The Third Sector Team at Burness Paull has, within its ranks, two proud Lanarkshire lassies who have spent many a childhood school trip or family outing experiencing, first hand, Robert Owen’s vision for social philanthropy at New Lanark’s historic mill town.

As Rhona points out, the distinctive smell of the Annie McLeod experience lives with you for a long time. And now too the Court of Session’s recent decision on the charitable status of New Lanark Trading Ltd and New Lanark Hotels Ltd will linger long in our minds – did we ever expect to see the operation of a hotel as a charitable activity?

However, the decision is less significant than it first appears and we’ll guide you through why that’s the case.

Background

It’s very rare to see the granting (or not as the case may be) of charitable status forming the subject of litigation. The decision of the Office of the Scottish Charity Regulator (“OSCR”) to refuse charitable status to New Lanark Hotels Ltd. and New Lanark Trading Ltd. resulted in just that – hence charity law advisers like us got quite excited.

The key issue in dispute was the application of the charity test, particularly the requirement to provide public benefit.

While the final decision was made in light of the quite unique circumstances of the case, the decision could have an impact on how the charity test is interpreted in the future.

The facts

New Lanark Hotels Ltd. (“New Lanark Hotels”) and New Lanark Trading Ltd. (“New Lanark Trading”) are wholly-owned trading subsidiaries of the New Lanark Trust, the charity responsible for managing the UNESCO World Heritage site at New Lanark.

New Lanark Hotels does what it says on the tin – it is responsible for the running of the New Lanark Mill Hotel (with associated bar and restaurant), self-catering cottages, spa facilities, conference facilities and wedding packages.

New Lanark Trading operates the gift shop (which sells homeware, toys, clothing etc) and café at the main visitor facility, the hydro scheme, the production of textiles and the production and sale of ice cream.

New Lanark Trading also operates the visitor attraction, including the Annie McLeod experience. It is something that would clearly qualify for charitable purposes if directly operated by a charity with the appropriate charitable purposes – the purposes of advancing education and advancing culture and heritage spring to mind.

The visitor attraction is a direct link to our past and to the industrial revolution, to the experiences of young children working in mills, to early examples of social enterprise (hence our general enthusiasm for Robert Owen).

Indeed, the applications made by New Lanark Trading and New Lanark Hotels were made on the basis that their activities furthered the charitable purposes of advancing education and heritage.

The charity test

Crucial to this case is one limb of the charity test.

The charity test can be found in the Charities and Trustee Investment (Scotland) Act 2005 (the “2005 Act”) and is made up of two parts.

Firstly, an organisation must have only charitable purposes, as set out in the 2005 Act (or an analogous purpose).  Secondly, an organisation must provide public benefit.

“Public benefit” is not defined but the 2005 Act does say that in determining whether a body provides public benefit, regard must be had to certain factors including the extent of any private benefit v public benefit and any unduly restrictive nature of the benefit (e.g. if associated costs are such that only a section of the public will be likely to benefit).

OSCR’s decision

OSCR recognised that some of the activities undertaken by each of the subsidiary companies furthered charitable purposes and provided public benefit.

However, in making their decision, OSCR also considered activities such as the running of the mill shop, the manufacturing of ice-cream and operation of a hotel.

OSCR viewed these activities as being neither in furtherance of charitable purposes, nor incidental to charitable purposes, and therefore took the view that the subsidiary companies did not provide public benefit, and the applications were refused.

Journey through the courts

OSCR’s decision was initially appealed to the First-tier Tribunal, where their decision was upheld on the basis that, when considering the activities as a whole, they were generally commercial in nature and any furtherance of charitable purposes was secondary.

This was then appealed to the Upper Tribunal who found that the First-Tier Tribunal had erred in their judgment.

The Upper Tribunal took the view that the commercial activity carried on by each company, in the overall setting of New Lanark (being a UNESCO World Heritage Site etc), was itself of public benefit – this was on the basis that such activity was vital to the presentation of New Lanark to the public as a living, economically active village.

A balancing exercise between activities which further charitable purposes and those which purely raise funds was not appropriate in the Upper Tribunal’s view, as all of the activities in this case furthered the companies’ charitable purposes, and it was irrelevant that such activities raised funds at the same time.  The Upper Tribunal therefore directed that the companies be entered in the Scottish Charity Register.

On appeal by OSCR, the Inner House found that the appeal was no more than a disagreement with the Upper Tribunal’s conclusions on matters of fact, and that the Upper Tribunal was entitled to make the finding that it had. The Inner House suggested that OSCR had misunderstood the Upper Tribunal’s decision.

OSCR argued that the Upper Tribunal had erred in concluding that a balancing exercise was not appropriate and by not interpreting the charity test in line with OSCR’s guidance.

The Inner House clarified however that the Upper Tribunal had found that the activities of New Lanark Trading and New Lanark Hotels, as a whole, furthered their charitable purposes and provided public benefit.

Therefore, although a balancing exercise may be appropriate in some cases (in considering the balance between those activities which further charitable purposes as compared with those which are purely for fundraising), it was not in these circumstances, as all trading activity was primary purpose activity.

Impact of the ruling

A key factor in the Upper Tribunal’s decision in this case was that New Lanark is a unique attraction as it is a functioning village with a living community – certain commercial operations must therefore be undertaken in New Lanark as this is inherent to a living community.

Without occupied residential housing and economic activity, our understanding of what Robert Owen had created (with a carefully designed planned settlement) would have been less.

The key purpose of the subsidiary entities appears to have been that of “revitalising a viable New Lanark” and the court’s view was that making use of the mill buildings etc as a hotel and spa contributed to maintaining the life of the village.  The same was said in relation to ice cream production and the fact it could be viewed through a glazed screen.

The question then becomes what activities can validly be carried out in furtherance of that purpose. It would be interesting to see what view a court would take had there been a more controversial business located in the village.

Anyone seeking to rely upon this judgement should be extremely mindful of the very specific circumstances that apply here - and there are unlikely to be many parallels in Scotland.

As such, the law remains unchanged – charitable trading must either be in direct furtherance of charitable purposes or incidental to those activities.

And for what appear (on the face of things) to be purely commercial activities, these are safest routed through a non-charitable subsidiary unless (from OSCR’s perspective) they are of an incidental nature (but bearing in mind the small trading exemption from a charity tax perspective) or where very specific circumstances apply, such as here.

Once lockdown restrictions have ended, us Lanarkshire lasses might meet up by New Lanark’s Clyde Falls, sample some “charitably made” ice cream and bask in the glow of Mr Owen’s enduring legacy.