The folly of the public benefit test

This week the long running dispute between the Independent Schools Council (ISC) and the Charity Commission moves towards a conclusion in the courts. While Robert Pearce’s comments on Friday will come as a disappointment to association members hoping for clarity on the question of how schools may meet the new public benefit requirement, I can’t help but think that the issue has become little more than a distracting side-show.

The government has already made it quite clear that the Chair of the Commission must desist or be relieved her responsibilities; a future resumption of her unsuccessful attempts to force consolidation in the sector was always unlikely. In so far as the foray was the brainchild of Labour policymakers, the announcement on Friday that the Commission’s programme of assessments ‘is at an end’ and that irrespective of the outcome of the case ‘the commission intends to review the guidance in the light of its experience of its use’ comes as no surprise either: while politically useful in pacifying interests on the left of the party, this aspect of Labour’s policy excursion into the charitable sector has been far from successful in policy terms.

The episode offers a classic example of a market intervention gone wrong. The idea behind the legislative ‘fudge’ that was the Charities Act 2006 was that by removing the presumption of public benefit from charities concerned with the provision of education (among others), but leaving it up to the regulator to determine, on the basis of case law, what such charities must do to justify their existence, the Commission would be able to leverage to greater effect the assets of the ‘third sector’ estate – in particular those held in trust by charities whose objectives are achieved, wholly or in part, by charging fees. Though at the time, the Commission appeared nonplussed – arguing that case law meant the presumption would, in practice, be preserved anyway – Labour strategists calculated that under more assertive leadership (enter Dame Suzi Leather), this mechanism could make charities work harder.

Little surprise then that when the guidance for fee-charging charities emerged in 2008 many of the sector’s best rehearsed arguments for the public benefit – as, for example, those focusing on its contributions to the greater social good, and on savings to the taxpayer – were dismissed out of hand. The guidance stressed that the benefit must be ‘identifiable’, provided to ‘a section of the public’ in such a way as not to be ‘unreasonably restricted’ by inability to pay fees, and that ‘any private benefits must be incidental’, rather than integral to, its core purpose. It also stated that any benefits must also be set against any ‘detriment’ or ‘harm’ caused by their activities, giving unjustified legitimacy to the view that the continued existence of private schools has a negative impact on social cohesion.

At the same time the guidance made the level of bursary provision the key test of charitable integrity. Though the Commission has argued against setting specific targets, maintaining that schools should be judged on a case-by-case basis (an approach apparently set to be upheld by the Courts this week), hypothetical case studies supplied in conjunction with the guidance suggest what has effectively become a benchmark of 11% of fee income as an acceptable level of bursary provision. In consideration of other acceptable initiatives, such as offering the use of facilities to the wider community and partnerships with local state schools, the Chair subsequently made clear that in her view increasing bursary provision offers the most straightforward route to satisfying the new requirement.

The effect was to put such charities in an impossible situation. To continue to provide schooling, they must comply with the Commissions demands: they do not have the option to relinquish their charitable status; assets that have been put into trust cannot simply be taken out again. Effectively therefore, the prospect was of a choice between compliance and closure. Satisfy the regulator’s arbitrary definition of ‘trust’ or be forced out of the market. The experience the two test case schools – Highfield Priory prep school in Fulwood, Lancashire, and St Anselm’s in Bakewell, Derbyshire – both of which failed the test in 2009, giving rise to the ISC’s action, illustrates the stresses involved in being put in this position only too well. The hundred or so similar schools seeking as a result (under the leadership of IAPS chief executive David Hansen’s) an alternative not-for-profit vehicle that will enable them legally to relinquish their charitable status in the courts provides an indication of the number of schools affected. The fact is that ordinarily schools simply cannot afford this level of bursary provision. The price hikes involved would ruin them.

As my recent paper on the potential of England’s proprietorial independent schools made clear, I don’t happen to think that the charitable trust model is necessarily the most effective or efficient out there, nor do I find the ISC’s arguments in favour of charitable status ultimately convincing. Most people assume that charities exist to help people who cannot help themselves and I can only think of one example of a public school with an endowment substantial enough to be able to function with absolute integrity in this way. Far more fundamentally than they are charities, schools are businesses, and it would serve us all to approach them as such.

But legislation is not the way to get from A to B on this question. Labour’s approach was ultimately an attempt to force consolidation in the market; the irony is that left alone, this would have happened anyway and far more efficiently. Charitable mergers have been commonplace for some time now. The trend towards federation had begun well in advance of these developments and will doubtless continue long after the furore has died down – witness, for example, the rise of the GDST and of CfBT. Analysts estimate that a fifth of all independent schools will be in federation or alliance by 2020. Other schools, notably the Whispers School, Surrey, have taken the decision to liquidate their assets and expand their bursary provision to more competitive charitable schools.

This option has been successfully taken up by a number of charitable schools selling up to the Cognita schools group in recent years too. Schools acquired in this way to date include Cranbrook College, Ilford; Glensesk School, East Horsley; and Downside and West Dene (now Cumnor Girls), Croydon. With the Conservatives now committed to pursuing greater charitable efficiency by increasing competition in the market through academy expansion, the Charity Commission should put this sorry episode behind them and focus on developing and facilitating these and other means of rationalising independent school provision.