STRATEGY, STUDENTS AND GOVERNANCE

What (if any) are the benefits of being a limited company?

In the context of increasing commercialisation and pressure to generate income, our article looks at the pros and cons of different constitutional structures for universities and the option (for those which are not already companies) of incorporating. Read more

Student contracts – help or hindrance in student disputes?

Plenty of comment and discussion (not to mention abuse!) was generated by the draft model of a university – student contract which AHUA commissioned us to prepare.  Here we look at the arguments for and against having a written contract.  Read more

University staff victims of anonymous and defamatory blogs

We report on recent guidance from the High Court on when it might make an order against a website operator requiring them to disclose information about anonymous postings.  Read more

Model Statute: revision or removal?

Our article provides an update on progress in current university constitutional reforms where the Model Statute is being removed from statutes into ordinances, and therefore outside Privy Council/Government control for the future, and outlines the Government's position. Read more

FINANCE, TECHNOLOGY AND IP

Strategic review of pensions in the UK HE sector

A short report on the recent review's background and conclusions about the future for pension provision in the sector.  Read more

Opting to tax land and buildings for VAT – the financing problem

The supply of an interest in land is exempt from VAT unless the person making the supply elects to waive the exemption over the land being supplied (the "option to tax").  Anti-avoidance legislation can operate to disapply the option to tax.  Although the rules are targeted at tax avoidance, they can also affect entirely commercial arrangements, particularly where a university is deemed to be "financing" an acquisition or development.  Read more

HUMAN RESOURCES

Recruitment without tears – managing the risk of discrimination claims

Discrimination claims relating to recruitment exercises are a relatively low proportion of the discrimination claims which we deal with in the university sector.  However, some commonly experienced pitfalls can pose significant problems in successfully defending such claims especially if the burden of proof shifts to the university to show a non-discriminatory reason for the claimant's unsuccessful job application.  These risks were highlighted recently in the case of Walls v Warwick University, which resulted in a £35,000 award of compensation to an unsuccessful job applicant.  Our article looks at some of the practices which give rise to risks and offers suggestions on how universities can best protect themselves from liability in this area. Read more

Confirmation of employer's right to deduct pay for industrial action short of strike

During last year's industrial action by UCU, one hot topic was the issue of deducting pay from those staff taking part in industrial action short of a strike.  For most institutions, the decision on whether to withhold or deduct pay was a tactical one.  There was also some legal uncertainty about whether deductions from pay could be made without having to exclude from work altogether staff who were not prepared to carry out their full duties.  Our advice to institutions during the dispute was that this was possible and that approach has now been confirmed in a case brought against London Metropolitan University by a lecturer who challenged the lawfulness of deductions made from pay during the dispute.  Read more

FULL ARTICLES

STRATEGY, STUDENTS AND GOVERNANCE

What (if any) are the benefits of being a limited company?

Are there any benefits to universities of incorporating as limited companies?  The new Charities Act, increasing amounts of commercial and international activity, and private providers entering the HE market, are developments which have led to a focus on questions about charitable status and the limitations of current university structures.

This article (directly applicable in England and Wales but relevant throughout the UK) follows on from a workshop at the AHUA Autumn Conference in Bristol exploring the questions and issues around this subject and considering possible alternatives.

Issues and concerns

Some of the issues and concerns about current structures which we considered at the workshop were, for example: constraints on powers and independence; freedom and flexibility; government interference; lack of appreciation by government of the business context in which universities now operate - competing internationally and with private sector providers; the scope for investment and commercial activities; governance and decision-making; the tax advantages of charitable status; what happens on dissolution, transfer or merger; staff issues; regulatory burdens; and - not least - fees paid to lawyers as a result of doubts about powers to engage in ground-breaking activities.

Questions to be asked

The first question to consider is where you are starting from.  A number of universities are already incorporated as (charitable) companies limited by guarantee – for example, the LSE, the post-1992 institutions formerly under ILEA, and a number of other "designated institutions", mostly former trusts and/or church colleges.  The other main types of university considered here are the chartered institutions and the higher education corporations. 

HECs are statutory corporations and their powers are set out in the Education Reform Act 1988 (ERA).  These powers are fairly circumscribed.  HECs can only do what is specifically provided for in ERA.  Chartered institutions have much wider powers – essentially all the powers of a natural person.  They are limited by what their charter and statutes say they can't do – and by charity law in some respects: for example, while a chartered institution might have the power to bet its entire investment portfolio on a horse race, this would obviously be contrary to charity law duties.

Therefore, if you are considering a possible change of status, the starting points are entirely different.  On the face of it, HECs might have quite a lot to gain by incorporating, in terms of being able to define their own powers and freeing themselves from the restrictions of ERA and governmental whim; whereas a chartered institution already has very wide powers, which is obviously beneficial - so you would need to think carefully about what you might be giving up by converting from chartered status to anything else. 

