   {Including preparing regular reports to Trustees}

Payments to Trustees (and connected persons)

Minutes {Recording discussions & decisions effectively}

Preparing the Trustees Annual Report & Accounts

 

Managing a Small Charity

TrusteesTeamworkOutputs & Outcomes
   {What the charity does, and what it achieves}

Programme Planning

   Introduction to programme (aka: business) planning

   Programme Plan Template (editable text document)

   Programme/Project Tasks Monitoring (editable spreadsheet)

 

Managing Meetings

Typical Roles & Responsibilities of the Chair

Minutes {Recording discussions & decisions effectively}

Managing the Money

Typical Roles & Responsibilities of the Treasurer

Budgets & Cash Flows

For more information, see "Simple Accounts for Small Charities", below

Preparing the Annual Report & Accounts

ALL charities, regardless of their size MUST prepare Trustees Annual Reports & Accounts and make them available to the public on reasonal requeste WHETHER OR NOT they are required to submit them automatically (ie: without being requested) to the Charity Commission.

 

ScrollExample Policies & Procedures for Small Charities

Takes you to a separate web-page where you can find a range of 18 downloadable/editable example policies & procedures which you can adapt to your charity's own requirements.

 

Simple Accounts for Small Charities

0404b CashFlowMonitoringAugTakes you to a separate web-page with guidance on how to prepare and manage the finances of a small charity in accordance with Charity Commission requirements WITHOUT having to use complicated accounts procedures and professional accountants or financial advisors.
The leaflets on that web-page are:

    • What accounts ALL charities MUST keep;
    • Typical Roles & Responsibilities of the Treasurer;
    • Recording & Managing Your Charity's Funds
    • Budgets & Cash Flows
    • Financial Controls CheckList
    • Bank Account
    • Preparing the Trustees Annual Report & Account;
    • Simple Accounts Spreadsheet {MS-Excel} & Instructions

 

Starting & Registering a Small Charity

StartingACharityTakes you to a separate web-page with guidance on what you will need to have and to do to set up a new small charity and get it registered with the Charity Commission.
The leaflets on that web-page are:

    • Introduction & Overview;
    • Outputs & Outcomes;
    • Charitable Purposes/Objects;
    • Governing Document
    • Roles & Responsibilities of Trustees;
    • A "Minute" Book;
    • Bank Account;
    • "Simple is Beautiful" - Managing Charity Accounts;
    • Programme Planning;
    • Policies & Procedures;
    • Registering with the Charity Commission.
    • Preparing the Trustees Annual Report & Account;

 

Quiz ScoreBoard

Not a leaflet - just a bit of fun !
A downloadable Quiz Scoreboard {in open-source MS-Excel}

If your charity runs quizzes, whether as social events or fundraisers (or both) this might be of interest

 

 

 

So what is a Charity?

The problem is summed up rather nicely by none other than Lord Hailsham, who said:    
“ … the words ‘charity’ and ‘charitable’ bear, for the purposes of English law and equity, meanings totally different from the senses in which they are used in ordinary educated speech or, for instance, in the Authorised Version of the Bible.”

HumptyDumptyColourOr, as Lewis Carroll put it more eloquently in Alice’s encounter with Humpty Dumpty in “Alice Through the Looking Glass":

"I don't know what you mean by 'charity,' " Alice said.

Humpty Dumpty smiled contemptuously. "Of course you don't—till I tell you.
I meant 'there's a nice knock-down argument for you!' "

“But 'charity' doesn't mean 'a nice knock-down argument'," Alice objected.

“When I use a word," Humpty Dumpty said, in rather a scornful tone, "it means just what I choose it to mean—neither more nor less."

“The question is," said Alice, "whether you can make words mean so many different things."

“The question is," said Humpty Dumpty, "which is to be master—that's all."

 

With apologies to Lewis Carroll, who was clearly also familiar with the tendency of legislators to use words in idiosyncratic ways.

 

The following text is taken without alteration from the HM Revenue & Customs website
https://www.gov.uk/hmrc-internal-manuals/vat-charities-manual/vchar2000

What is a Charity?

Distinction between a charity’s objects and the way it operates (VChar2050)

You should not confuse the way in which a charity fulfils its objects with the charitable nature of the objects.   There is nothing to stop a charity charging a large amount of money for its charitable services.   Private hospitals, nursing homes and schools can have charitable status and may charge substantial fees.   They will normally be charitable organisations provided they are non-profit making ie there is no distribution of profits to shareholders.

Trading subsidiaries (VChar2100)

Charity law restricts the activities in which a charity can engage to those relating to its charitable objectives.   In addition trading activities of charities are exempt from corporation tax only to the extent that they are in pursuit of the organisations charitable objectives.   For these reasons many charities establish trading subsidiaries.   Charity trading subsidiaries engage in a wide range of commercial ventures in order to raise funds for the parent charity.   Profits of trading subsidiaries can be passed to the charity free of corporation tax.   It is important to remember that charities’ trading subsidiaries are not charities.   Some VAT relief, such as the sale of donated goods and fund-raising events, specifically extend also to charities trading subsidiaries.   But in many cases relief is available only to the charity.

