Trading and charitable status: context matters

This update considers a recent decision of the Court of Session, Office of the Scottish Charity Regulator, Appellant [2021] CSIH 7 (29 January 2021) on the application of the Scottish charity test in the context of New Lanark. It is a case that might be seen to make no change to Scottish charity law, while at the same time being significant in focusing attention on the Scottish charity test. A likely reason for charitable status being desired in the New Lanark situation is also worth considering: the matter of Scottish non-domestic rates.

New Lanark is a famous UNESCO World Heritage site. New Lanark Trust (“NLT”) manages the site. There is also New Lanark Trading Ltd (“NL Trading”), which runs activities including visitor attraction, hydro scheme, retail shop, café, and ice cream production; and New Lanark Hotels Ltd (“NLH”) which, as the name suggests, operates a hotel and other accommodation, as well as conference centre, bar and restaurant, wedding venue, beauty treatments and spa. NL Trading and NLH are wholly owned subsidiaries of NLT.

NLT is a registered Scottish charity. It has been recognised as a charity for some time. For those that know and have visited New Lanark, that would seem wholly uncontroversial. NLT is the guardian of an important heritage site. NLT’s charitable purposes are stated (per the online Scottish Charity Register) to include: “(a) the restoration, maintenance and management of those buildings and others in and around New Lanark… (b) securing so far as possible that buildings restored by the Trust shall be occupied and/or put to use with the aim of bringing about the complete revitalisation of the village of New Lanark; (c) stimulating public interest both national and international in the village of New Lanark and its surroundings by means of exhibitions, lectures, the publishing of books and pamphlets supporting research work and by the provision of facilities for visitors in and/or near the village” (my emphases).

NL Trading and NLH apply for charitable status

NL Trading and NLH separately applied for charitable status from OSCR. OSCR refused both applications. This was on the ground that NL Trading and NLH did not provide public benefit within the terms of the Charities and Trustee Investment (Scotland) Act 2005. A failure to provide public benefit means a body fails the Scottish charity test.

OSCR accepted that some of the activities of these bodies advanced charitable purposes and provided public benefit, but considered that some did not. Those that did not were not incidental, which would have been permissible. OSCR also said that there is a distinction between advancing charitable purposes and undertaking activities which happen to generate funds to be applied for charitable purposes. OSCR concluded that there was no public benefit arising from the activities of these bodies as a whole.

NL Trading and NLH applied to the First-tier Tribunal to challenge the OSCR decisions. The First-tier Tribunal agreed with OSCR.

Undeterred, NL Trading and NLH appealed to the Upper Tribunal. This was on the basis that the First-tier Tribunal had “failed to provide proper, adequate and intelligible reasons” for its decision. This time, the Upper Tribunal sided with NL Trading and NLH. As the Upper Tribunal was making a decision of new, it decided that NL Trading and NLH should be entered into the Scottish Charity Register.

OSCR then appealed to the Inner House. The court rejected OSCR’s appeal and upheld the Upper Tribunal’s conclusion that NL Trading and NLH should be granted charitable status.

The Court of Session decision

The Court of Session was considering the Upper Tribunal’s decision and whether it not it had erred in law. It was not revisiting the factual conclusions it reached.

In rehearsing the history of the case, the court noted that the Upper Tribunal concluded (as agreed by OSCR, and NL Trading and NLH) that a body could not pass the charity test on the basis simply that it would donate any surplus to a charity to apply it for charitable purposes. It was necessary that the activities of NL Trading and NLH (which in this case happened to be commercial in nature – charities can be “commercial”) were themselves providing public benefit in terms of the 2005 Act. And those activities should be looked at as a whole.

OSCR’s position before the Upper Tribunal was that commercial activities could be acceptable for charitable status where (1) they directly furthered a charitable purpose, or (2) they were incidental. The court referred to the Upper Tribunal conclusion that this view “missed the point of the argument” from NL Trading and NLH, “that in the overall setting of New Lanark the commercial activity in itself amounted to a public benefit”. If an activity furthered charitable purposes and provided public benefit, it did not matter that the funds raised might be donated to another charity. It would then not be appropriate or necessary to carry out a balancing exercise to determine which of the two aims (raising funds for another charity or furthering the body’s own charitable purposes) was the more important. OSCR, and NL Trading and NLH, did accept that a “minor or trivial contribution to the charitable purposes” would be insufficient for charitable status.

The court highlighted a part of the Upper Tribunal’s findings: “It is a crucial feature of the New Lanark site that it is not merely preserved, but maintained as a living village so that visitors may, so far as practicable, experience the original concept… At New Lanark the availability of commercial facilities to visitors is, on the evidence, an integral part of that presentation, contributing to the experience which has given the site its reputation and thereby providing public benefit.”