Questions then to consider are what you see as the limitations of your institution's current status, what you would seek to achieve by changing status, whether change of status is necessary, or whether you could achieve the same result by an easier method.

Possible alternatives

HECs have a ready-made route under ERA to transfer to a successor company by Order of the Secretary of State.  We covered this in more detail in our article in ULB June 2006 

(http://www.pinsentmasons.com/media/134101645.htm). 

Other company structures could be used to carry on the activities of a university, but a CLG is a suitable vehicle for a charitable operation.  Non-charitable activities are considered below.

Another possible alternative which has been suggested is for the university to give up charitable status altogether and operate on a purely commercial basis, leaving its assets and estate held on charitable trust.  It is a bit difficult to see the advantages of this kind of structure, basically because of the limitations on the use of charitable assets.  Charitable assets must be used for charitable purposes, and therefore cannot be transferred for use in a non-charitable, commercial undertaking, as explained further below.

Charity law issues

Funds, property and resources of the university must be used only for its charitable object – the furtherance of education including teaching and research.  This means that funds can't be diverted for other purposes; broadly that universities can't enter into "money making ventures"; and that they can't trade unless it is either to further the institution's primary purposes (eg by charging fees) or is ancillary (eg the provision of cafes, bars, or serviced student accommodation).  On the other hand universities can invest their charitable funds, and invest by holding shares in trading companies or joint ventures.

Broadly, a charity can't be "terminated".  Existing assets, funds and property would remain held for charitable purposes (eg in a trust).  In the alternative structure envisaged above, the new "commercial" university would need to pay market value to access these assets; the trust would have to use its profits for educational purposes – and the best use might not be for the benefit of the new university!

Possible benefits of incorporating

There are clearly potential benefits to HECs from incorporating, as outlined above.  For other types of institutions the benefits are not so obvious, although there may be particular circumstances which would make it worth considering.  Incorporating as a CLG would not mean necessarily giving up charitable status.  On the whole, our view is that charitable status confers considerable benefits (mainly tax) in return for limitations which are not all that difficult to deal with or overcome.

A final point to note: one of the benefits which is most unlikely to follow purely as a result of incorporation is any difference in the relationship with staff.  For the avoidance of doubt (and contrary to the claim in the THES's article on the subject), incorporation will not make it easier to hire and fire staff.  Staff would almost certainly transfer to any new organisation under TUPE with their terms and conditions of employment intact.  So, as far as chartered institutions are concerned, this is not a handy way of getting rid of the Model Statute!  (But see further our article on the Model Statute in this issue).  Go back

nicola.hart@pinsentmasons.com

Student contracts – help or hindrance in student disputes?

There has been controversy in the press recently following the move by a number of universities towards putting a written student contract in place.  At first sight it seems difficult to argue against such rationalisation which would seem to bring certainty and clarity to a relationship that is arguably otherwise difficult to define.  On the other hand, as we saw in the alarmist press articles this summer, such an approach gives rise to serious concerns on the part of students as well as obvious difficulties in the management of the process.  When it comes to student disputes however, will a written contract really help?

This article is relevant to universities throughout the UK.

One of the key difficulties when dealing with student disputes is determining precisely what the terms of the relationship between the university and the student are.  Students may claim that as part of their course they were "promised" trips abroad, a free laptop or one-to-one tuition by a particular tutor for example, and so reference to a single document to see whether these "promises" do indeed form part of the contract, will surely assist both students and universities.  Similarly students might claim that they were unaware of the existence of any academic regulations or any requirement not to copy others' thoughts and ideas in their written assessments and so being able to point to a specific part of the student contract setting out those terms (or not as the case may be) will inevitably dispose of this as an issue very quickly.

We all know that a contract to admit and a contract to educate exist between the university and the student, so surely it is only common sense to record this in one place, without the need for constant reference to a swathe of different documents.  Arguably this approach is fairer and clearer from the students' perspective as well as providing an easier route to resolution of issues that arise between the student and the university, as the parties have acknowledged at the outset the terms of the bargain between them.

Of course a written contract is not the end of the story, as universities may well end up facing arguments that terms can be implied into the contract, or that an oral or collateral contract exists alongside the main written contract.  Universities can at least attempt to deal with these arguments by the inclusion of appropriate boiler-plate clauses in the written contract which exclude oral representations and make it clear that the entirety of the relationship is contained within the written contract.

There are, as we know, equally forceful arguments that a written student contract will not be a cure for all student disputes and could in fact lead to increased litigation from students.  Arguably a written student contract will only ever be a starting point and cannot possibly capture the entirety of the relationship between the student and the university.  For example, despite the inclusion of an entire agreement clause in the contract, a court is still likely to take into account material representations when determining the scope of the student contract and how its express terms should be interpreted.  Indeed, given the nature of most student disputes, there will almost always be some argument that an implied term, oral or collateral contract exists which falls outside the written agreement.   Equally, a court will not be willing to uphold onerous contractual terms against a student where they are too one-sided and breach consumer protection laws.

