26
Wholly Owned Subsidiaries, Special Purpose Vehicles and the University of Manchester experience Mike Shore-Nye Director of Sport Trading and Residential Services 1
Wholly Owned Subsidiaries, Special Purpose Vehicles and the
University of Manchester experience
Mike Shore-NyeDirector of Sport Trading and Residential Services
1
CUBO FINANCE GROUPMonday 29th November
11.30amHarwood Room, Barnes Wallis Building
AGENDA
1. The current use of SPV’s at Manchester
2. The benefits of an SPV
3. The risks and challenges of an SPV
4. SPV how does it work?
5. Questions
2
The current use of SPV’s at Manchester
• The University of Manchester Conferences Limited formed in 1991, in order to recover input VAT on the building of a Hotel and Conference Centre.
• Current UMC operations include Chancellors Hotel and Conference Centre, Student Bars and a contract catering business ‘Christies Bistro’.
• Current turnover £3 million, Profit of £300,000
• Total staff numbers 1303
SPV Structure
• UMC Ltd is a private company limited by shares, wholly owned by the University
• The Board of Directors includes Registrar & Secretary, Director of Finance, Director of Estates, Director of STARS.
4
The current use of SPV’s at Manchester
SPV Financial Characteristics
• SPV cannot be subsidised by the University eg. arms length leases but can pay for services from parent eg. payroll
• All profits are gift aided to the University, to avoid corporation tax
• VAT is payable on activities as SPV is not in the same VAT group as the University
• Separate accounting entity therefore own accounting system, stand alone audit, responsibility for filing of own accounts and company returns
5
The current use of SPV’s at Manchester
The current use of SPV’s at Manchester
SPV Operational Characteristics
• UMC Ltd has own HR terms and conditions, salary scales, policies and procedures leading to efficiences
• Greater workforce flexibility eg. Nil hour contracts
• Can focus operation on non-core University mission
• Ability to be competitive in open market
6
The current use of SPV’s at Manchester
The Future of UMC Ltd
• Inclusion of all University Catering
• Inclusion of Conference and Events
• Potential expansion into shared services with other HE Institutions
7
Operations Options Pendulum
In house Mixed Economy SPV Leased options
• In house - pressure on management plus spiralling costs• Outsource – loss of control, quality Vs profit• Opt out – at the mercy of the market
The benefits of an SPV
Strategic Benefits
• Commercial management culture
• University retains influence
• Flexibility and speed of decision making
• Reduces political interference
9
Legal Benefits
• Charity law Charities such as Universities , should not carry out non-primary purpose activity
• Activities must be permitted under your Universities’ constitution –check for a general power to trade if this is what you will be doing
• Investment in the trading subsidiary is subject to an Universities’ usual duties as a charity regarding an investment
The investment must be in the charity’s interest Sufficient information must be provided Is advice required? The investment must be reviewed
The benefits of an SPV
10
Financial Benefits
• Ring fences other risks in the trading company• May enhance the recovery of VAT• Avoids risk of corporation tax
UK Tax Law, starting point : all profits are taxable unless you can find a reason why not.
The main exemptions are: Primary purpose trading Rental payment Annual payment Small scale trading One-off fundraising events
The benefits of an SPV
11
What is Primary Purpose Trading?
Profits are applied solely to the purposes of the Universities as a charity and
a) the trading is in fulfilment of the main charitable objects in the Universities’ constitution
b) work in connection with the trade is mainly carried out by beneficiaries; or
c) the trade is ancillary to a primary purpose trade(i.e. Meals for staff/ students)
The benefits of an SPV
12
Primary purpose trading (Continued)
• Does charity law allow primary purpose trading – Yes
• What about tax? - The profits of primary purpose trading are exempt from tax if they are applied solely for the purposes of the Universities
• What about VAT?
There is no blanket exemption from VAT for primary purpose trading
• What about rate relief?
The Universities’ entitlement to rate relief is not affected by primary purpose trading
The benefits of an SPV
13
When to route trading through a trading subsidiary If the activity is trading but
a) not primary purpose trading; and
b) there is no relevant tax exemption or there is significant risk
The Universities must not carry out the trading. The trade should be routed through a subsidiary company.
Or you may want to use a trading companya) For management reasons (e.g.. Commercial focus)
b) Isolate risk
The benefits of an SPV
14
Payroll efficiencies
• Breaks link with University pay scales
• Ability to use bonus schemes and other incentives
• Flexible contracts allow labour planning to meet demand and reduces cost of weekend and evening working
• Longer working week introduced
The benefits of an SPV
15
Disadvantages of a trading subsidiary
• Extra administration
• Extra costs (set up and accounting)
• Potential threat to business rate relief
• TUPE Transfer of employees
• Union and staff disgruntlement
• Going bust – cash flow
The risks and challenges of an SPV
16
Decide on appropriate type of entity
• Spin out company
• Joint venture
• Community Interest Company
• Wholly Owned Subsidiary
SPV how does it work?
17
Spin Out Companies – what are they?
• Enterprises in which the Universities or employees of the Universities own shares to enable commercial exploitation of knowledge arising from academic research
• Often this is done through the ‘Technology Transfer’ arm of the Universities
SPV how does it work?
Joint Ventures
• Purpose :Utilise expert outside skills married with the University’s assets and skills.
• Forms : Traditionally limited companies Possibly a CIC But third parties may not like the restrictions Limited Liability Partnership (LLP)
SPV how does it work?
Community Interest Companies
• What can they be used for?- Running services to benefit a university
• Could use a company limited by guarantee – less ‘capitalistic’
• All profits go back to the Universities
• Directors can only be paid reasonable remuneration
• Recognised brand for social enterprise
• Can profits be distributed?
SPV how does it work?
SPV how does it work?
The trading subsidiary – how does it work?
Company limited by shares all of which are owned by the Universities
The Universities funds the trading subsidiary by loan, share purchase or grant
The trading subsidiary carries out the trading activity
The profits are paid to the Universities under gift aid
The trading subsidiary has no profits to tax
21
Establishing and funding the trading subsidiary
• Investment in the trading subsidiary is subject to an Universities’ usual duties as a charity regarding an investment
The investment must be in the charity’s interestSufficient information must be providedIs advice required?The investment must be reviewed
22
SPV how does it work?
Establishing and funding the trading subsidiary continued
• Any loan should be at a commercial rate of interest, secured and on proper repayment terms
• Failure to do this can give to rise to a tax charge on non Qualifying expenditure
23
SPV how does it work?
The relationship between the charity and trading subsidiary
• Two boards a degree of overlap?
• Two separate organisations
• Arm’s length relationship Cost sharing Name and Logo Data
24
SPV how does it work?
Common types of trading operated through a trading subsidiary
• Commercial lettings of accommodation
• Operation of sports centre for Universities
• Contracting, consultancy and other commercial activities
25
SPV how does it work?
Questions and Discussion Points
26
