A roadmap to subsidiary companies in Higher Education

Karen Stephenson, University Secretary at Birmingham City University, offers an overview of how universities can take a strategic approach to subsidiary companies.

Posted by Karen Stephenson on 13th June, 2024

A subsidiary company is owned by a parent or holding company. If the parent company owns 100% of the subsidiary, this is referred to as ‘wholly owned’. If, however, the ownership is between 50.1% – 99% the subsidiary will be ‘partly owned’. The parent company can, in the case of educational institutions, be a functioning business or a holding company, which solely controls other companies and investments. A subsidiary company is a separate ‘legal personality’.

Ownership

Although subsidiary companies are a separate legal entity, because parent companies are a major shareholder they are able to impose processes, oversee operations and contribute to management decision making within that separate entity.

Motivation

A subsidiary company offers efficiency in terms of risk mitigation, thereby limiting the exposure of a parent company.
The de facto control exercised by the parent company is crucial in ensuring compliance with the ethos and values of the parent company. This is a critical factor given the charitable status of universities and the reputational implications of subsidiaries’ possible conduct / management.
Subsidiaries offer a convenient vehicle for the parent companies to diversify from their core business in a manner which does not detract from the ‘mission and vision’ of the parent company.

This is common in the commercial environment. Johnson & Johnson for example own 265 individual businesses in a range of synergistic areas which include pharmaceutical, consumer health care and medical equipment. Similarly Apple Inc. which produce iPhones and Apple Mac computers own Shazam and Siri Inc. while the Walt Disney Company wholly own Marvel Entertainment, Disney+ and Pixar.

The charity dimension

Most universities in the UK have the status of a charity. This means that there are a set of defined activities, which, under Charity Law they are legally allowed to undertake. These are specified in ‘The Corporation Tax Treatment of UK Universities’. This has been agreed by HMRC and the British Universities Finance Directors Group (BUFDG). Universities achieve charitable status because their ‘primary’ trading purpose is charitable and for the public benefit. The Charities Act 2006 defines the ‘advancement of education’ as having a charitable purpose and consequently exempt from both Corporation Tax and VAT. Ancillary or complementary activities such as the provision of accommodation and catering for students registered at the university are included in this definition. There are many examples within the UK HE sector. The University of Bristol has a wholly owned subsidiary, NCC Operations Limited, which provides goods and services based on composites technology. An example of a Holding Company is the University of Edinburgh’s Subsidiaries Oversight Group (SOG). This is not formally part of the university governance structure. Its purpose is to maintain a strategic oversight of the university’s portfolio of subsidiary companies.

However tax is chargeable on activities which fall outside of those specified in the Charities Act and the ‘Corporation Tax Treatment of the UK Universities Agreement’. An approach to placing a legal boundary between the charitable activities of the university and other work that the university might engage in is a subsidiary company. These activities typically include the commercialisation of university Intellectual Property (IP), commissioned research for industry or ‘closed’ courses’ which are run for a particular employer and not open to the public. These are non-charitable because they are deemed to only provide private benefits. The advantages lay in expediting potential complications between charitable and non-charitable activities as well as the fact that subsidiary companies are not subject to the restrictions on their activities that charities are. If the subsidiary company makes profits these can be transferred in a tax efficient way to the parent company via The Gift Aid Scheme where profits transferred to the university will be exempt from tax.

Universities strategic approach to subsidiary companies

*Strategic Outcome*	*Supported by:*
1. To build global reputation, market position and revenue streams	A subsidiary company may be used as the vehicle for a specific activity or initiative, such as a business operation; a new campus or segment of the University’s workforce. This is likely to support one or more of the Business Outcomes to deliver the Corporate Strategy
2. Grow high quality research and use it to drive excellence in all of the University’s activities	The majority of the University’s research will be considered charitable and therefore can be undertaken in the name of the University. However, some research may not be and will therefore be most appropriately placed in a subsidiary company structure.
3. Maximise student and stakeholder satisfaction.	Subsidiary companies are unlikely to have any direct impact on the student experience. However, the transfer of activities to a subsidiary company operation could maximise external stakeholder satisfaction; support the University in dealing more effectively and flexibly with external bodies and partners with whom it wishes to contact, through a recognised structure.
4. Strengthen operational efficiency and effectiveness, and foster a culture of continuous improvement	Subsidiary companies are a more efficient way of managing specific resources and assets, separating these from other activities for commercial or charitable purposes. Other efficiencies include greater flexibility and the ability to employ staff on different contracts and terms.

The role of subsidiary companies has developed from one of operational expediency to that of strategy. Given the pace of change in the sector and the driving financial imperatives it is likely that their strategic importance will grow.