Private Schools (Charitable Status) (PE1531)
The next item of business is an evidence session with the Office of the Scottish Charity Regulator, as part of the committee’s consideration of petition PE1531, by Ashley Husband Powton, on removing charitable status from private schools. Members have a note by the clerk—paper 2 refers—and the submissions and two reports from OSCR. From OSCR, I welcome to the meeting Martin Tyson, head of registration, and Judith Turbyne, head of engagement.
I invite Mr Tyson to make a brief opening statement, after which we will move to questions.
Thank you for the invitation to attend and elaborate on the written evidence that we submitted on 22 December.
I have worked in the registration team at OSCR for eight years, and for the past five years as head of registration. I oversee issues of charitable status for OSCR and as part of that role I have had operational responsibility for the review of fee-charging schools’ charitable status. My colleague Jude Turbyne joined OSCR in 2013 as head of engagement; she has responsibility for strategic policy and stakeholder relations.
I understand that members have had the opportunity to see the summary report that we published in December. The idea of that was to give an overview of the work that we have done since 2006 to ensure that fee-charging schools on the Scottish charity register comply with the charity role. In our letter to you we tried to respond to the committee’s specific concerns, which arose from its meeting in October.
The reviews of the schools have been a high-profile piece of work for OSCR. We have tried to be as transparent and proactive as possible in explaining how we made our decisions and we are very happy to help the committee in its consideration of the petition.
In OSCR’s December report, you recognised that independent schools have a high risk of failing the new Scottish charity test. Nine of the 50 schools initially failed the test on the basis that the fees that they charged unduly restricted access to the educational benefit that they provided. Does the fact that there is a high risk of failing the charity test suggest that independent schools are operating on the margins of what it means to be a charity?
Looking back at the reasons for our decision to examine the independent schools in the first place, the Charities and Trustees Investment (Scotland) Act 2005 introduced the explicit requirement that access to the benefit that a charity provides should not be unduly restricted. During the debate on that part of the bill, that was discussed specifically with reference to the independent schools. It was fairly clear that there was a need to consider the issue of those schools, and that Parliament wished us to do so.
The charity test has been in operation for eight years, so it is not that new. However, over the piece, we have found that, although the majority of schools have passed, there has been a reasonable failure rate. It is not necessarily that the schools are operating on the margins of what it means to be a charity; it is more that this is a group for which the undue restriction requirement is particularly relevant. In the past, we have said that this is a high-risk group, and that is probably the position that we would stick with.
I was under the impression that businesses cannot be charities. A private school that charges a fee is, in essence, a business. How do those schools qualify as charities, if they charge for the main business that they carry out?
There are a couple of elements to that. First, an organisation cannot be a charity if it distributes profits to its members and none of the schools does that. That is one of the basics of charity law, which applies to the 23,500 charities on the register.
The other element concerns what a charity is about. A charity is a body that is set up for a charitable purpose and provides benefit in furtherance of that purpose. The schools are established for educational purposes—education is clearly a charitable purpose—and it is clearly recognised that running a school is a way of providing benefit in furtherance of the advancement of education. Obviously, there are all sorts of difficult issues beyond that, but that is the essence of it.
On the issue of charging and whether that makes a charity a business, there are many charities that charge for various things that they do. For example, there are theatres and concert halls that charge entrance fees and sports organisations and medical charities that charge for the benefit that they provide. Charging is one way of charities sustaining what they do. It is one business model. Other charities run on grants or on a mixture of grants and donations, but some also charge for things that they do. The matter of charging does not make an organisation a business or stop it being a charity.
Under the legislation, OSCR has wide discretion to decide on a case-by-case basis whether a charity meets the charity test. Do you think that the degree of discretion that is afforded to OSCR introduces a level of flexibility and unpredictability to the charity test?
The level of discretion that is afforded is relatively wide in terms of quite a lot of the requirements of the charity test. As I said, there are some absolute things, such as the issue of profit distribution, in relation to which there is no discretion.
We are concentrating on the requirement that there should be no undue restriction to access, which is helpfully precise because it signals to us that simply charging, as we have discussed, is not a problem in itself. Having a restriction on what a charity can do is not a problem in itself, but it is a problem if it is an undue restriction. There are some fairly clear signals there.
