Kenneth Pinkerton, Senior Associate in Turcan Connell's Charity Law Team write's in today's Courier.

Independent schools have faced a steady increase of pressure on their charitable status over the past decade.  

Between 2009 and 2014 the Office of the Scottish Charity Regulator (OSCR) carried out a complete review of the charitable status of the independent school sector. A small number of schools failed the charity test because OSCR determined they did not provide sufficient public benefit. All of them took corrective action, including expanding bursary programmes, and later passed. 

More recently, the Scottish Government has confirmed that it intends to press ahead with the recommendation of the Barclay Review of business rates to end charity relief for independent schools. The outcome of that Review was that it was unfair and unequal for independent schools to receive rates relief at 80% when state schools do not qualify, and recommended that independent schools should no longer receive the reliefs. The Scottish Government’s Programme for Government 2018-19 stated that a Non-Domestic Rates Bill would be introduced to further implement recommendations of the Barclay Review. In particular it will “…deliver measures to increase fairness and ensure a level playing field by reforming a number of reliefs……”.  It is understood that the Bill will be introduced in the early New Year, subject of course to ongoing demands on civil servants due to Brexit. 

Will the outcome of the Barclay Review be a push too far? The removal of business rates relief will no doubt lead independent schools to re-examine their business model. That will likely include increasing fees and perhaps decreasing bursary provision. It has been suggested that decreasing bursaries would be a dangerous move for independent schools. This is one of the elements of their work OSCR considers a public benefit and qualifies them for charitable status. 

What then if the independent schools consider abandoning charitable status and thus the requirement to provide public benefit?  In an article in Civil Society in May 2018 it was reported that independent schools south of the border are increasingly finding ways to abandon charity status, according to recent reports. The independent schools council reported in its annual census that only 75% of schools have charitable status and its figures show this percentage has been falling gradually but steadily for a decade.   

Abandoning charitable status will require consideration of the options and risks of removal from the Scottish Charity Register, critical for charitable status. That said, there is provision within the Charities and Trustee Investment (Scotland) Act 2005 (2005 Act) for a charity to ask to be removed from the Scottish Charity Register. 

Matters are not necessarily as straightforward as one may think. Under the 2005 Act, OSCR has monitoring obligations over former charities. Those obligations relate to the assets of a charity at the time of removal from the Scottish Charity Register.  OSCR has a duty to ensure that such assets are used for the purposes of the charity set out in the Register immediately before its removal. For example, even although no longer a charity, any “permanent assets”, for example the school buildings must still be used to advance education. However, it would not be necessary to provide public benefit. 

In addition, there will be the loss of tax privileges to consider. The key ones for the independent schools to consider in addition to the loss of business rates relief are direct tax, VAT, Land and Buildings Transaction Tax for land transactions in Scotland and Stamp Duty Land Tax for land transactions in England and Wales. 

In taking the decision to ask to be removed from the Scottish Charity Register, the charity trustees would have to apply their general duties under section 66 of the 2005 Act. In particular, the charity trustees must act in the interests of the charity and act with the care and diligence that is reasonable to expect of a person who is managing that affairs of another person. That is taken to be a higher standard than a person looking after his or her own affairs.  Given the ongoing monitoring obligations and the loss of tax privileges it would be challenging for charity trustees to conclude that removal form the Scottish Charity Register is in the best interests of the school. 

As mentioned earlier in this article, the removal of business rates relief will prompt the re-examination of the business model. There will likely be planning opportunities to ensure that any tax reliefs available are secured. Any re-examination should consider the entire “business” and include for example the use of associated foundations and the like. 

In all of this who might suffer the most? It has been reported that, following the review of independent schools, in addition to the consistent sharing of facilities and resources with local community, means tested bursaries provided by independent schools in Scotland have tripled. Were independent schools to abandon charitable status and as a consequence resolve to reduce bursary provision then surely it will be those benefitting the most from bursary and scholarship provision who will suffer the most, namely our children and young people.   

If that is an outcome of the Barclay Review, how will it fulfil the aim of the Scottish Government’s education policy, “….to ensure that we achieve excellence and equity for all of our children and young people in a highly performing education system”?