Trading Companies and Charitable Status – The New Lanark Trust

Most charities are familiar with the non-charitable trading subsidiary model. A charity sets up a wholly owned company limited by shares to generate income donated to the charity under gift aid. The subsidiary can carry out all forms of commercial activities, particularly those that cannot operate through the charity.

A recent decision of the Inner House of the Court of Session concerning New Lanark Hotels Limited (“NL Hotels”) and New Lanark Trading Limited (“NL Trading”) generated a lot of public interest, however it is important to point out that it does not set a general precedent for other trading subsidiaries because of the unique circumstances of NLT.

Both NL Hotels and NL Trading are wholly owned trading subsidiaries of the New Lanark Trust (“NLT”). The Inner House ruled that both subsidiaries should be recognised as charities in their own right and entered onto the Scottish Charity Register. This ruling allows NLT to potentially recover up to £650,000 paid in non-domestic rates since 2015. Both subsidiaries will also now be able to claim mandatory business rates relief at 80%, a significant cost saving.

Overview

NLT is a Scottish registered charity responsible for managing New Lanark, a former 18th century village built around a cotton spinning mill which is now a protected UNESCO World Heritage Site. NL Trading operates the visitor attraction in New Lanark,  for which it charges an entry fee, as well as a café, retail shop, produces spun woollen yarn, hydro-electric power and makes and sells ice cream. NL Hotels operates a hotel, hostel, self-catering accommodation as well as a conference centre, bar, restaurant, wedding venue, leisure club, pool and beauty treatment facilities. Both subsidiaries operate within original mill buildings on the site.

The Office of the Scottish Charity Regulator (“OSCR”) had refused to enter the subsidiaries onto the Scottish Charity Register, stating that they did not provide public benefit and so failed to meet the charity test as set out in the Charities and Trustee Investment (Scotland) Act 2005 (the “2005 Act”).

OSCR’S view

OSCR made a distinction between the commercial activities that it considered to be directly related to a charitable purpose or incidental to a charitable purpose and those which were not. OSCR accepted that while some activities may result in public benefit, this did not mean that the subsidiary’s activities as a whole did, so found that on balance, neither NL Trading nor NL Hotels met the public benefit test.

For example, in NL Trading, OSCR accepted that activities such as the exhibitions, events and tours, preserving and maintaining the buildings and exhibits, producing wool and hydro-electric power advanced charitable purposes and provided public benefit. But OSCR argued that activities such as the retail shop, café and ice cream manufacturing were not and as significant commercial activities generating a large turnover, could not be regarded as being incidental to charitable activities.

OSCR also held that in NL Hotels, the main purpose of operating and managing the hotel, hostel and self-catering lodges were not either incidental to or directly related to charitable purposes.

OSCR’s decision was upheld at the time by the First Tier Tribunal of Scotland, the first step in the independent appeal process when seeking a review of a decision made by OSCR.

The case was then taken to the Upper Tribunal, whose decision on 2 February 2020 quashed the First Tier Tribunal’s decision and directed OSCR to enter the subsidiaries onto the Scottish Charity register. OSCR then appealed to the Inner House of the Court of Session. There are some key points to consider in this appeal:

• “Public benefit” is not defined in the 2005 Act. The case made reference to section 8 of the 2005 Act, which states that “no particular purpose is, for the purpose of establishing whether the charity test has been met, to be presumed to be for the public benefit”. It was accepted that when considering whether or not a body provides public benefit, any degree of private benefit or public dis-benefit provided, as well as any reasonable fees and charges made, would be taken into account. It was also necessary to look into the subsidiary’s activities as a whole.
• The case considered the “balancing exercise” that is required by Section 8 i.e. that in looking at the full picture, it would be necessary to determine whether trading activity was primary purpose in direct furtherance of charitable purposes, incidental to primary purpose, or primarily non-charitable commercial activities. This involved a balancing exercise weighing one activity against another. Section 8 also necessitated a “materiality” requirement i.e. that the charity test required at the very least a minimum level of public benefit to be provided and must also show a “predominant contribution to the charitable purposes”.
• All parties accepted that just because a subsidiary donated income to the charity using gift aid, this did not mean that the charity test was met.
• All parties also accepted that where a trading company carried out large scale commercial activities that were not related to any charitable purpose of its own, that it would not meet the charity test. For example, a subsidiary whose main activity was selling Christmas cards to raise funds for the charity, would not further a charitable purpose or pass the charity test.

The findings of the Inner House

• The Inner House considered whether or not it regarded all the trading activities of NL Trading and NL Hotels to be wholly primary purpose or not to New Lanark’s charitable purposes of the advancement of education and heritage. It held that they were. There was no ancillary or non-primary purpose trading. The balancing exercise was therefore irrelevant and the materiality test was clearly met.
• New Lanark is open to the public as an “inhabited, economically active settlement with facilities for visitors”, which visitors need and expect owing to the size and nature of the site.  The Inner House took the view that the subsidiary’s activities, all carried out within original mill buildings contributed to the “vitality of New Lanark” as a UNESCO World Heritage Site. They also promote an “understanding of the philanthropic intent at the heart of its establishment”.
• The fact that the subsidiaries raised money for both themselves and NLT did not mean that they would fail the public benefit test. The Court accepted that producing a surplus income for NLT was not their main purpose. The decision was therefore in accordance with OSCR’s guidance, and referred to OSCR’s guidance on charitable trading at paragraph 1.2, which states that “primary purpose trading is where the trading activity directly contributed to the charity achieving its purposes”.

For example, re NL Hotels it was held that “the accommodation enabled visitors to immerse themselves more fully and for longer in the historic village and to stay in one of the historic buildings; and the hotel business provided a means of the historic buildings being occupied in a useful way which contributed to maintaining the village’s life and economy”.

Conclusions

Although ground breaking, it must be recognised that the situation which applies to New Lanark is unique. Very few trading subsidiaries would meet the criteria set by this case.

The judgement stated that “it is a crucial feature of the New Lanark Site that it is not really preserved, but maintained as a living village so that visitors may, so far as is practicable, experience the original concept which has led to its world heritage designation. I accept that this feature distinguishes New Lanark from many (although not necessarily all) other heritage sites, where the presentation of the site as a living community may not be of central importance. 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.”

It further stated that: “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”.

Following the decision OSCR stated that “OSCR’s intention of  bringing the appeal was to clarify the position in respect of its guidance on public benefit in charities… we are pleased that the court has clarified that charitable status for these companies is in accordance with OSCR’s public benefit guidance”. NL Hotels and NL Trading have since been entered on to the Scottish Charity Register as Scottish Charities.

It should be noted that OSCR is currently in the process of reviewing the guidance on “Meeting the Charity Test” and we will provide a further update on this in due course.

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