Within that, we have discretion about how we interpret the provisions. We look at case law here and in other jurisdictions, such as England and Wales. Obviously, we look at the evidence in individual cases. One of the ways in which the Parliament tried to make our exercise of our discretion predictable was to require us to publish guidance on how we implement the charity test, and we are required to consult on it.
We publish guidance—we will shortly consult on new guidance—that sets out how we exercise our discretion and tries to make it predictable. On the other hand, one of the principles of decision making in a public body is that its discretion should not be unduly fettered. We have a balancing act between giving people something that is predictable and principled, and locking in our decision making in a way that will subsequently be challenged.
If a charity fails to meet the test, OSCR has the power to issue a direction. If the charity still wishes to be a charity, it must provide a plan of how it will meet the test and it has three years in which to implement the plan. Does not the process of issuing directions facilitate the ability of independent schools to operate successfully at the extreme margin of what can be considered as a charitable institution? In effect, does it not give the schools a get-out-of-jail-free card when they fall on the wrong side of the margin? Is their commitment to a charitable action a case of doing the minimum required or less, if they can get away with it?
With the powers that we have, we do not have much discretion if a charity fails the charity test, because we must do something. We have the choice of issuing a direction or of taking the charity off the register straight away. In most cases—for all charities, not just the schools—because our business is to try to get charities to comply with charity law and behave proportionately, we tend to issue a direction and try to get the charity back on track.
You mentioned a charity getting three years in which to change, which is something that we reviewed halfway through the process. Back in 2011 or 2012, we decided that the three-year period was too long. We have tried to make the latest round of directions more workable in a number of technical ways and to shorten the timescales on the basis that the charity test is now familiar to the schools. We felt that, in some ways, having the longer timescale was not necessarily helpful and that the priority must be to get charities compliant in the shortest timescale.
Your question was about charities operating on the margin. The process of issuing directions is inherently about charities that have problems in meeting the requirements and have not passed them. When we are deciding whether they have complied with our directions, the question is whether they have behaved appropriately and meet the requirements fully. I contend that that is what we have ensured when we have gone back and looked at the charities that have had directions.
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We know from the information that we have received that of 50 independent schools surveyed, nine initially failed to meet the charity test due to restricted access. Following a direction from OSCR, all nine schools implemented plans that enabled them to meet the test.
When the committee took evidence from the petitioner, Fettes College was given as an example of a school that had increased the proportion of its school roll on fees assistance from 9.6 to 10.6 per cent. The median proportion for all 50 schools is 10.2 per cent. Will you expand on how the nine schools changed their activities to allow them to comply with the test?
In the nine schools, we found nine different situations. We told the schools that we had found that they did not pass the charity test and that they needed to take steps to address the issues that we had raised and to ensure that they passed the test. There were different issues in each of the nine cases.
You mentioned the various percentages at Fettes. One issue at Fettes was that the percentage of its income that it was spending on means-tested bursaries was not as high as we would have wished it to be. That was not necessarily the key issue. The key problem at Fettes was that there was an ambiguity that really worried us in the school’s bursary scheme, which, it seemed to us, did not focus on people who could not afford the fees. The scheme was very mixed up with the school’s academic and sporting scholarship programme. The resource that the school was putting into bursaries was therefore not having the effect that we would want it to have, which would be to try to ensure that people who could not afford the fees would be able to go to the school. Although the crude bursary spend was an issue, the way in which the school was spending its income, and the transparency around that, was as much or possibly more of an issue that we wanted to see resolved.
There were different issues at the other schools. Loretto, for instance, had a very low cap on the level of bursaries that it would pay. It would pay up to a maximum of 30 per cent of the fee, although there were some exceptions in which it was 50 per cent. That meant that the bursary scheme did not have much effect on people on lower incomes. The school was not providing for people on a range of incomes, which is one of the principles that we have set out for our decision making.
We asked the charities to take action to resolve nine individual situations. Where there is a variation in some aspects of what was done, you need to look at the whole of the decision that we made.
So Fettes and Loretto are now in line.
Yes. We were satisfied that they had addressed the issues that we had raised.
In the east of Scotland, some fee-paying private schools offer scholarships to outstanding rugby players in fifth and sixth year at state schools. I can understand how that benefits the school—it improves its chances of being successful on the pitch—and I can understand why a parent might see opportunities for their youngster. However, the school could offer an opportunity to a youngster from the same community who, rather than having a significant sporting talent, had academic or other abilities. What are the criteria? How do you balance what suits the school and what suits the recipient?