Perhaps more worrying is the thought that a written contract may inspire more claims by students against universities.  The student population seems to be gradually becoming increasingly litigious and the concern is that a written contract may make it easier for students to point to particular clauses and assert that they have been breached. 

There is force in both sides of the argument.  On the one hand universities may well be assisted in any student disputes by the existence of a student contract which attempts to set out what the precise terms of the student contract are.  On the other hand, universities may well be better served by simply maintaining the status quo and the flexibility that currently exists when determining what the contractual terms actually are, by reference to several student and academic regulations.

On balance it seems to us unlikely that having a written contract will put either a university or a student in a worse position in a dispute situation.  Quite the contrary - having the terms of the agreement recorded in a single document is in our view far more likely to resolve claims due to the certainty that it will bring, as opposed to encouraging litigation.    Additionally, courts these days favour an open approach with clarity and accountability on both sides which may be achieved through the existence of one contractual document.

Go back  

joanne.garbett@pinsentmasons.com

University staff victims of anonymous and defamatory blogs

This article is directly applicable in England and Wales.

We have previously reported on the growing amount of comment that appears in blogs and other postings on the internet about universities and individuals within them, usually members of academic staff or senior officers of the university.  Sometimes remarks that are posted are disparaging, inaccurate and seriously defamatory of the university and individuals within it.  It can be very hurtful to be on the receiving end of such libellous comments and dealing with it causes even more stress to those involved.  As the web postings are usually anonymous, it can be difficult to know what to do about them if it is not possible to resolve the matter through dialogue with the website operator.  Whilst it is often possible to persuade the operator to remove the offending content, in certain circumstances it may also be necessary to pursue the authors themselves, and operators will not be willing to disclose the identity of their members voluntarily.

On 18 October, the High Court gave some guidance on when it might make an order against a website operator requiring them to disclose information about anonymous postings.  The Claimants, Sheffield Wednesday Football Club and others, wanted subscriber information for a number of contributors to an unofficial supporters club relating to 14 web entries which they considered to be defamatory.  The judge refused to order the information sought in relation to 9 of the 14 web entries. 

There are 3 requirements for such a disclosure order to be made: 1. a wrong must have been committed or be imminent; 2. the order must be necessary for a defamation action to be brought; and 3. the party against whom the order is sought must have facilitated the wrong and be in possession of the necessary information.  Requirements 2 and 3 will usually be satisfied (as they were in this case).  Requirement 1 is likely to be trickier.  The test is whether the web entry is "arguably defamatory".  Even if the postings satisfy the requirement, the Court has discretion to refuse to grant an order and takes into account the seriousness and strength of the case.  The judge found that 9 of the postings were unlikely to have been taken seriously or result in quantifiable harm and refused to order the disclosure of information about them.

The Court had to balance the website members' rights to anonymity and freedom of expression against the claimant's right to protect their reputation.  The Court regarded the other 5 postings which contained allegations of greed and dishonesty as tipping the balance in favour of the claimants getting an order.  

The case illustrates some of the difficulties that will need to be overcome if formal action is to be contemplated.  The guidance is really interesting. It's possibly the first case of online defamation we've had in this country where the right to privacy has outweighed the right to protect a reputation simply because defamatory comments were trivial.

The judge said it was relevant "to consider whether the words complained of were, even if strictly defamatory, more than a trivial attack which would not be taken seriously...I do not think it would be right to make an order for the disclosure of the identities of users who have posted messages which are barely defamatory or little more than abusive or likely to be understood as jokes....that, it seems to me, would be disproportionate and unjustifiably intrusive."

A comment by a user called 'cbrbob' fell into that category. It replied to another's posting about a trip abroad by the club's manager and its chief executive to watch players with a view to making a signing. "They blew all the money on hookers," wrote cbrbob. Someone else replied, "It's not a hooker we need, it's a striker," to which cbrbob retorted, "they wouldn't know the difference."

The judge held: "The claimants are not, it appears, concerned about the suggestion that they spent the club's money on prostitutes, which I presume they accept might have been unlikely to be taken seriously, but with the suggestion that the [chief executive] would not have known the difference between a hooker in rugby and a striker in football, which would have been understood to mean that [the chief executive] would not have been capable of spotting a competent player."

The judge thought this and another statement were plainly intended as jokes. Two others were deemed "no more than saloon-bar moanings about the way in which the club is managed". Another two "add to the mix a smidgeon of personal abuse of a kind which I would have thought most unlikely to be taken seriously."

Often the best policy might be to ignore postings, however, in more serious (particularly repeat) cases it may be necessary to take steps to remove the content and then take formal action against the offending website members.   Go back

stefan.paciorek@pinsentmasons.com

Model Statute: revision or removal?

