Tax threat could hit hundreds of public schools

£100m of benefit in jeopardy after dramatic Charity Commission ruling

Hundreds of independent schools will be forced to raise their fees to take in more pupils from poorer backgrounds, following a landmark ruling by the Charity Commission. Two of the first five schools investigated by the watchdog have been told they fail to meet tough new standards for retaining their charitable status – worth about £100m in tax breaks across the sector.

The leaders of Britain's 2,500 private schools fear the verdicts could be a foretaste of what is in store for all of them. Most independent schools, including Eton, Harrow and Winchester, have charitable status they say is vital for their survival.

The two schools singled out by the commissioners – St Anselm's in Bakewell, Derbyshire, and Highfield Priory in Preston, Lancashire – are ranked among the top 100 private preparatory schools. They have been given 12 months to start doing more to help disadvantaged children in their communities, or risk losing their charity status altogether.

A spokeswoman for the commission said: "All charity trustees are being required to ensure they carry out their charity's aims and for the public benefit." However, she said no decision had yet been taken about how it would proceed with future public benefit assessments.

David Lyscom, the head of the Independent Schools Council, an umbrella group representing 1,280 independent schools in the UK and Ireland, said the watchdog's ruling would inevitably lead to higher charges for most parents who paid full fees for their children to attend private schools.

He added: "We are deeply disappointed with the approach taken by the Charity Commission – which focuses on the amount of means-tested bursaries provided by each school.

"The implication of the commission's findings appears to be that many schools must aim to provide a significant but unspecified proportion of their turnover in full bursaries. This will inevitably lead to fee increases for the vast majority of parents, putting the benefits of an independent education beyond the reach of a greater number of children."

The Charity Commission's report on St Anselm's revealed that the 250-pupil school provided only two bursaries, up to the value of 90 per cent of fees. This cost £20,000, or 1 per cent of its total income. It also provided £30,800 in assistance to nine children of armed forces personnel through a Ministry of Defence grant, and scholarships offering a 10 per cent discount on fees to a further seven children. The report concluded that the school was "not currently operating for the public benefit".

Highfield Priory did not provide any bursaries, the commissioners found, concluding that it did "not ensure that people in poverty are not excluded from the opportunity to benefit". The school, however, insisted that it kept fees as low as it could – £5,975 a year – so that as wide a range of children as possible could benefit from its tuition. Simon Northcott, the headmaster of St Anselm's, said: "[The commissioners] haven't told us what they want us to achieve. We believe we can play ball with what they want but it obviously makes a difference whether they want us to go up to spending 2 per cent of our income or 6 or 7 per cent."

He said a recent fundraising drive to provide the school with more resources had not been as successful as was hoped because of the recession. The only other way to find extra money for bursaries would be to raise fees at a time when families were suffering from the downturn.

Today, the Charity Commission publishes a report setting out the key issues and offering information on how charitable organisations can meet its public-benefit test. Under a section on fee-charging, which affects private schools, it states that a charity which charges high fees that many people cannot afford must demonstrate that "there is sufficient opportunity for people who cannot afford these fees to benefit in a material way that is related to the charity's aims".

It sets out a number of ways that charities might fund fee assistance, including income from fees, from specific funds set aside for that purpose, using funds from a third party and setting fees at a "slightly higher" level in order to create a fund to assist those who cannot afford them.

But Mr Lyscom warned that small schools which had tight budgets could find themselves vulnerable in the future – a rise in fees might mean some parents could not afford to keep sending their child to the school.

He also condemned the commission for failing to specify how many bursaries a school needed to provide to meet the test. "The schools are being found guilty without knowing what innocent looks like," he added.

But Dame Suzi Leather, chairman of the Charity Commission, said: "The majority of the charities we have assessed are already providing public benefit in a variety of ways. The other charities are capable of doing so and remain registered but they must now agree with us in the next 12 months the changes that are needed."

In all, 12 charities acted as "guinea pigs" for the pilot inspections and eight passed the test. These included Manchester Grammar School, the only school to volunteer for the pilot.

The other two charities to fail were fee-paying residential care homes.