Legal Challenges to Charities

Disclaimer: This article is written by Jessica Williamson. Any views and opinions expressed in this article are those of the writers and do not necessarily reflect the views or positions of the team editor nor any entities they represent.

The law regarding what exactly constitutes a charity has been the subject of debate for years, though the question has grown increasingly important with a litany of recent challenges to the charitable status of well-established organisations. What is the best way of reconciling the benefits charities provide to society with the need to prevent an abuse of the system? 

What constitutes a charity?

The 2006 Charities Act defines a charity as an organisation set up for a charitable purpose and which provides benefit to the public. What precisely constitutes ‘public benefit’ is open to interpretation by the Courts, although useful guidance can be found in Lord McNaghten’s 1891 grouping of charitable purposes into four divisions: the relief of poverty; the advancement of religion; the advancement of education; and other purposes beneficial to the public. It is also worth noting that, while charities can engage in activity in support of political causes, the raison d’etre of a charity cannot itself be political.

Nonetheless, determining whether the stated purpose of an organisation is dominant or ancillary, and attempting to define ‘public benefit’, may be difficult when put into practice. This can be demonstrated through the following three challenges to the charitable status of well-established organisations.

Nuffield Health

The first of the recent challenges is that brought against Nuffield Health by the London Borough of Merton Council, a case which reached the Supreme Court and was heard in March 2023. Examining the facts of the case, Nuffield Health is a charity established “to advance, promote and maintain health and healthcare of all descriptions and to prevent, relieve and cure sickness and ill health of any kind, all for the public benefit.” To this end, it runs 112 fitness and wellbeing centres, including that in Merton Abbey, which contains facilities that are primarily available to fee-paying Nuffield Health gym members. The Council decided to challenge the charitable status of the organisation owing to the way in which membership fees were set at a level which excluded persons of modest means from enjoying the gym facilities. In the Council’s view, this meant that Merton Abbey was not being wholly or mainly used for charitable purposes failing to satisfy the organisation’s stated aim of working towards ‘the public benefit’.

In their judgement, released in June 2023, the Supreme Court emphasised that it was clear that, where the public benefit requirement is satisfied, all the activities of a charity are carried out for public benefit. As set out by the Local Government Finance Act 1988, benefit is examined by reference to the purposes of the charity and the manner in which the body fulfils the relevant purpose “overall rather than whether it does so in any particular place where its activities are carried on”. In this case, the Supreme Court considered that the activities at Merton Abbey were directly for the fulfilment of Nuffield’s charitable purposes of promoting health through exercise. Accordingly, as a registered health charity using the gym for the direct fulfilment of those charitable purposes, Nuffield Health was entitled to charitable relief.

LGB Alliance

The second challenge has been posed by the transgender charity Mermaids, questioning the charitable status of LGB Alliance, in a case which marks the first time that one charity has attempted to remove the legal status of another. Mermaids argued against the legal recognition of LGBA as a charity, on the basis that its raison d’etre was hostile anti-trans activism, as opposed to the protection of lesbian, gay and transgender rights. To substantiate their claim, they cited LGBA’s output on social media, which allegedly ‘went beyond the boundaries of civilised debate’.

Nonetheless, the judges clearly regarded this attack as malicious and politically motivated. They affirmed the importance of ensuring that competing views, opinions and policies can be publicly debated, and therefore ruled in favour of LGB Alliance. This judgement has broadly been received with relief; had the ruling been in favour of Mermaids, this would have established a dangerous precedent, in leaving open the possibility that a charity may be closed down on the basis of ideological disagreement. This is all the more important given that those helped by charities surrounded by such toxic discourse (in this case, lesbian, gay and bisexual individuals) are often among the most vulnerable and marginalised in society.