Instead of living with the original Model Statute on Academic Staff ("MS"), or compromising with the Revised Model Statute, a number of chartered universities are pursuing the more radical path of complete removal of the MS from their statutes, as part of a wider programme of modernisation and constitutional reform.  We report on the progress of this initiative and the latest Government position.

This article is relevant to chartered institutions and other pre-1992 universities throughout the UK.  (For more background on the MS and its problems, see our previous ULB article January 2007 at 

http://www.pinsentmasons.com/media/491916267.htm).

Is it possible to get approval from Government for removal of the Model Statute?

In 2005, the Privy Council approved a new Supplementary Charter for City University and a completely new set of Statutes not including the MS.  A precedent was created.  However, it has been made clear by government advisers that each application will be considered on a case by case basis.  (Other applications are going through the approval process or have been approved more recently).

On 6 February 2006, Bill Rammell sent a letter to Vice-Chancellors outlining a list of those areas in which Government would continue to take an interest (see our article in ULB February 2006 at

 http://www.pinsentmasons.com/media/68418519.htm).  At the last minute, the Model Statute was included in this list.  In the industrial relations climate at the time, we understand it was considered by the Minister that its non-inclusion would be too provocative.

Union opposition

The UCU has indicated in relation to more recent proposals by a number of universities to remove the MS into ordinances that it will oppose this move.

At the University of Salford, such a proposal went out for consultation before being presented to the University's internal bodies for approval.  UCU sought to halt the internal approval process by making a petition to the Visitor, complaining that the consultation period with UCU had been inadequate and that the changes were being forced through the University's internal decision-making processes. This was an unusual case of the Visitor's jurisdiction being invoked and accepted in a dispute relating to employment issues (see our article in ULB April 2006 at http://www.pinsentmasons.com/media/1477946825.htm). 

The Visitor (Philip Havers QC acting on behalf of Her Majesty the Queen) accepted jurisdiction here because he found the complaint to be a general one as to the content of the statutes and the procedure the University was following  to change them, rather than a dispute specifically concerning the appointment or employment of staff or its termination.  He then proceeded however to find against UCU, on the grounds that the University was correctly following its internal decision-making procedures (requiring approval by Senate, Council and Court) and that it had consulted in adequate time with interested parties including UCU.  The complaint was premature insofar as it was directed at the content of future ordinances, which would be circulated in draft for consultation and comment before being implemented.

UCU did not give up but pursued the issue by writing to Bill Rammell and arguing that if the Privy Council were to approve the proposed removal of the MS from Salford's constitution, he would be acting inconsistently with the letter of 6 February 2006.  Bill Rammell has now replied to UCU, rejecting this argument. 

Government position

The Minister explained in his letter to UCU that the identification of key areas where there is continuing public interest in university governance does not mean that universities are prevented from moving MS provisions into ordinances or regulations.  However, the Privy Council will give careful consideration on a case by case basis to proposals to de-regulate these provisions, in contrast to non-key provisions such as university structures, membership of Court and Senate etc.

The Privy Council will need to be assured that universities proposing such changes have duly consulted their staff and UCU, but the Minister's letter makes clear that "the Department's policy is that staffing matters are for institutions themselves to determine in line with current employment and other legislation." 

It is unlikely in our view that approval would be refused as long as the institution demonstrates to the Privy Council that it has gone through an adequate consultation process with its staff and recognised trade union, even if the consultation failed to result in agreement being reached.

The Minister concludes his letter by noting that "in the majority of publicly funded HEIs, provisions about dismissals of staff are not in any of the governance documents which are subject to Privy Council control".  There is no logical reason for government to support the perpetuation of a system which still obviously divides what were historically the two parts of the sector.  It will be interesting to see how much energy and resource UCU are prepared to commit to a cause which benefits only a small minority of their membership (now that membership extends not only to post-1992 institutions but to FE Colleges as well).

The way forward

Privy Council will expect this in all cases - but it does mean that universities as we advised in our article in January 2007, it may be possible to amend the MS without agreement with the UCU or individual members of staff – if employment contracts effectively incorporate the whole of the university's charter and statutes the general right of Council to amend or repeal statutes may be relied upon to give a right of unilateral variation. This does not mean that institutions should not consult UCU to seek agreement - as explained above the Privy Council will expect this in all cases - but it does mean that universities may be able to start those discussions with a strong negotiating position.  Go back

nicola.hart@pinsentmasons.com

christopher.mordue@pinsentmasons.com

FINANCE, TECHNOLOGY AND IP

Strategic review of pensions in the UK HE Sector

The survey

On 18 October 2007, the Employers Pensions Forum (EPF) delivered its initial findings through a survey of HE employers into attitudes to pension arrangements currently provided and the future of pension arrangements in the sector1.