Accordingly, the commercial activities furthered an appreciation and understanding of the original aims of New Lanark’s founders, David Dale and Richard Arkwright and then Robert Owen, to create a living and viable community at New Lanark. The activities of NL Trading and NLH were to be classified as “primary purpose trading”, as they directly contributed to the body achieving its charitable purposes: a revitalised, viable New Lanark. The Upper Tribunal was entitled to reach that factual conclusion.

The role of OSCR guidance was discussed in the case. OSCR has obligations to issue guidance. It has published guidance on “Meeting the Charity Test”. The court confirmed that OSCR guidance is not determinative of the legal interpretation of the 2005 Act. However, the Upper Tribunal decision on primary purpose trading was made in accordance with the guidance. It was entitled to conclude that hotel accommodation and spa/beauty treatment facilities were activities designed to further charitable purposes and provide public benefit so as to “enhance the presentation of New Lanark as a living village”, and allow visitors to “immerse themselves more fully” and show the buildings “being occupied in a useful way which contributed to maintaining the village’s life and economy”. Ice cream production was noted as also “contribut[ing] to the presentation of the village as a functioning entity”. It is understood that ice cream production had previously been carried out through a standalone company before being transferred to NL Trading.

Context was everything here. One might have arrived at a different outcome if each activity was looked at in isolation. But that would not be right approach. The court also ended by saying “Another tribunal might have reached a different decision, but standing the evidence and the acceptance of the uniqueness of the village, and the aim of presenting it as a living, working community, the Upper Tribunal was entitled to make the findings which it did.”

Why this case matters, and what next

OSCR status and rates relief

Charitable status matters. It has various financial and “softer”, yet valuable benefits. Often, the tax benefits of charitable status are highlighted. Charities can receive donations with the benefit of Gift Aid. Charities can have a primary purpose trade and not pay corporation tax on that trade. That latter one is less relevant for New Lanark, as profits of NL Trading and NLH would be donated to NLT and the corporation tax should be “washed out” by doing that.

Gift Aid and corporation tax is an HMRC recognised benefit. OSCR charitable status is not sufficient. Indeed, it is possible (although very, very unusual) to obtain the benefits without OSCR registration. However, for non-domestic rates relief, OSCR granting charitable status is a vital factor. The buildings used by NL Trading and NLH will now be in a position to seek to benefit from charities rates relief, and that could be very valuable – perhaps the real prize in a case like this. Indeed the 2019 accounts for NLT notes the negative “impact of the loss of business rates relief [being] felt” on NLH’s financial performance. Unless the charitable status case has any further procedure, the next port of call will be the application of rates relief.

Implications for charitable status

The Court of Session stressed that the Upper Tribunal arrived at its conclusion in accordance with the OSCR guidance on “Meeting the Charity Test”. The decision was therefore made on the basis that the activities of NL Trading and NLH furthered charitable purposes and provided public benefit. So, no change to what we all already understood perhaps? The position remains that “simply” generating funds for a charitable purpose is not enough to base charitable status.

This decision does however provide another opportunity to consider what is “charitable” under Scots law, and how a range of apparently non-charitable activities can further a charitable purpose. While New Lanark might be a unique place, the issue of apparently non-charitable activities being the basis for a charity is really quite common. The grant giving charity that spends much of its time and costs on the activity of investment fund management could have the same analysis applied. What matters is having only a charitable purpose(s) and providing public benefit. It is then up to the ingenuity of the sector to come up with ways and activities to further those purposes and deliver public benefit. Sometimes those activities could look or be “commercial”. There is nothing in principle wrong with that. The 2005 Act does not set out a test based on carrying out some form of defined or exhaustive notion of “charitable activities”; and frankly nor should it.

The phrasing of a charity’s constitutionally stated purposes is important: if NLT did not have “revitalisation” in its constitution, would there have been a different outcome? Purposes in articles of association and constitutions often prove to be critical. A 2019 Scottish charity rates relief case was an example of that: Centric Community Projects Ltd v Aberdeen City Council [2019] CSOH 76 (10 October 2019).

Procedure in this case probably had an impact on what happened and the wider implications of the decision. The appeal to the Upper Tribunal was focused. And the Court of Session did note that “another tribunal might have reached a different decision”. It was said that New Lanark village has a “uniqueness”. Quite true in many respects. However, it could be that other charitable projects can point to their own factual situation to support charitable status, despite the activities, when looked at in isolation or at first blush, appearing to be non-charitable. The application of the principles in the New Lanark case might not be unique. But that is, in part, due to the findings in New Lanark being that the activities in question did further charitable purposes and provide public benefit – even the making of ice cream.