There is a balance between the sporting side and the academic side. You are right to identify the benefit to the school—the marketing benefit, if you will. However, the balance between that and the means-tested bursaries that we feel have an effect in alleviating undue restriction has really changed, both in the schools that we failed and which received directions and in the other schools that we reviewed along the way. In a number of schools there has been a move of resource out of academic and sporting scholarships into the means-tested bursaries. That is how the schools have financed the uplift in means-tested bursaries, where they have done that. Others have done it in other ways, but that is what many of the schools have done.
Our view is that means-tested bursaries, discounts and other such things are likely to have the most effect in letting people on a range of incomes, including those on low incomes, get access to the primary benefit that the schools provide.
The Scottish Council for Independent Schools states in its first submission to the committee that independent schools will provide
“over £45.5 million in assistance this year.”
It is also worth noting for the record that the SCIS highlights what it believes is a
“positive economic impact for the Scottish economy”
of
“£445.8 million gross value added ... and around 11,240 jobs in operational benefits alone.”
It states:
“member schools generate exchequer benefits to the state worth £263 million annually.”
OSCR’s report states:
“schools spent a varying amount of their available gross income on means-tested bursaries, ranging from 4.6% to 42.1%. The median proportion of available income spent was 6.1%”.
OSCR also gives examples of the provision of facilities and services to the wider community.
Does the financial subsidy that is provided to independent schools through tax reliefs match the financial assistance that the schools provide through bursaries and community access? Is that relevant to consideration of the charity test?
I could not say, because that is not something that we have considered and we do not think that it is relevant.
Okay. Thank you.
The issue for many people, and particularly for the petitioner, is the definition of profit. How does OSCR define that? Basically, you say that the charities test is whether an organisation makes a profit. Mr MacAskill said that it may be profitable for a private school to bring in the best sportspeople, be they boys or girls, in the fifth and sixth years. That independent school can then say, “We have a wonderful track record in sport,” but basically it has gone to the state sector and hived off the best of the sportspeople. The sporting achievement can be seen to be beneficial as well as the academic achievement.
Looking at the longer-term benefit, I read this morning that 17 per cent of parliamentarians in this building went to independent schools, and the petitioner says that 40 per cent of students at the University of St Andrews are from independent schools.
How does OSCR measure the profit that is gained? Is it purely in monetary terms that the decision is made in relation to the benefit of charitable status?
There are probably two definitions or two kinds of profit that we are talking about. One is fairly simple to deal with. It is financial surplus, if I can put it in that way. None of the schools on the register is a company that passes a dividend on to their shareholders; a body cannot be a charity if it does that.
I would like some clarification on that point. The dividend may not be financial but may instead involve personal gain as a result of the recognition and promotion of independent schools, which enables pupils, when they leave, to gain access to higher education and better-paid jobs. Individuals and families may accrue that long-term dividend as a result of the investment that they make in the private sector in the early stages to allow their sons or daughters to gain educational advantage in the further or higher education sectors.
That is, in a way, what we are talking about when we talk about the benefit that education provides. We have many kinds of educational charity on the register, including colleges and universities. In a sense, every one of those bodies will provide benefit to individuals by enabling them to further their careers because they are educated and to get jobs or wages that they would not have got if they had not taken advantage of the educational benefits that those institutions provide.
You are talking more about the societal prestige of independent schools and whether that is legitimate. That is a very difficult aspect for us to take into account. The various submissions, including the petitioner’s submission and our response to it, raise the issue of disbenefit—the disbenefit to the public that a charity’s activities might result in. Our take on that, which we set out in guidance after long thought and consideration of the case law, is that the disbenefit to be taken into account must come from evidence on what the school itself does. The issue that you are talking about is very difficult to evidence in a school’s specific activities—in the nuts and bolts of what it does. It is more of a general societal issue, which it is very difficult for us to take into account in making the type of judgment that we are called on to make.
I offer my apologies, convener, as I should have declared that I am chair of a charitable organisation that works in my local community.
I would argue that the qualification for charitable status of independent schools rests on the point about the wider societal benefits to which Mr Tyson referred. Does the guidance that OSCR issues and operates take account of the wider benefits to society? At present, we tag that element on to the question of the benefits that accrue to those students receiving bursaries, who currently make up roughly only 10 per cent of the students attending independent schools. Ninety per cent of students do not receive bursaries, and their fees are paid. Does that justify charitable status?
