Universities and Sports Companies

As universities look to diversify income streams, Sarah Litchfield, University Secretary and General Counsel for the University of Surrey, considers what this means for charitable assets in the context of sport provision.

Over recent years, there has been a trend for universities to create wholly-owned subsidiaries to run often large and expensive sports complexes (“Sports Co”).  These facilities are available to students and used by paying members of the public as a means of subsidising the costs of the facilities and staffing.

Providing sporting facilities to students is viewed as ancillary trading, which is legally part of the charity’s primary purpose trading, whereas opening facilities to the general public is considered to be non-primary purpose trading.

Charity Commissioner’s Guidance on ‘Trustees, trading and tax: how charities may lawfully trade’ (“the Guidance”) states:

a trading subsidiary must be used in any case where there would be a significant risk to the assets of the charity, if it were to carry on non-primary purpose trading itself.

More recently, institutions have started to move the whole trade into Sports Co, as that removes risk from the public operation. Once in Sports Co the question about whether the trade is primary or non-primary becomes irrelevant: the normal expectation is that trading subsidiaries are set up to run commercial trades at a profit. Generally, Sports Co is regarded as just another regular trading company.

However on a deeper dive, there is often a problem with that analysis. Sports Co’s ability to charge commercial rates for public or commercial use is often impacted by the needs of the parent university. For example where the university decides that fewer facilities should be available to the public, a decrease in revenues can result or worst case scenario, Sports Co may end up trading at a loss. The Guidance states that:

If the trustees sink further funds into supporting an ailing trading subsidiary at a time when it was reasonably clear that the failure of the subsidiary was likely, this could constitute a breach of trust on their part, putting them at personal risk to make good any losses to the charity.

However, the Charity Commissioners’ Guidance on investment recognises that sometimes a subsidiary trading company can be set up to further both the charity’s aims and to generate a financial return. These are termed mixed motive investments. The statutory power for charities to make such investments was introduced by the Charities (Protection and Social Investment) Act 2016. For Royal Charter institutions the ability to make such investment falls under their existing powers. A charity may be able to justify the investment as a mixed motive investment if the return is dual: part financial and part justified by the investment’s contribution to the charity’s aims.

So can investment into a Sports Co be considered a mixed motive investment? Does this reflect the nature of the relationship between Sports Co and parent as well as reflecting the purposes for which it was set up? Much will turn on the arrangement between parent and the Sports Co in question. If the sports facilities are primarily directed at the university’s own use and the commercial use is ad hoc, it seems unlikely that investment into the Sports Co would fit the criteria of mixed motive as the commercial side is not set up to create value on a stand-alone basis. Would a trustee, acting prudently and in the charity’s best interests, invest in a venture that has no real right to determine how and when it will use its facilities?

The question posed is therefore whether Sports Co are a genuinely part-commercial venture or a charitable venture with spare capacity?

Common sense dictates that a university seeking to off-set the cost of delivering student sport by commercially exploiting any spare capacity has to be in the charity’s best interests, yet the restrictions around trading and investment seem to be barriers to this pragmatic approach. Instinctively this doesn’t feel right.

A possible solution is for a university to appoint Sports Co as their agent to deliver student sport at the university’s cost. Sports Co would be able to earn a profit when the facility is not required by the university and this would constitute its trading income. The company would not be charged rent and would receive an agency fee for delivering student sport. A cost-sharing agreement would be needed to ensure that a reasonable proportion of the costs reflected commercial usage.

The above is an illustration of the complexity and care that leaders – and governing bodies – have to be aware of in navigating changes in operating models for a variety of services. In the context of challenges around value for money, diversifying income streams and creating innovative solutions in providing access to civic partners, this has to be tensioned against the core purpose of universities in the context of charitable objectives and use of charitable assets.