Terminology (VChar2150)

Charities will often refer to certain of their activities as “trading” activities.   In this context the term “trading” is usually used to describe the organisation’s non-charitable commercial fund-raising activities.   These activities are usually, if they are of any scale, carried out by the charity’s trading subsidiary.   It is important not to confuse the term “trading”, when used in this way, with the term “business” as used for VAT purposes.   For VAT purposes “business” can have a much wider application than “trading”, as understood by charities.   A charity’s trading activities will invariably be business activities for VAT purposes.   But it is important to bear in mind that, in addition, some or all of the charity’s primary or charitable activities might also be business activities for VAT purposes.

The distinction between “trading” and “business” is a common source of confusion for charities.   A charity may consider very carefully the VAT aspects of their trading activities, but neglect to consider whether their charitable activities might also be “business” for VAT purposes.

When seeking advice charities will often refer to their “trading” activities.   It is important when responding that you do not use the term “trading” if what you mean to refer to are the charity’s business activities.

Not for profit (VChar2200)

Charities and “not for profit” organisations are not the same thing.   While all charities will be non-profit making organisations, not all non-profit making organisations will be charities.   Clubs and associations, professional and trade bodies, mutual societies (including many large insurance companies and building societies), friendly societies, motoring organisations, the Co-operative movement, trades unions, political parties and lobby groups etc are all non-profit making organisations, but they are not necessarily charities.   Bodies which exist to benefit their members, as opposed to the community at large, are not usually charities.   Organisations with political aims and objectives are not charities.

Charities may have a membership structure and the members may derive some benefits.   But usually it is a case of the body of members coming together to support work which is of benefit to the wider community.   An organisation which exists solely to benefit or further the aims of its members is not a charity.

The status of commonly found organisations (VChar2250)

The following paragraphs outline the status of some common organisations.

Sports clubs

Sports clubs are not usually charities.   This is because the promotion of sport is not a charitable object in itself and such clubs usually exist to provide facilities for their members.

However, it may be possible for some sports clubs to be charities.   If the organisation has objects which are:

  • for the public good
  • in the interests of social welfare
  • the club exists for people who are in some way in need by reason of youth, old age, infirmity, disability, poverty or social circumstances.

Under these conditions an organisation which exists to promote, for example, swimming to assist the rehabilitation of injured people might qualify as a charity.   Or the provision of sporting facilities might be ancillary to wider charitable objectives.   Also, certain umbrella bodies which exist to promote a sport and physical welfare in general might have charitable status as being for the benefit of the community.

Affiliation to a national charity

A local organisation may be affiliated to a national organisation which is a clearly recognised charity.   It may be that all affiliated organisations are governed by the same written constitution and share the same aims as the national charity.   Only where this is the case can you accept that the local organisation is also a charity.

Philanthropic organisations

There are a number of organisations which exist to do good work but are not charities.   Many such organisations choose not be charities.   Charitable status brings with it many restrictions on the use to which funds can be put.   Some organisations prefer to retain freedom to spend money on non-charitable activities.

Educational organisations

Charities that are advancing education are a benefit to the community.   The term “advancing education” includes not only the obvious purpose of schools and universities but also other activities of benefit to the public such as research or information services.   However, there are commercial organisations providing similar services and the main distinction between the commercial and the charitable organisation is likely to be the intention or not to make a profit.

Hospitals

Many private hospitals (ie non-NHS) and nursing homes are operated by charities.   Others may be profit-making commercial organisations.   NHS hospitals and NHS Trusts are Crown bodies for VAT purposes and are not charities.   However, such hospitals may have associated charities, leagues of hospital friends etc which exist to help and raise money for the hospital.   NHS Hospital managers and consultants frequently act as trustees of charitable Trusts founded to help the hospital in its work and funded from donations or bequests.   These charitable Trusts will usually have charitable status in their own right.

Political organisations

Charities freedom to engage in political activities is limited and they cannot have political objects.   They are constrained by law to reasonable lobbying to further their non-political objects.   The Charity Commission have set guidelines to specify what is and what is not acceptable.   Many political organisations operate along the same lines as charities.   For example they will engage in fund-raising and rely on volunteer support.   They will usually have a membership structure.   They are not charities because they pursue political objects; as do lobby groups, eg Greenpeace and Amnesty International.   (However, please note that some political organisations may set up a charitable foundation or trust which does not get involved in the lobbying.).

Housing Associations

Particular care should be taken with Housing Associations.   Some have charitable status and some not.   Charitable Housing Associations usually exist to provide housing for a particularly needy sector of the community eg the elderly, people with disabilities or those who are homeless.   Other Housing Associations exist to provide housing generally, or to serve a particular locality; these will not necessarily be charities.   You will find that some Housing Associations are Industrial and Provident Societies.   This does not entitle them to claim the charity reliefs - you will need to check if the Housing Association is registered with the Charity Commission or recognised as a charity by HMRC.

Conclusion  (VChar2300)

Despite the apparent complexity of the issues set out above, the status of an organisation is rarely a subject of dispute.
If there is doubt it is up to the organisation concerned to demonstrate its charitable status.

 

 

So What is a Charity?

As Humpty Dumpty puts it:  if you are powerful enough to be the "master" you can make the word mean what you want and it is up to everybody else to fathom out what it means, and act accordingly.

And if you are Humpty Dumpty, you can also make word NOT mean what you don't want them to mean to avoid doing things which would otherwise be illegal under the Charities Act.
For example:   you can make "Investor Bonds" NOT mean "Shares", and the payments of generous "interest" on those bonds from the charity's "surplus" income NOT mean paying "dividends" on the charity's "profits".
See the companion Charity Thought - Charity Bonds Raise £33M