1 Strategic enquiry into the pension arrangements for the higher education sector, a report prepared by Hewitt for Universities UK

EPF stated that the scope of the review: "sought the views of higher education institutions on the current system of pension provision and how, if at all, they would like to see changes made."

The survey took place against the background of significant change to both public and private sector pension schemes and the Government's more wide-ranging strategic review of pension provision nationally. A total of 163 invitations were issued by various interest groups ranging from the Russell Group through to the University Alliance and 87 responses to the invitations were received, representing a response rate of 53% of all invitees.

The structure of the survey was to set a series of 20 questions with two diametrically opposed alternative responses and allow respondents to indicate on a scale of one to ten whereabouts on the spectrum their opinion lay.

The conclusions

The survey reached conclusions in a number of areas:

Points of consensus between the respondents – these included:

• There should be a greater degree of risk and cost sharing between employers and members;
• Institutions should continue to work together to achieve economies of scale;
• Allocating the cost of early retirements to the individual institutions which consent to those retirements;
• Members should pay more;
• The sector aligns more closely with the public sector than the private sector; and
• Pensions and rewards should reflect a changing workforce.
  

Diversity of views between respondents – the report called these diversities "hotspots".  The main areas of disagreement were around the role of pensions in the reward package with some institutions seeking greater flexibility to offer alternatives to pensions and others favouring the traditional approach to helping employees to provide for their retirement. Further differences were around finance and individual institutions being allowed to implement their own cost saving strategies.

Possible solutions – whilst this is under consideration by EPF, who will issue a further consultation paper identifying the main options and seeking consensus across the sector for the way forward, the survey identified three distinct areas for consideration when assessing possible solutions:

• Delivery vehicles – is a single source of pension provision viable in the sector or would a less drastic rationalisation of the current arrangements be more appropriate? The survey concludes that, providing governance and cost issues can be addressed, it may be possible to implement a more uniform delivery platform for the sector;
• Benefit design – whilst there is support for a greater degree of flexibility in benefit design, there cannot be a "free for all" which suggests some form of limited "menu" approach; and
• Risk sharing – took two forms, cost sharing and benefit design with career average benefits being perhaps less risky than final salary benefits. 

Next steps

As mentioned above the EPF will consider the results of the survey and issue further consultation on the possible ways of taking the issues forward including views elicited through conversations with both Treasury and existing pension providers.  Go back  

john.hanratty@pinsentmasons.com

Opting to tax land and buildings for VAT – the financing problem

Background

This article applies throughout the UK.

The supply of an interest in land is exempt from VAT unless the person making the supply elects to waive the exemption over the land being supplied (the "option to tax").

Universities predominantly make VAT-exempt supplies of education.  As a result universities cannot reclaim the vast majority of the input VAT they incur when purchasing supplies of goods and services.  It follows that when a university wishes to commission building works, the VAT charged to the university would normally be an irrecoverable cost.  One way in which universities sought to get around this problem was to grant a lease of the relevant property to a subsidiary company and opt to tax the lease.  VAT on the construction works could then be attributed to the taxable lease and the university would be able to recover the VAT.

As a reaction to this and other similar schemes put in place to assist mainly VAT-exempt entities, HM Revenue & Customs introduced anti-avoidance legislation in 1997 which, if applicable, means that the option to tax is disapplied.  The effect of this is that, in the example above, the lease will not be a taxable lease and will remain exempt, and the input VAT on construction costs would not be recoverable.

The disapplication rules are targeted at arrangements which involve a university "financing" a development. They operate in addition to the rule that an option to tax will not have effect in relation to any land intended for a "relevant residential" or "relevant charitable" purpose.  This means that a grant of an interest in land to a university, where the university is to use the land or building for residential student accommodation or for its charitable (ie educational and not business) purposes, will be exempt in any case.  The disapplication rules are therefore more relevant to the commissioning of building works and the grant of an interest in land to be used other than for charitable purposes.

The tests for the disapplication of the option to tax

Motive is irrelevant under the financing rules.  If the tests in the legislation are satisfied, the option can be disapplied even if the aim of the arrangements is not to engineer a tax saving.

The three tests which must be met for the option to tax to be disapplied on a supply of land can be summarised as follows:-

• the property must be in the Capital Goods Scheme ("CGS") of the grantor of the supply - who will usually be a developer of the land;
• the grantor, or someone financing the grantor's acquisition or development, must intend or expect that the property will be occupied by one or other of them, or someone connected with either of them; and
• the occupation referred to above must be otherwise than wholly or mainly for "eligible purposes".  If the person occupying the property will not be using the property to make taxable supplies at least 80% of the time, this test will generally be satisfied.  Clearly this will typically be the case for universities.

Broadly, the land will be within the grantor's CGS if the grantor spends at least £250,000 on the property in a taxable supply.

