When we decide if an organisation provides public benefit, we must look at:
If it appears that the organisation has been set up wholly or mostly for the private benefit of an individual or group of people, it is unlikely that it will pass the charity test.
Individuals can, do, and should benefit from the activities of charities. However, where individuals, other than as a member of the public, benefit from a charity’s activities, we will regard this as private benefit.
The fact that some private benefit exists does not on its own mean that an organisation will fail the charity test. We look at the private benefit in the context of the whole benefit the organisation provides, or (in the case of applicants) intends to provide in pursuit of its purposes.
To pass the charity test any private benefit must be incidental to the organisation’s activities that advance its purposes:
We must make a judgement on the balance between the private benefit and the public benefit resulting from the activities of an organisation. If the private benefit is not incidental to the activities in pursuit of the organisation’s purposes, then we need to consider whether the charity is being set up or run for the private benefit of individuals.
For example, a heritage charity plans to use its funds to restore a historic mill belonging to a private individual. The owner will benefit from the value added to his property from this activity.
In this case, we would look for reassurances that firm arrangements were in place to make sure that the private benefit to the owner is removed or minimised. Examples of this would be a firm undertaking to transfer ownership to the charity or for it to take a long-term lease of the property. Whatever action the charity took, it would need to make sure that any private benefit is outweighed by the public benefit from continued access to the property and use for charitable purposes. Where this is not possible, and the private benefit appears to be the real purpose rather than being incidental, the organisation may fail the charity test.
What is incidental private benefit?
Private benefit is incidental when it is a by-product of the provision of benefit in pursuit of a charity’s purpose and not a purpose of the charity itself.
A common example of incidental private benefit is a charity with paid staff. There is private benefit to the staff, but if the charity cannot operate on a purely voluntary basis, then paying suitable staff at a reasonable rate is necessary to the pursuit of its purposes.
In some cases, it will not be clear that paying a salary or providing some other benefit to a particular person is necessary to let the charity achieve its aims. In those cases, we need to consider if the private benefit is incidental or whether the charity has been set up for the benefit of that person.
Where a charity has members, and the members get particular benefits from the charity, we need to be satisfied that those benefits are incidental to the purpose of the charity. Benefits that are trivial or of little value will usually be considered as incidental.
Members of a charity can also be the main people who benefit from its activities (for example Girl Guides, Scouts or similar groups). Where a charity directs benefit at its membership, we need to consider how far there is public access to that membership. Any criteria for membership must be justifiable and reasonable bearing in mind the charity’s purposes. If a charity exists primarily to benefit its members and it has a closed or unduly restricted membership, then its ability to provide public benefit will be in doubt.
For example, a professional body that provides training and improves the standards and status of their profession, will benefit its membership. If the organisation can demonstrate that the focus of its activities is towards the indirect benefit to the public through the maintenance of high professional standards and practice, then the private benefit to the members may be regarded as incidental.
When is private benefit not incidental?
One example is where the main beneficiaries of a charity are its members, and all the members are also charity trustees (and there are no other potential members or beneficiaries). The charity then exists for self-interest or private benefit only and not public benefit.
We have particular concerns where the charity trustees of a charity are the people benefiting from it as private individuals, or where those benefiting most are people connected with the charity trustees such as family members or companies in which the trustees have an interest.
In any case where a charity trustee is remunerated for services provided to the charity (including an honorarium), the other charity trustees must make sure that the remuneration conditions set out in the 2005 Act are met.
We make a judgement on the whole picture of public benefit in the organisation being looked at, including:
We do this based on all the facts and circumstances applying to the organisation.
Case 1: an organisation’s private benefit to its founders clearly outweighed its proposed public benefit
We received an application to become a charity from an organisation which intended to provide counselling services. The organisation had three co-founders (prospective charity trustees); one would be employed as the Chief Executive and the other two as paid counsellors.
We acknowledged that it might well be necessary to employ individuals in salaried positions but queried with the applicant why they thought that they were the most suitable people for the positions. The three co-founders alone made the decision to appoint themselves as ‘Executive Directors’, and drew up a draft governing document which permitted only the Executive Directors to be paid. It was not clear if the co-founders had specialist skills and experience which would justify their direct recruitment, or if they had considered carrying out a fair and open recruitment process to identify the most suitable candidates for the positions.
The applicants were unable to give us a satisfactory explanation as to why they were best people for the jobs. Taking everything into account, we concluded that this level of private benefit to the co-founders was not incidental and that the private benefit outweighed the benefit to the public. The application to become a charity was refused.
Case 2: an organisation’s private benefit was unnecessary
A commercial company intended to set up a charity to undertake some of its activities, which it had identified as being potentially charitable. The proposed charity would pay a regular fee to the non-charitable company for administration and back office services.
The applicant could not provide evidence that provision of those services by the company represented the best value option to the proposed charity or that any other options had been considered. The charity could have carried out its own administration and back office services, or it could have outsourced those activities to another provider following a tender process or other assessment of value.
We concluded that the proposed remuneration of the connected company was not incidental because it was not necessary, as there were reasonable alternatives available. We refused the application to become a charity as any potential public benefit was outweighed by this private benefit.
Case 3: an organisation wanted to raise funds for a sole individual
A fundraising organisation had been set up to raise money to pay for an individual’s medical treatment for a rare condition. The treatment was only available overseas and was very expensive.
The organisation had the charitable purpose of advancing health in their governing document and so met this part of the charity test. However, the organisation made it clear from the outset that the sole beneficiary was one individual and following the end of the treatment the organisation would be closed down.
The application to become a charity was refused, as there was clear private benefit that was not incidental.
We frequently see applications of this type and generally have no option but to refuse them. Individuals and organisations wishing to raise money to help fund medical treatment and expenses for a specific person can do so without being a charity.