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New Charity and Tax Laws: What They Could Mean for University/Business Collaborations

The government has been encouraging the development of relationships between business and educational establishments with a view to generating a source of innovation, specialist skills, world class research and development, increased productivity, and to promoting the transfer and commercialisation of technology for the benefit of the UK economy.  However, recent changes in the law seem to indicate that this kind of collaboration might prove less attractive for both educational establishments and for businesses themselves.

The Advancement of Education – a Charitable Purpose

The law previously presumed that the aims of any organisation which advanced education were ‘for the public benefit’.  Under the old law, bodies set up to advance education would have qualified for charitable status.

The Charities Act 2006 removes that presumption of public benefit, meaning that charities advancing education now have to demonstrate positively to the Charity Commission that their aims are for the public benefit.  This may affect the tax liability for the education organisations involved in collaborative research with businesses and may therefore have a knock-on effect on those businesses.

Public -v- Private Benefits

The two key principles of showing public benefit are that (1) there must be an identifiable benefit; and (2) that benefit must be to the public or a section of the public.  

One key requirement of the new law is that any ‘private benefit’ must be incidental.  A ‘private benefit’ means benefits to people or organisations that are not the benefits that the charity exists to produce, even though they might ultimately be justified as a necessary means to a charitable end.  

Benefits to commercial organisations may be considered to be private benefits.  For example, educational establishments set up as commercial businesses where the aim is to provide a profit for their owners are not for the public benefit, as the private benefit to the owners is not incidental.  

If a research project is carried out with the aim of benefiting the commissioning business that will exploit any learning in order to increase its own profits, then the private benefit will not be incidental.  If, however, the research has been carried out by a university and, in order to obtain the funds to develop the research results into a useful product, the university goes into partnership with a business, the private benefit to that business might be incidental, provided that results of that research are disseminated into the public domain within a reasonable time so that the general public can exploit any useful results.  Retaining secrecy whilst seeking patent or similar protection would be considered “reasonable”, provided the results are withheld no longer than is absolutely necessary to seek such protection.

The courts have emphasised that research is only charitable if its useful results are made available to the public. This does not mean that research has to be presented in a way that is understandable by everyone.  What is important is that it is published and placed in the public domain so that everyone capable of understanding it has access to it, and its benefits or usefulness are available to everyone.  Contract research undertaken for a business that wishes to retain the results solely for its own use and will not allow them to be published is likely to be non-charitable.  If, for example, there was an agreement with the main objective for the educational organisation being to assist in product or technical development for private customers, then this would be more likely to be seen as a commercial project for private benefit.

Ultimately, educational institutions will need to be in a position to show that:

             • a rigorous process of deliberation took place and expert advice was taken; 

             • the decision to engage in the collaborative project was one actually directed at furthering the institution’s scientific or educational purpose;

             • the main aim of furthering that purpose could not be achieved without facilitating or providing the private benefit to a business; and

             • the amount of benefit to the business was reasonable and proportionate.

The problem is that the Charity Commission seems to disregard the value and public benefit which will flow from the publication of research, the improved goods and services arising from it, the fact that the educational institution may also benefit from enhanced teaching and research activities from working with the commercial entity, or the positive impact on the wider economy. 

Tax Implications

Why is it so important for organisations to pass the ‘public benefit test’?

HM Revenue & Customs will apply a ‘public benefit test’ when deciding whether or not activities such as collaborative research between a university and a business are part of the university’s primary charitable purpose.  If it decides that they are not, then such activities will be subject to corporation tax.  Further changes in the law mean that this is the case whether the activity makes a profit or a loss.  If it makes a profit, corporation tax is payable on the profit element.  If the activity makes a loss, the amount of the loss will be regarded as “non-charitable expenditure” and tax exemption is not available on that amount of the charity’s income.  This means that the charity would effectively have to pay corporation tax on the sum it has lost.  There are some reliefs which may be applicable to reduce the tax burden on these losses, but it is not clear that these will be available in all cases.

It seems now that the more substantial the benefit to the collaborating business (e.g. in terms of improved business processes, early or exclusive access to research results, or superior rights to the intellectual property generated by the collaboration), the less likely it is that the private benefit from the activity will be considered incidental to the benefits the charity exists to produce.  Therefore, whilst educational establishments will need to ensure that the collaborating business provides sufficient funding for supporting their research, they may at the same time be more conscious of trying to limit the rights granted to businesses arising from the research they are financing.  In the long-term, this seems likely to discourage future collaboration between educational institutions and businesses.  

Your Right to Reply

The Charity Commission has produced draft guidance for public consultation on this subject; the closing date is 11 July 2008.  Further information is available on http://www.charity-commission.gov.uk/publicbenefit/pbedu.asp .   

This focus is a general guide to what is a very complex area; action should be taken only after specific advice has been sought.  For further information contact: Esther Gunaratnam by email on esther.gunaratnam@laytons.com  or telephone her on 020 7842 8000.

For PDF vesrion of this focus sheet please click here