The occupation referred to in the second test does not apparently need to be exclusive occupation, although it does probably require some degree of possession and control.  This was the opinion of the Court of Appeal in a case decided earlier this year in favour of Newnham College, Cambridge, which successfully argued that it was not in occupation of a library which it had leased to a subsidiary company.  HM Revenue & Customs have appealed this decision to the House of Lords, which may mean that the question of "occupation" will be clarified further.

Financing

Clearly where a university commissions works on a new building which it will occupy, and attempts to avoid irrecoverable VAT by opting to tax a lease to a subsidiary, the disapplication rules will apply to prevent this type of planning.  The intention of this article, however, is to focus on financing.  Care must be taken if a university is to do anything that could be construed as financing a development by a third party, or the acquisition of land by a third party, where that third party is the grantor of the interest in the property and the university is occupy the property.  In such circumstances third party's option to tax could be disapplied.

Financing has a very broad meaning under HMRC guidance and can include any of the following in relation to the acquisition or development:-

• Directly or indirectly providing or procuring the provision of funds for meeting some or all of the cost of the acquisition or development.  This includes direct contributions and making a loan or providing security.
• Discharging a liability which has been incurred by the grantor or procuring such discharge.
• Agreeing to do any of the above.

Using this broad definition, even a payment of rent by a university under a lease could be construed as financing, although HMRC do not take this approach in the context of normal commercial rent payments.  In addition, the existence of a pre-let or having the tenant pay a higher rental for a higher specification of fit out will usually not be viewed as financing.  These exemptions are to be contrasted, however, with the situation where HMRC view the tenant as paying an amount of what HMRC refer to as "rent", which is in reality a contribution to development costs rather than a commercial rental payment. 

A lease premium will generally not be regarded as the provision of finance unless the grantor requires the premium in order to proceed with the acquisition or development or to obtain the finance required to do so.

In respect of contributions to fit-out works, the position is complicated.  A person, typically a tenant, would be deemed to be financing a development where the work is the developer's responsibility and the tenant pays a capital sum in respect of or as a contribution to the works.  HMRC guidance indicates that where the works are the tenant's responsibility, this will generally not be financing even if the tenant engages and pays the developer to carry the works out, so long as the works are separately documented and paid for. Unhelpfully, though, HMRC go on to attach importance to the separate question of whose capital item is being financed.  In the majority of cases, it will be the developer/landlord's interest which benefits in terms of the ownership of the item being funded, giving rise to financing issues.  One solution could be to deal with any contribution by way of additional rent, but then there are uncertainties regarding HMRC's distinction between rent and "rent".  If the works are in fact the tenant's responsibility and the tenant's capital item, this should not constitute financing.

Financing can take the form of non-monetary contributions.  If a university were to provide the development site to a developer either for no consideration or for less than the full market value, this would be financing the development.

Assisting in obtaining necessary planning permission can also contribute financing, particularly if the tenant bears any of the cost of obtaining it.

What this means for universities

While universities will no doubt be aware of the pitfalls of the option to tax anti-avoidance legislation in the context of commissioning building works, the financing part of the rules is an added complication which could have a dramatic effect upon the intended VAT treatment of transactions. Leases and development agreements will usually require warranties from the university that its occupation does not fall foul of the financing rules so the risk in this area will be borne by the university.  If a university is in any way facilitating the acquisition or development of a site which it intends to occupy, the legislation and guidance should be analysed in detail in order to investigate the possibility of any vendor/developer's option to tax being disapplied.  Go back

jon.robinson@pinsentmasons.com

HUMAN RESOURCES

Recruitment without tears – managing the risk of discrimination claims

The discrimination pitfalls for universities in recruitment exercises were illustrated in the recent case of Walls v Warwick University, in which an employment tribunal awarded £35,000 compensation to an Irish academic for race discrimination. 

Dr Walls applied for a role which would have required her to carry out research aimed at improving mental health services for black and ethnic minority communities. She was told the research would cover Afro-Caribbeans and South-Asians. Dr Walls suggested at her interview that the project would be better if it included Irish and Chinese communities as well.  The University subsequently offered the position to another candidate, who was less qualified and experienced than Dr Walls. The Tribunal found that the reason that Dr Walls was not appointed was based on an assumption that she would not be interested in the project unless it included the Irish community.  As this was an assumption which would not have been made about a non-Irish person, the Tribunal ruled that the University had discriminated against Dr Walls on the grounds of her race.

Discrimination law protects job applicants from discrimination on the grounds of sex, sexual orientation, gender reassignment, marital or civil partnership status, race, colour, nationality, ethnic or national origin, disability, trade union membership and age. Universities can only escape liability for the acts of their employees during the recruitment process if they can show that all reasonable steps were taken to prevent discrimination occurring – this is an onerous standard but would certainly require a clear and communicated equal opportunities policy, a clear recruitment procedure highlighting the steps relevant to avoiding discrimination and equality training for those involved in the recruitment process.