The decision that we make and the evidence that we take into account are much narrower than that, on both sides. We look at what an individual school does. If a school is providing an education to pupils on its roll, whether they pay fees or not, it is advancing education.
We do not take into account the wider societal benefits. People talk about the tax saving to the Exchequer, but that is not relevant to us, and we are not interested in it. They talk about wider benefits such as extending parental choice, but we do not take that into account either. We focus on the activities of the school in furtherance of its purpose.
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I am aware of OSCR’s position on not measuring the financial benefit to an organisation that is registered as a charity and avoids paying tax or other state revenues in its operation; I have seen examples in recent years in the establishment of a number of organisations.
Why does OSCR not measure the disbenefit to wider society that may come from granting charitable status to organisations? There is a disbenefit to wider society. If an organisation receives charitable status, it can avoid paying tax and rates. Why does that not enter the calculation that OSCR makes in issuing charitable status? How does OSCR ensure that independent schools and other organisations do not register for charitable status simply to avoid paying their contribution to wider society in tax and rates, and that they do not view charitable status as a tax avoidance scheme rather than a scheme to benefit wider society?
In general, the charity test that is set out is very explicit. It asks whether an organisation has charitable purposes and whether it provides public benefit. Within that, there is consideration of undue restriction, disbenefit and private benefit.
You suggested that we measure the benefit in terms of tax relief, but we do not take that into account. We do not take into account things such as savings to the Exchequer where those are not in furtherance of a charitable purpose. The likes of SCIS and the Independent Schools Council have made various claims that independent schools have saved the Exchequer millions of pounds, but we do not think that that is relevant, because saving the Government money is not a charitable purpose.
With regard to the issue of disbenefit, tax and rates reliefs are a consequence of charitable status. There is something very hard to reconcile in saying that we could make a body a charity if it were not for the fact that doing so would give it tax reliefs if it has passed the rest of the test. Again, that would apply to all charities, and there is something very problematic about that.
Would Judith Turbyne like to add anything to that?
I would like to offer a reflection. We are talking about schools, but we could have this discussion about other sectors in which organisations gain charitable status. Our test sets out to deal with each charity individually. That is what we do, and it is how our equation works. On the question of the wider sectors, we do not work with sectors and make a judgment on them all at once.
We are talking about a wider policy issue. It is a valid discussion for people to have, but the issue that you raise is not something that we, as a regulator, can work to solve.
As a regulator, do you not have the right to make recommendations to the Government on whether the test as it is applied is suitable? If you, as the regulator, are claiming that you work to the test as it is set out, there is an argument for you to make representations to the Government to say that the test is no longer fit for purpose and needs to be reviewed. Has the regulator had any discussion on reviewing the test, particularly given that almost 20 per cent of the schools failed the test and another two schools out of the 51 that were originally under review in 2012 have to be taken out of the calculation? Surely that situation is sufficient to justify a wider review of charitable status.
Ms Turbyne is right. We may have to review the criteria applied given the wider aspect that other sectors are using charitable status to gain what would be seen as financial benefit, because they are not paying tax or other revenues that would normally be paid to local authorities and the Exchequer.
I will come back on that. As you say, one of our functions is to make recommendations to ministers and we have made various recommendations to them about mostly technical aspects of the 2005 act.
The charity test is fit for purpose; it is operable. As you say, a number of the independent schools failed the charity test first time round. The act gave us the power to do something about the situation and we did something about it. The schools complied with the directions that we made. The test works.
As a regulator, we work with the laws that we are given. If there is a wider social and political view that particular institutions should not be charities, there should be specific provision in the test about those. That is a matter for Parliament or for ministers. We can work with the test that we have.
To come back on the wider issue, you talk about all types of organisations and not just schools becoming charities just for the benefits. Yes, that is correct, but it is perhaps worth thinking through what that means. Why do bodies become charities? Some will become charities because it is the difference between being able to operate and not being able to operate. For example, certain funders will give funding only to bodies that are charities, because charitable status gives funders the reassurance about governance and accountability that they want. For others, it may be about reassuring the public that they are not for profit and that they have what people call the charity brand.
