Housing Associations: what is a charitable activity?
The Court of Appeal recently ruled that Helena Partnership Limited ("HPL") could not reclaim £6m in corporation tax because it was not established for charitable purposes during the period of the claim.
The court held that the objects of HPL were not exclusively charitable. The court determined that the objects were not limited to carrying out operations for the primary benefit of the community and the provision of housing (as opposed to providing housing for the relief of a charitable need such as poverty) was not a charitable activity.
The case is unusual as HPL was neither registered as a charity with the Charity Commission nor an exempt charity (as rather than an Industrial and Provident Society, it was registered as a company limited by guarantee) and therefore instead of considering the statutory definition of charity in the Charity Act 2006 (now set out in the Charities Act 2011) it was necessary to consider the Preamble to the Elizabethan Statute of Charitable Uses (the "Preamble") where the law on charitable purposes originates.
Nonetheless, the case is significant as the courts considered in detail the circumstances in which the promotion of the benefit to the community is a charitable purpose.
Between 2001 and 2004 HPL was a company limited by guarantee and a registered social landlord set up to acquire some of the housing stock of St Helens Metropolitan Borough Council; it was not, at that time, a registered charity.
The question for the Court was whether HPL qualified for corporation tax relief on rents during that period? In order to do so, it needed to establish whether it was established for charitable purposes, such that its funds were applicable exclusively for those purposes.
HPL’s objects in its articles of association were as follows:
"4.The Company’s objects shall be the business of providing:
4.3 assistance to help house people;
4.4 associated facilities and amenities; and
4.5 any other object that can be carried out by a company registered as a social landlord with the Housing Corporation
for the benefit of the community.
The Company shall not trade for profit."
Decision of the Court of Appeal and consideration of key charity law issues
1. Registration status
If a body is a registered charity that is conclusive as to its status. If a body is not a registered charity it may still qualify for corporation tax relief on rents. Whether it qualifies depends on whether or not it was established for charitable purposes only.
2. What purposes are charitable?
Lloyd LJ in his judgment in the Court of Appeal discussed extensively the Preamble and subsequent case law relating to when a body’s purposes will be charitable. He referred to the Pemsel case (1891) which held that charity in its legal sense comprises four principal divisions ("head"):
- trusts for the relief of poverty;
- trusts for the advancement of education;
- trusts for the advancement of religion; and
- trusts for other purposes beneficial to the community, not falling under any of the preceding heads.
Where a body’s objects fall into one of the first three heads they are by their nature charitable. Where a body’s objects fall within the fourth head, whether those objects are charitable is more complicated.
The court determined that HPL could not argue that just because its objects were stated to be confined to those which are "for the benefit of the community", this in itself, was sufficient to hold that those objects were charitable. Those purposes would need to fall within the spirit and the intendment of the Preamble.
3. Purposes which would be the proper function of government
HPL submitted that it was undertaking a function (i.e. housing) which is provided for by an Act of Parliament. If HPL had not provided this function the expense would have been incurred by the Government. On that basis, HPL argued its purposes were therefore charitable. This argument was rejected by the Court of Appeal; that in itself was insufficient.
4. Private benefit
It is a basic requirement that for a body’s objects to be charitable they must be for the public benefit, and that any element of benefit to individuals must be subordinate to the benefit to the public.
Lloyd LJ explained that there were two types of charity:
- Charities which provide direct benefit to individuals – this is justified as being charitable on the basis that it is desirable that there should be such provision for those in particular need (e.g. charities for the relief of poverty).
- Charities which provide fewer or no identifiable benefits to individuals – any such benefits may be entirely general (as in animal welfare) or where some individuals obtain more benefit than others (for example, the provision of public works such as building and maintaining bridges).
The court applied these principles to the facts of HPL. It considered that although HPL’s objects stipulated that the promotion of trade, commerce and enterprise was to be "for the benefit of the community", the private benefits which were or could be conferred by the pursuit of this object were not merely incidental or subsidiary to the public benefit. For this reason the purpose was not charitable.
5. Is the provision of housing stock charitable?
The court further considered and concluded that:
- The provision of housing accommodation, otherwise than for those in some relevant charitable need (for example due to poverty, old age etc) was not a purpose within the spirit and intendment of the Preamble, either directly or by analogy with any other purpose which has been recognised as charitable.
- The provision of housing was not analogous with, or within the spirit of, the list of public works in the Preamble, so as to be charitable in itself.
- The level of benefit conferred by the provision of housing accommodation on those housed went far beyond the degree of benefit that individuals may obtain from an organisation recognised as a charity under the fourth head.
Summary of decision on the application of the principles to the objects of HPL
The Court concluded that:
- The provision of housing without regard to a relevant charitable need is not in itself charitable.
- The private benefit which arises to those who occupy the accommodation is not merely incidental or subsidiary to the public benefit afforded by the existence of the housing stock. It is a benefit for its own sake, not incompatible with the benefit to the community, but not subordinate to it.
- The use of the phrase "for the benefit of the community" was insufficient to conclude that the objects were charitable; they must still be within the spirit and intendment of the Preamble.
However, the case is of such significance that it may yet go to the Supreme Court. On that basis, the discussion in relation to what amounts to a ‘charitable purpose’ will no doubt continue.