Reducing the risks of discrimination

The Walls case illustrates the danger of making unjustified assumptions about job applicants and the need for all decisions to be based on clear evidence. The tribunal decision also indicates a number of other commonly encountered pitfalls, which create the risk of tribunals drawing inferences of discrimination. Some of these are discussed below.

Given the volume of recruitment undertaken in the sector, it is surprising that the number of discrimination claims encountered in relation to recruitment exercises is relatively low. However, when claims are made in this area, there are often vulnerabilities in the university's case. Perhaps the relative lack of challenge leads to a degree of complacency – in our experience there is nothing like being put through the mill in the employment tribunal to enlighten managers to the importance of following established procedures and keeping clear records of the decisions that they take!

One major risk in all discrimination cases is that the claimant is able to demonstrate a prima facie case of potential discrimination, which shifts the burden of proof back to the respondent to satisfy the tribunal that no discrimination has taken place. So, in a recruitment case, if a candidate can show that he/she met the criteria for shortlisting or appointment – or, most dangerously, that other candidates didn't but still progressed further – the focus will shift to the university to establish a non-discriminatory explanation for the claimant's application being unsuccessful. It is here that failures in process or a lack of adequate records create real problems as they allow the tribunal to either find that the employer's explanation is unsatisfactory or unproven or to draw adverse inferences to support a finding of discrimination.

Most universities have good, solid recruitment procedures – the real issue is that inpractice these are not always followed as rigorously as they could (and should) be. The following summarises the typical issues which we see in these cases in the sector – they won't always be fatal flaws, at least in isolation, but they do create real risks of liability and certainly make defending these cases much harder.

Equal opportunities training

One key – and commonly encountered problem – is the lack of equal opportunities awareness and training amongst (particularly academic) members of shortlisting/interview panels.  It is a legal example of "sods law" that the University's witnesses will be academics who have not received equal opportunities training or read the relevant University policies.  As questions about their equality awareness and training are often among the first questions raised during cross-examination, this can mean that they create a very bad impression as a witness right from the start.  For example, they acknowledge that the University offers voluntary training, and when pressed on why they have not attended, they generally come out with "bad" answers, namely that they were too busy or did not think that they needed the training.  This is then compounded in cross-examination when procedural flaws in the way that they have handled the process are pointed out to them and they acknowledge, or are forced to acknowledge, that had they received training, they might have acted differently.  The practice within the sector has very much tended to be that equal opportunities training is not mandatory or is only mandatory for the Chair or the short listing or interview panel.  Our view is that there is a very strong case for compulsory training, particularly given the impact of positive equality duties in the areas of race, sex and disability discrimination.  Training also gives a good opportunity to reinforce the importance of following the University's procedures and stressing, for example, the fact that awards can be made against individuals as well as against institution.

Failure to keep clear records

Another typical area of vulnerability is a lack of contemporaneous record keeping - without contemporaneous and detailed notes of the short listing and interview process, it is very difficult to provide a clear and coherent explanation of the outcome of the recruitment process.  This is often compounded by the fact that the case reaches a hearing many months or even years after the recruitment exercise, when the witnesses can find it very difficult to recollect their actual thought processes.  There is a real risk of the witnesses appearing to provide a post hoc rationalization of what they did, rather than evidence of what actually happened.  Particularly where the burden of proof in discrimination cases is reversed, this lack of records creates an uphill struggle in successfully defending claims.

Make sure person specification is followed

It is a trite point that recruitment decisions should be made against person specifications and the essential/desirable criteria for the post. However, it is not uncommon to see that such criteria have not been applied in a systematic and transparent way at short listing or interview stage, or that there is simply no record to show that this has been done and to explain the recruitment decisions that have been made.  It is also not uncommon for decisions to be explained – either in the contemporaneous notes or in evidence - by factors which are not expressly referred to in the criteria, such as issues of "strategic fit", "personality fit" or interest in the post. We have also come across cases in which candidates have been short listed and interviewed  because, while they did not fit the criteria for the post, they were nevertheless considered to be "very interesting"!

Inconsistencies between adverts and person specification

This problem is exacerbated by inconsistencies between job adverts/further particulars for the post and the person specification or recruitment criteria.  Such discrepancies create confusion about what the University is actually looking for and fail to manage candidate expectations properly - applicants assume on the basis of the advert and further particulars that they are well suited for the post but are then told that they have been rejected for reasons that were not mentioned in the material that they have seen. Another widespread practice in the sector is the use of very widely drafted adverts – for example covering a range of seniority levels from professor down to lecturer – which are aimed at "testing the market" and encouraging as wide a pool of applicants as possible. What then happens is that the short listing panel decide at what level they wish to interview based on the strengths of the candidates at each level. This practice creates a real risk of discrimination challenges from candidates who assume that their application is a strong one but see the university recruit in a different area and argue the that this is due to their sex, race, disability etc. In our experience, in most of these situations the university will have some starting preference and this ought to be articulated in some form of contemporaneous note (or even better in the further particulars or advert), so that the decisions which are taken about the level of appointment which is ultimately pursued can be shown to follow from this, rather than being a response made to the actual applications received.