We deal with getting on for 1,000 applications for new charities every year. That will be because those bodies regard that as being an advantage rather than a disadvantage to them.
It is interesting. We are having a discussion about schools. There will be differing opinions across the country about whether their charity status is a worthy thing, but that would be true of a number of other different sectors.
As a regulator, we are trying to create an environment that allows charities to flourish, grow and contribute to Scottish life. That is what we are here for. If there are wider issues on a global policy scale, it is difficult for us to be the people who deal with them. There is a great contribution to Scottish life through the charity sector overall. If we pick on one sector today, will we pick on another sector tomorrow and another the next day? We must be careful—I am not saying that you are not being careful, but there is a general question about how we look at the matter overall and how we ensure that we have the right test.
At the moment, the test is workable. We have made technical suggestions to ministers on matters that we want to change. We are favourable towards reviewing the act. We are coming up to 10 years since the act was established, so we are very pro that, but that would have to take into account all the different sectors.
I have a final question. Given that the petition relates to education, what would OSCR’s view be if local authorities were to register all their educational provision as charitable provision, based on the educational benefit to the communities that they serve?
As the person in charge of registration, I would be looking forward to a slightly busy time. The best that I can do is say that we would look at the applications in line with the charity test. I do not know what the entities would look like if a local authority chose to do that. What kind of organisation would come forward to us? That is a huge hypothetical, but I can say that we would look at the application on the basis of the law as it stands.
I will pick up on Mr Wilson’s last point. It had crossed my mind that the solution is not to abolish charitable status for private or independent schools but to provide charitable status to all schools, including local authority schools. However, that would of course require a change to the legislation.
I will deal with independent schools that provide specialist education that is often taken up by central Government or by local authorities. What different criteria do you apply to them? On the face of it, they appear to have a niche, as they offer something that is not provided elsewhere.
That is an interesting question, because for some of those schools the fees can be very substantial, as the cost of what they provide is very substantial. We are talking about such things as the secure units, where there is one-to-one education, and providing for various kinds of special needs and disabilities.
We looked at Donaldson’s school quite some time ago. We came to the view that it charges very high fees, but the access to what it provides is not unduly restricted because, although maybe one or two students were self-funding, otherwise the fees were being paid by either English or Scottish local authorities on the basis of a stringent assessment of needs. If you need what they do, you can get access to it, not necessarily because of what the school does but largely because of what the state does. The approach that we took was based on the view that there was no undue restriction.
As there are no further questions, I thank Mr Tyson and Ms Turbyne for their evidence. I suggest to the committee that we seek the petitioner’s views on the evidence heard and consider the petition again in the light of their response.
Based on the evidence that we have heard, I suggest that we also write once again to the Scottish Government to seek its views on whether, in light of Ms Turbyne’s comment that we are coming up to 10 years since the introduction of the 2005 act, the Government has any intention of reviewing it. This may be an appropriate time to review the legislation.
Is your assessment, which will doubtless be based on legal advice, done on the basis of interpretation of statute, or is it based on guidance and direction from the Scottish Government?
Do you mean, do we have advice from the Scottish Government?
Yes, in terms of the interpretation. Alternatively, is it down to a strict interpretation as you see it through your formal legal advisers?
We are a non-ministerial body, so we are independent. We generate our guidance with independent legal advice on the statute and case law, and on individual cases it is our decision too.
I come back to John Wilson’s comment about writing to the Scottish Government. The fact that it is coming up to the tenth anniversary of the 2005 act makes that a good idea, because I feel that more and more organisations are jumping on the bandwagon. It has become fashionable to become a registered charity to avoid paying various taxes, and the Parliament needs to look at that again, so we should suggest just that.
I agree that we should write again to the Scottish Government. In addition, given that we are continuing the petition, could I ask that we get some more information from the Scottish Parliament information centre about how much local authorities receive in rates from their own schools at the moment? For the record, I note the SCIS submission that independent schools constitute just 0.3 per cent of registered charities awarded rates relief in Scotland, which may put the issue into perspective.
Yes, it is possible to get that further information. Does the committee also agree that we should write to the Scottish Government with regard to the 10-year review? We may also want to seek the petitioner’s views on the evidence heard and consider the petition again in light of that. Is that agreed?
Members indicated agreement.
I thank Mr Tyson and Ms Turbyne for their evidence.
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