Decision Date: February 20, 2012
Link: Case Summary Document
Citation: The Upper Tribunal (Tax and Chancery Chamber), Warren and McKenzie JJ

Summary:

This was a determination of a reference from the Attorney-General of the United Kingdom regarding the meaning of paragraph 2(1)(A) of Schedule 1D to the Charities Act 1993 as amended by the Charities Act 2006 (Eng & W). The specific issue was whether charities for the relief of poverty in which the potential beneficiaries are connected by family relationship, common employment or membership of an unincorporated association, were in fact charitable. The issue turned on whether charities directed to the relief of poverty of a restricted group of persons were charitable, given the removal of the presumption of public benefit for such charities in the Charities Act 2006. Did such charities still meet the public benefit test?

There were a lot of parties involved in the hearing, including 11 charities which had restricted groups of beneficiaries, and 19 interveners. Their Honours acknowledged the ‘evident concern’ that had been caused to an estimated 1500 benevolent charities affected by this reference.

It was common ground amongst the parties, with the important exception of the Charity Commission, that the Charities Act 2006 (the 2006 Act) did not affect the charitable status of charities for the relief of poverty. It was submitted on behalf of the Attorney-General and the charities that although the presumption of public benefit had been abolished by section 3(2) of the 2006 Act, there had been no impact on trusts for the relief of poverty because their charitable status had never rested on a presumption. It was clear from the case law that in order to be charitable, a trust must be established for the public benefit. The 2006 Act made it clear in section 2(2) that ‘the prevention or relief of poverty’ was a charitable purpose. The public benefit aspect of such charities was provided by either the potential beneficiaries constituting a sufficient section of the public (even if a narrow class), or by a significant indirect benefit to the public as a whole arising from the relief of poverty.

The Charity Commission argued that trusts for the relief of poverty did not have to meet a public benefit test before the 2006 Act, but that this was no longer the case, and such trusts were therefore no longer charitable. This was particularly so where the potential beneficiaries were defined by reference to their relationship.

Their Honours said that there were three issues to be discussed:

·         the law of public benefit as it applied to trusts for the relief of poverty prior to the coming into force of the 2006 Act;

·         the basis on which charities for the relief of poverty amongst a beneficiary class were said to be ‘anomalous’ or at least different from other classes of charity under the pre-existing law; and

·         the effect (if any) that the coming into force of the 2006 Act had on the pre-existing law and consequently on the charities affected by this reference.

Their Honours considered the meaning of ‘public benefit’ in the case law. The meaning of ‘public benefit’ varied with the type of charitable purpose. It had two senses. In the first sense, it meant merely a requirement of any charity that it be beneficial to the community. In the second sense, it meant that it should benefit a ‘sufficient section’ of the public. Trusts for the relief of poverty only needed to meet the meaning in the first sense, but not in the second sense. Thus, relief of poverty charities were an exception to the requirement in the second sense, and it did not matter that they benefited only a narrow class of persons.

Before the 2006 Act became law, a charitable trust had to meet a charitable purpose within the Preamble to the Statute of Elizabeth. After the 2006 Act became law, the charitable purposes allowable were expressed in section 2(2) of the 2006 Act. In both timeframes, there was a requirement of public benefit. Counsel for the Charity Commission submitted that all charities had to meet the requirement of public benefit in both senses of the word since the 2006 Act. This was emphatically rejected by the Upper Tribunal. Their Honours said:

It is clear, we consider, that whether or not an institution satisfies the public benefit requirement must be assessed by reference to the criteria which are relevant to its purposes. For instance, as is clear from the cases, what is or is not a sufficient section of the public to satisfy the second aspect of public benefit varies depending on the nature of the charity: a sufficient section of the public in relation to an educational institution may not be sufficient in relation to a religious institution and vice versa. Accordingly, it does not make sense to address in abstract the public benefit requirement under the 2006 Act. Rather, it has to be asked what that requirement is in relation to the particular institution under consideration. In the case of a trust for the relief of poverty which had a narrow class of direct beneficiary, the trust was nonetheless charitable under the law prior to the 2006 Act even though the class was not wide enough to establish public benefit in the second sense as applied to poverty trusts. In order that a trust for the relief of poverty with a narrow class of beneficiary should be charitable, the public benefit requirement as applied to such a trust required only that public benefit in the first sense be established. The 2006 Act has not in our judgement, changed that. [emphasis added]

The 2006 Act refers to trusts for the prevention or relief of poverty. Either of these purposes will be charitable if it fulfils the public benefit requirement. But is there a difference if the trust is for the prevention of poverty alone, or in combination with the relief of poverty? Their Honours said that ‘logic and coherence’ required that the principle relating to trusts for the relief of poverty should equally apply to trusts for the prevention of poverty or for those with a combined purpose of prevention and relief. Their Honours held that ‘public benefit’ in the first sense applies to trusts for the prevention of poverty in the same way as those for the relief of poverty.

Their Honours stated that it hardly seemed necessary that the reference should have been made. The law seemed clear, both before and after the 2006 Act, that trusts for the relief (and prevention, under the 2006 Act) of poverty were both charitable and for the public benefit. The same sense attached to the words ‘public benefit’ as had always attached to them in relation to relief of poverty charities.

The case may be viewed at: http://www.tribunals.gov.uk/financeandtax/Documents/decisions/CharityCommission_v_HMAttorney.pdf

Implications of this case

The meaning of public benefit can vary with the type of charity that is being considered. The Upper Tribunal had previously looked at the case of independent schools and held that ‘public benefit’ in both senses applied to trusts for education – that is, that it be beneficial to the community and that it should benefit a ‘sufficient section’ of the public: see The Independent Schools Council v The Charity Commission for England and Wales at http://www.tribunals.gov.uk/financeandtax/Documents/decisions/Summary1_%20ISC_v_Charity_2_HM_AGref_v_TheCharityComm.pdf (summary of case).

However, this had been the case both before and after the 2006 Act came into force. In the schools case, the Upper Tribunal held that benefiting a sufficient section of the public was and always had been a requirement for education charities, but that it could be met by independent schools in a variety of ways that were within their own choice, such as scholarships or remission of fees. The Charity Commission had been making findings of non-charitable status for some schools, but this was ruled erroneous in law.

The ruling on this reference to the Upper Tribunal makes it clear that under the 2006 UK Act, as previously, relief of poverty charities are an exception to the ‘two meanings’ of public benefit rule. However, apart from the extension to prevention of poverty charities, the Upper Tribunal stated that this exception was not to be extended further.