Give full, accurate feedback

Universities also need to take care when giving feedback to candidates, ensuring that full and accurate feedback is given at the earliest opportunity.  This is preferable to a standard and formulaic response that that there were candidates who were considered more suitable for the post.  The danger of a standard response is that if the candidate presses for further feedback, it may be pointed out only at that stage that the candidate did not meet some of the essential and desirable criteria for the post.  Candidates then seek to exploit contradictions in the feedback, or the "drip feeding" of explanations, by suggesting that they have not been given the real reasons for their rejection.  Go back

susie.das@pinsentmasons.com

Confirmation of employer's right to deduct pay for industrial action short of strike

During last year's industrial action by UCU, one hot topic was the issue of deducting pay from those staff taking part in industrial action short of a strike.  For most institutions, the decision on whether to withhold or deduct pay was a tactical one, based on considerations of whether making deductions would escalate the dispute or cause a separate dispute about whether the deductions should be repaid at the end of the industrial action.  However, in the absence of deductions, staff participating in industrial action short of a strike were effectively doing so with impunity, continuing to receive their normal pay even though they were boycotting critical activities such as marking exam papers and carrying out student assessments. 

There was also some legal uncertainty about whether deductions from pay could be made without having to exclude from work altogether staff who were not prepared to carry out their full duties.  Our advice to institutions during the dispute was that this was possible.  That approach has now been confirmed in a case brought against London Metropolitan University by one of their lecturers who challenged the lawfulness of deductions made from pay during the dispute.

No right to full pay for partial performance

The lecturer concerned, Helen Spackman, was a member of Natfhe at the time of the dispute and had suffered a 30% deduction from pay for the period when she was participating in industrial action short of a strike.  Her argument was that, notwithstanding the fact that she was failing to submit student marks or assessments, she had worked a minimum of 40 hours per week during the dispute and so should receive her full pay.  She claimed that by allowing her to continue to work, the university had forfeited its right to make deductions from pay and that in any event that the deductions made were excessive, and should have limited to a maximum of 10% of pay in light of the work that she had still carried out.

These arguments were rejected by the court.  Crucially, the university had made it clear that it was not accepting partial performance from those staff taking part in the industrial action.  On that basis it could not be said that the university had waived Ms Spackman's breach of contract.  Staff who were in breach of contract had no right to claim full pay – indeed the judge in this case suggested that the university could have made a total deduction from pay in these circumstances.  On the alternative argument that the amount of the deduction made was disproportionate bearing in mind the work which was still carried out, the decision makes clear that it is for claimants in such cases to prove that the level of deduction is excessive.  Ms Spackman had failed to show this and could not back up her claim to have done 90 to 95% of her normal duties.  As the claim was brought in the ordinary courts – and not the employment tribunals – Ms Spackman's failure to succeed in her claim meant that costs were awarded in the university's favour, to be paid by UCU.

Implications

Although, as we advised a number of institutions during the dispute, it is possible to lawfully withhold pay from those taking part in industrial action, employers need to be careful about how they deal with such situations, in particular taking steps to avoid a situation where they have effectively waived the employee's breach of contract and are deemed to have accepted partial performance.  The clearest way of doing this would be to exclude the employee from work altogether if they are not prepared to carry out the full range of their duties.  That is, however, a very extreme step which escalates the dispute and of course maximises the disruption caused by the industrial action.  Where employees are allowed to work, employers must make it very clear that they are refusing to accept partial performance and, as we advised during the dispute, it is also sensible (if making deductions) to state that the university is not waiving its rights to make a complete deduction from pay and that any pay given is made on a purely ex gratia basis.  This particular decision confirms the appropriateness of that approach.  Furthermore, in assessing the rate of deduction to be applied, universities can take a relatively broad brush approach to identifying the proportion of work not undertaken, given that it will be up to the employee to prove that the claims are disproportionate. Go back

christopher.mordue@pinsentmasons.com

We welcome your feedback, criticism and suggestions

If you have any comments, or if you would like further advice or assistance with any of the issues covered in this briefing, or for information about Pinsent Masons' National Universities Team, please contact Nicola Hart, Head of Education at Pinsent Masons.

 Email: nicola.hart@pinsentmasons.com

Tel: 0121 260 4050

While our Universities Legal Briefing is copyright, you are welcome to copy or forward it to colleagues within the institution, and to quote from it as long as the source is acknowledged.

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