Research - when do universities need to think about charity law?

Drawing on our experience of supporting universities with charity law and governance aspects of key strategic projects, income diversification and trading, research and innovation, spin-outs, investment, fundraising and much more, our main aim is to help prompt the question: "Do we need to be thinking about charity law?" 

The vast majority of research activities carried on by universities with charitable status need little consideration in terms of whether they meet the requirements of charity law. However, for some projects and income generating research activities, some upfront analysis is needed to ensure effective structuring and mitigation of tax liabilities.

Most UK universities are charities established for the advancement of education and research, subject to charity law in the same way as (other) registered charities. The requirements of charity law as regards research carried on by universities in England & Wales are best reflected in the Charity Commission's guidance: Research by Higher Education.

Research as a charitable activity

The Commission's guidance distinguishes between research carried on by an HEI as a charitable activity in furtherance of the HEI's objects and 'non-charitable' research, including research undertaken for income generation purposes. It provides that university research will be a charitable activity where three criteria are met:

• Useful subject - The subject matter of the research must be a "useful subject of study" i.e. it is in a subject and is directed towards an outcome which is of value and calculated to promote in a meaningful and direct way the institution's objects.
• Dissemination of knowledge - The useful knowledge or results acquired from the research must be disseminated to the public, by making it available or otherwise accessible. A broad view is taken in determining what research results are useful and what amounts to dissemination, which may take place through teaching, academic and other publication, the filing of a patent or the exploitation or application of IPR.
• Public benefit - Research must be undertaken for the benefit of the public and must not confer any non-incidental "private benefit" on third parties, meaning financial or wider commercial benefits (including competitive advantage) to non-charitable partners.

While most academic research will meet these requirements, the terms of some contract research or sponsored research collaborations with commercial partners may not. In particular, where a commercial partner:

• Restricts the publication of results;
• Restricts the use of the research outputs by the university for teaching or further research purposes, whether in the form of a restriction or because the commercial partner will own the results or receive an exclusive licence;
• Is not required to cover the full cost of the research; or
• Requires the university to assign or licence its background IPR for free or on very favourable terms;

such an arrangement may not satisfy the dissemination requirement and/or may result in a commercial benefit to the partner at level which is greater than can be justified as incidental to the benefit to the public.

Assessing the charitable nature of research

An analysis of the terms of the relevant arrangement will therefore be needed to determine whether it meets the requirements for charitable research. In particular:

• On dissemination, there is some specific commentary in the Charity Commission's guidance about its expectations (including around publication and pre-publication access) in the context of sponsored research collaborations and contract research
• The assessment of the level of private benefit to a commercial partner can, in our experience, be complex. The Commission's guidance recognises that this can be very difficult to do in advance, including where the university has incomplete commercial information.

The difficulty in assessing private benefit is also reflected in the 2018 guidance from the Intellectual Property Office to supplement the model agreements in the Lambert Toolkit which explains that whether or not a benefit to a commercial collaborator is incidental is a matter of judgment with various factors influencing that judgment. However, if providing a benefit to a commercial collaborator is the reason, or a substantial reason, for carrying out the research (which will often be the case in relation to contract research), the research will likely be non-charitable.

The key point in practice is to ensure that systems and processes are in place to examine the details of particular contracts and assess whether research meets the requirements of charity law and whether the university's interests are protected, including ensuring adequate records of decision-making processes and any advice relied upon. This assessment of the charitable nature of a research activity is separate to an assessment of whether an activity constitutes research within the Frascati definition (although the principles are similar) and under the various measures on which the university's research activity is assessed, including the REF.

Why does this matter?

The Charity Commission's guidance is over 15 years old, but is still the most comprehensive summary of the requirements of charity law in relation to university research. Whether research meets these requirements is not just a theoretical question; it is important both in terms of a university's compliance with charity law (which is ultimately capable of being of regulatory concern to the OfS) and the tax treatment of any income generated by the research.

The principles which university tax teams will adopt when categorising research income as "primary purpose" income (in broad terms, income from charitable activities which are for the public benefit) and, more unusually, 'non-primary purpose income' (income from non-charitable activities) are similar to the charity law analysis. Tax teams will be familiar with the helpful guidance published by the British Universities Finance Directors Group (BUFDG) "The Corporation Tax Treatment of UK Universities" (updated May 2021) on this point, which has been agreed with HMRC and which refers to the Commission's guidance.

Using a subsidiary

Where a particular research project raises questions regarding the charitable nature of the research and/or generation of non-primary purpose income, routing the activity through a subsidiary is the Charity Commission and HMRC approved structure for mitigating the relevant tax liabilities and associated charity law implications.

The Commission's guidance on research (reflecting other guidance from itself and guidance from HMRC on trading by charities) confirms that significant or substantial research for income generation purposes should normally be carried on via a separate non-charitable trading subsidiary. Many universities obviously carry out commercial (non-primary purpose) research on a significant scale via subsidiaries.

There are a wide range of legal and commercial issues to consider in relation to conducting research through a trading subsidiary. The key point from a charity law perspective is that the relationship between the subsidiary and the parent university is on arms' length terms and ensures that the subsidiary is charged on an appropriate basis for the provision by the university of research and other staff, facilities, premises and equipment and the university's IPR and any related funding is provided on terms which secure compliance with charity law duties.

Summary - key questions  

In many cases, the charitable nature of research will be obvious, either because it clearly meets the relevant requirements or because it is carried on primarily for income generation purposes and (normally) is already routed through a subsidiary. However, based on our experience of supporting HEIs with this kind of analysis, where flags are raised about the charitable nature of the research, key factors / questions to be considered will include:

• Are the university's rights to use the research outputs for its own teaching and/or research purposes restricted, and if so, on what terms?
• Is publication or other dissemination of the results restricted, and if so, on what terms?
• Where the commercial partner owns the IPR in the research outputs, will the university receive adequate financial or other reward in return for its participation in the project?
• Overall, what is the level of 'private benefit' to the commercial partner and can this be said to be legitimately incidental to the public benefit?
• What are the benefits of the research to the university's wider research activities e.g. Is it complementary to key areas of interest for the university? Does it enhance knowledge in those areas, contributing to other research of the university?
• What are the benefits of partnering with the relevant partner to the achievement of the university's aims in the future?
• What is the university's overall motivation for entering into the arrangement.

A similar analysis may be needed if a university is providing ancillary services alongside contract research or associated services for research purposes, rather than being involved directly as a research collaborator. Examples may include the provision of consultancy, training, or access to the university's facilities / premises; or associated services such as data analysis, scanning or diagnostic services.

This article is part of a series looking at the practical implications for universities and their operations of having charitable status. For further advice about charity law as it impacts on research or any other aspect of your university's operations, please contact Rachel Tonkin in our Charities team on  0117 314 5397, or complete the form below.