Use of Subsidiary Companies
Introduction
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The University is an educational charity. As a charity it gains certain advantages and accepts certain obligations. The advantages include exemption from VAT on fees charged to students and exemption from Corporation Tax on any profits from its charitable activities, provided that these are applied for charitable purposes.
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Some of the above matters have recently been substantially amended and clarified through:
§ the Charities Act 2006 ("the Act")
§ Charity Commission Guidance on the application of the Act
§ a guidance note on The Corporation Tax Treatment of UK Universities, agreed by HM Revenue & Customs and the British Universities Finance Directors Group.
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The extent to which the University can undertake non-charitable activities is significantly constrained both by charity law and by tax considerations. Charity law requires the University to apply its funds solely for charitable purposes. In particular, it must not engage in non-charitable trading involving significant risk of loss. Corporation Tax liabilities are likely to arise where non-charitable trading is profitable, and can also arise where non-charitable trading is loss-making (because they imply non-charitable use of profits from charitable activities).
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For these reasons, the University has a wholly-owned subsidiary company, London Metropolitan University Enterprises Ltd ("Enterprises"), through which it channels certain non-charitable activity. Enterprises is not a charity but can avoid Corporation Tax by paying any profits to the University as Gift Aid. This is a model used by many universities and its use has been endorsed by HM Revenue & Customs.
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The University also has several other subsidiary companies, some active and some dormant.
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Charitable Status and Use of Subsidiary Companies
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It is assumed throughout that a proposed activity has been properly costed and is acceptable in terms of the University's Costing and Pricing Policy.
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It then needs to be considered whether the activity is charitable. The definition of what is charitable has been significantly tightened by the Charities Act 2006 ("the Act"). There are three tests to be applied and each must be satisfied:
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1. Is the activity within the University's objectives as set out in its Memorandum of Association?
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Memorandum of Association: Objects
2. Is the activity within one of the areas of charitable activity as defined in the Act? In practice the only such area that is likely to be relevant to the University is "the advancement of education".
3. Is the activity for the public benefit? This a new test introduced by the Act. Charity Commission guidance on public benefit requires application of the following sub-tests and, again, each must be satisfied:
a) Is there an identifiable benefit to the public or a section of the public? This means that the ability to benefit from the activity should not be unreasonably restricted.
b) Are people on low incomes able to benefit? The Charity Commission is currently consulting on guidance regarding the application of this test. It is suggested that it may be sufficient that people on low incomes should be able to benefit from some of the activities of a charity (rather than from each specific activity).
c) Is any private benefit incidental? This means that the benefit to the public must be the main reason for undertaking the activity. Private benefits would include both benefits to individuals and benefits to the University or to other organisations.
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If an activity fails to meet any one of these tests (and cannot reasonably be re-designed so that it does meet them), then it should probably be channelled through Enterprises.
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Other Reasons for Use of Subsidiary Companies
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Sometimes other considerations are relevant in determining whether an activity should be channelled through a subsidiary, for example a client may only be prepared to commission work on the basis that it is undertaken by a subsidiary company.
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VAT and Use of Subsidiary Companies
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A common mis-perception is that VAT is a key consideration in determining whether an activity should be channelled through a subsidiary company. Activities should not be channelled through a subsidiary company purely to gain a VAT advantage (case law has established this could be deemed to be "abuse of law"). However, if an activity is put in a subsidiary company for other reasons (eg because it is non-charitable), then this sometimes affects its VAT status.
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Application to Specific Activities
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Most courses are charitable. Degree courses will nearly always be charitable given the financial support (loans, bursaries, etc) available to enable people on low incomes to benefit. Short courses open to the public will also in most cases be charitable. However, closed courses (those which are run for a particular employer and are not open to the public) are likely to be non-charitable because they only provide private benefits.
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Most research is charitable. If the research is on a topic of interest to a section of the public and is intended to lead to publication then it will almost always be charitable. The national or international community of scholars in a particular subject would probably be sufficient to count as a section of the public. However, contract research undertaken for a client who wishes to retain the results solely for its own use and will not allow them to be published is likely to be non-charitable. For further information see the Charity Commission guidance on Research by Higher Education Institutions.
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Consultancy and miscellaneous services will usually be non-charitable as normally they yield only private benefits to the client and provider.
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Conferences will normally be charitable where they involve the provision of education by the University. The provision of student accommodation will also normally be charitable because it is considered ancillary to the provision of education.
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However, the provision of accommodation to third parties will normally be non-charitable. This would include room hire, letting of accommodation to non-students, and hire of facilities to third parties running conferences.
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Losses Incurred by Subsidiaries
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The University's normal expectation is that activities undertaken within its subsidiary companies will be profitable. A loss by a subsidiary normally implies a subsidy from the University and therefore a use of its charitable funds. Charity Commission guidance on trading subsidiaries is that continuing losses by a subsidiary over a period of years are unacceptable and imply a misuse of charitable funds.
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Guidance for Departments
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The Finance Department is responsible for considering whether proposed new activities should be channelled through a subsidiary activity. In most cases the issue will be identified by the relevant member of the Finance Department in the course of existing approval procedures, eg the PAF form for research and third stream activities. For larger activities, however, and especially where bids for external funding are in preparation, it is recommended that advice be sought from the Finance Department at an early stage as this can help to avoid problems at a later date. Requests for advice should be addressed to Adam Bailey (x (79) 4529).
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| University Companies |
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| London Metropolitan University Enterprises Ltd |
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| Metropolitan New Media Ltd |
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| Use of Subsidiary Companies |
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