The Scottish Government is pressing ahead with the recommendations of the Barclay Review, chaired by Kenneth Barclay in 2017, to remove non-domestic business rates relief from independent schools. The calculation of tax is based on the 'rateable value' of property and, therefore, the financial repercussions of the removal of business rates relief will vary across the sector.
What is certain is that all independent schools will feel the pinch, and every Board of Governors will need to be fleet of foot in devising a strategy to manage this additional financial obligation.
Almost inevitably, the parents of pupils attending independent schools will shoulder a large part of the burden through a likely increase in school fees.
Early engagement with the parent body is essential in this respect, particularly as The Non-Domestic Rates (Scotland) Bill 2019 is working its way through the parliamentary process, with the intention of removing the relief from the 2020/21 financial year onwards.
Other headwinds working against the sector include the increase in pension contributions and salaries of teachers in the state sector. Employer contributions to The Teachers' Superannuation and Pension Scheme have increased to 23% of teachers' salaries, and state sector teachers have also recently secured a 13% compound pay rise over the next three years. Independent schools will undoubtedly be forced to make additional funds available in order to retain talented teachers and compete with the state system.
Finally, politics play an important role, and policy announcements from different political parties signal that reform within the sector may be on the horizon. During the recent General Election campaign Labour pledged in its manifesto to "close the tax loopholes enjoyed by elite private schools and use that money to improve the lives of all children" and to "ask the Social Justice Commission to advise on integrating private schools and creating a comprehensive education system".
The idea of scrapping charitable status for private schools has also been debated within the Conservative party, however it remains to be seen what, if anything, the UK Government will propose in this regard in its new Budget, due to be announced in February 2020.
The loss of business rates relief, in particular, is a major blow to independent schools. In light of these immediate and future threats, the sector must adapt. The question then arises as to whether retaining charitable status still makes sense, or if it is not worth the trouble?
Putting charitable status to the test
The Charities and Trustee Investment (Scotland) Act 2005 introduced a new test for a body to register as a charity in Scotland. The charity test consists of two parts:
- the purposes of the body must be exclusively charitable; and
- the body must provide public benefit, either in Scotland or elsewhere.
When the 2005 Act came in to force, independent schools were able to demonstrate their main purpose was exclusively charitable, namely the advancement of education. Where schools struggled was in satisfying the 'public benefit' test. Charging fees imposes a condition, which in turn restricts access to those wishing to obtain the benefits from a school's functions if only a section of the public can meet that condition.
In order to satisfy the second aspect of the test, schools had to prove that, on balance, they did provide public benefit. Therefore, certain measures were introduced across the sector, such as means-tested fee remissions and bursaries, and widening access to school facilities such as playing fields to community groups and others.
It made sense for independent schools to implement such measures, as it was in their interests to maintain charitable status, and to benefit from the advantages that flowed therefrom, including tax reliefs and the legitimacy of the charity brand. In many cases this was already happening as part of the schools' outreach activities.
With the loss of arguably the most important tax relief (business rates) and other looming threats, independent schools may consider it worth abandoning their charitable status if they do not believe the advantages of retaining it outweigh the disadvantages. However, there is no guarantee, if they did do this, of a clean break from either the Office of the Scottish Charity Regulator (OSCR) or the obligations imposed on charities under the 2005 Act.
OSCR hangover powers – a headache for independent schools?
Under Section 18 of the 2005 Act, a charity has the power to request that OSCR removes it from the Scottish Charity Register. As a precaution, to ensure that charities cannot simply remove assets from charitable uses, Section 19 of the 2005 Act provides for a 'lock' on the assets the organisation has at the point of removal from the Register. Various provisions allow OSCR to continue to oversee the use of the 'locked' assets even though the body holding them is no longer a charity.
This 'hangover' power granted to OSCR means that independent schools would be obliged to continue to use their assets for the charitable purposes set out in their Register entry. This is most likely not an issue for most if not all schools, where their constitutions clearly lay out the educational purposes they are obliged to pursue.
While a charity removed from the Register must continue to use its assets for charitable purposes, there is no existing requirement for the assets to be used to provide public benefit. That being the case, the measures previously implemented to meet the charity test would no longer be required, and schools could effectively function on a commercial basis for private benefit.
OSCR has identified the weakness stemming from the separation of 'charitable purposes' and 'public benefit' and has proposed, following the Scottish Government's recent consultation on Scottish Charity Law, that Section 19 be amended to extend the duty on de-registered bodies. This is designed to ensure that public benefit is delivered from the use of the assets they held while registered as a charity.
What the future holds for private schools
If the proposed amendments are implemented, the debate surrounding whether independent schools should retain or abandon their charitable status becomes academic. If schools are obliged to use their assets for both charitable purposes and for public benefit, then the same obligations apply regardless of whether or not they are a registered charity.
The proposals raised following the consultation have yet to be debated by the Scottish Parliament, with no timeframe set, as yet, for this to happen. This is, therefore, a developing picture and independent schools will need to pay close heed to the pronouncements that are made in the coming months. In the meantime, Boards of Governors should ensure their Risk Registers are up to date with the actual and perceived risks, and monitor the situation closely as it develops.
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