Arguably, Mermaids’ claim held weight on the grounds that, according to the aformentioned Charities Act, a charity cannot be political in nature. The conflict between the lesbian, gay and bisexual community, and the transgender community, has become largely political, centring around the question of ‘what makes a woman’. Nonetheless, were this objection to stand, Mermaids too would have to close down, given that they are mired in just as much political controversy as LGB Alliance. Both charities, despite their disagreements, advocate on behalf of, and help to protect, vulnerable communities. Therefore, it can be safely concluded that the court’s decision was a wise one.

Private schools

The final controversy to discuss is that surrounding the charitable status of independent schools. This challenge has been ongoing for several years, although has recently risen to prominence due to Keir Starmer’s plans to remove the VAT exemption currently granted to private schools. It is generally accepted that, in order to satisfy the ‘public benefit’ requirement essential to the classification of an organisation as a charity, it is necessary to benefit ‘the poor’. This is not the case for private schools, whose fees are affordable only for the richest in society, with just 7% of students attending a private school. Many argue that private schools are actively harmful, insofar as they grant the best education only to those who can pay the most, undermining the objective of social equality that charities traditionally promote.

Nonetheless, there are two reasons why making it impossible for independent schools to qualify as charities might cause problems. Firstly, under the status quo, to qualify for charitable status, schools must show evidence of outreach activities that aim to benefit the poorest. For this reason, prestigious schools like Eton run academic workshops for students from state schools, and offer bursaries to those from disadvantaged backgrounds. It may be true that only a minority of students benefit from such initiatives. Nonetheless, benefitting a few is better than benefitting none, and the possibility of receiving a tax break due to charitable status furnishes private schools with an incentive to introduce and sustain these initiatives.

Secondly, were these schools no longer able to register as charities, they would have to pay VAT. This would necessitate an increase in pupil fees, which would prove harmful in two ways. Firstly, it would render private schools even more elitist; middle-class parents would no longer be able to send their children to these schools, reducing the possibilities of social mobility. Secondly, the higher fees may dissuade so many parents from sending their children to these schools that the schools might close down completely. Although many argue this is a good thing, insofar as it will encourage the integration of those of all classes in state schools, it might unintentionally harm the most vulnerable, like neurodivergent children who need to attend private schools because these are the only schools where their special educational needs can be met. Therefore, the maintenance of the charitable status of private schools may be benefitting more people than it appears prima facie.

What is the overlap between these cases?

The three cases are evidently based on differing motivations. The challenge against Nuffield Health was brought on economic grounds; Merton Council wanted to be able to collect more tax, and used the charitable status of an institution mainly used by the rich as an avenue to try to achieve this. The case against LGB alliance, on the other hand, was politically motivated, and can be read as an (albeit unsuccessful) attempt to use the law to gain an upper hand in the culture wars currently playing out. Meanwhile, the ongoing dissatisfaction in the case of private schools is largely fuelled by moral outrage at the dissonance between the traditional image of private schools as a space solely for the elites, and their legal status as charities whose provision of education provides wide-reaching benefits.

Nonetheless, a common factor that unites all three challenges is their failure. The law, it seems, errs on the side of allowing organisations to register as charities, while the bar that must be met to establish ‘public benefit’ seems to be set rather low. This inevitably means that many organisations, like private schools, will opportunistically register as charities solely for the tax advantages that the status confers. However, charitable intention is arguably of less importance than charitable action. Even if it is true that an organisation is not motivated solely with a view to assisting the poorest, it is true that the obligations that come alongside being labelled as a charity are positive in nature, such as increased access to high-quality education for those to whom it would be otherwise denied. Furthermore, establishing an unduly high bar would make it difficult for those who truly do want to set up a charity to prove their intent, discouraging the formation of new charities. This might ultimately do more harm to society than the extra money in the government budget that would arise from more organisations paying VAT, especially given that government spending on the poorest is unreliable, given the electoral incentives that often exist to divert it elsewhere. Therefore, it can be concluded that the retention of the charitable status of Nuffield Health, LGB Alliance and private schools is something to be welcomed, though it would certainly do no harm if these organisations were to expand their reach among the most disadvantaged who continue, in most circumstances, to be excluded from their services.