Charity status may be traded for legal gains

August 24, 2007

Institutions weigh potential bottom-line benefits of becoming limited companies, reports Melanie Newman.

Higher education institutions are increasingly seeking advice on becoming companies in order to give themselves more freedom to hire and fire staff and to expand their commercial activities, according to a leading lawyer.

John Boardman, head of the education sector group at commercial law firm Eversheds, said that increasing competition in higher education was forcing universities to be more businesslike in their outlook.

Eversheds alone has recently advised six institutions on these issues. One institution had sought advice on a management buyout, although it decided against the move. Mr Boardman said that some are even looking at plans to abandon their charitable status - an issue that is the subject of a conference of university administration chiefs in October.

The post-92 universities, established as higher education corporations by the Further and Higher Education Act 1992, were waking up to the limitations that their governing statutes imposed on them, said Mr Boardman. Pre-92 universities were established by charters, which are drafted more widely and give them more freedom.

A corporate structure would remove the rights of employees currently enshrined in statutes, said Mr Boardman. "The private sector has a much more flexible workforce."

Sally Hunt, general secretary of the University and College Union, said: "Universities should not be trying to downgrade the indepence of academics or the terms and conditions of employees.

"The independent status of universities is essential for the research and teaching that underpins so much of our country. Anyone looking to alter that must look very hard before unpicking a system that has delivered so much."

Eversheds, which has about 100 university clients, this month advised Trinity and All Saints College, a higher education institution accredited by Leeds University, on incorporating as a limited company. The new Cumbria University - formed by a merger of St Martin's College and the Penrith and Carlisle campuses of the University of Central Lancashire - has also been set up as a company.

Mr Boardman said that becoming a limited company could provide far greater investment opportunities because banks and other potential investors were nervous about encountering problems when dealing with universities as they are currently constituted. He pointed to a landmark legal case, Credit Suisse v Allerdale District Council , in which a bank was unable to recover a loan from a local authority because it had no legal authority to enter into the transaction in the first place.

"Third parties entering into joint ventures or considering investments also get nervous about restrictions the statutes may throw up in future," he said.

The Financial Times reported this year that India's 150-year old University of Mumbai was looking at a stock market listing as a way of funding new facilities.

British universities are also considering investment from industry using new and sophisticated financial structures.

"There is lots of cash floating around that the private sector is exploring investing in universities using fancy new instruments, such as real estate investment trusts," Mr Boardman said.

Universities have also been examining their charitable status. "It's very hard for charities to give guarantees or indemnities to non-charitable ventures," Mr Boardman said. Under the "public benefit test" introduced under the Charities Act 2006 in England and Wales, universities must show that people on low incomes benefit from their activities.

"The Charities Act will change the way universities are looked at, although the impact is still unclear," Mr Boardman said.

The Association of Heads of University Administrators' higher education law forum is holding a conference in October to discuss the constraints of charitable status in terms of trading and the implications of giving up the tax advantages that go with it.

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