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Essential Strategies for Universities to Stay Tax-Free

Steve Haywood · Posted on: December 12th 2025 · read

Universities are typically charitable entities, meaning that the main charity entity is exempt from corporation tax on most income and gains.

However, the reality is more complex. The most important tax relief is that of primary purpose trading. This exempts trading activities that are aligned with the charitable objects of the university itself, which are typically teaching and research activities, and for the public benefit with no significant private benefits arising.

Many universities have some commercial income which falls beyond this exemption, with consultancy work for commercial organisations being particularly common. This can cause tax leakages in the form of corporation tax payable.

In this article, we will explore how universities can stay tax-efficient in a commercially competitive environment.

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Trading Subsidiaries: The Key to Tax Efficiency

In most cases, corporation tax for universities is entirely avoidable by using trading subsidiaries to conduct the taxable trading activities, then using corporate gift aid to donate an amount equivalent to the taxable profits to the university. This has led to most universities having one or more trading subsidiaries. Trading subsidiaries may also be formed to commercialise intellectual property or manage overseas operations.

Complications can still arise in the university around how non-charitable taxable activities can be proactively identified and costs allocated to them to ensure that any taxable trading activities can be transferred to the trading subsidiaries in a timely manner and how this transfer is affected.

Gift Aid Rules and Future Planning for the Long-Run

Use of trading subsidiaries should be able to avoid UK corporation tax being payable by the university group, generally eliminating taxable profits by a combination of gift aid and group relief, but this isn’t always the case as there are a number of situations that can result in corporation tax being chargeable anyway.

Gift aid rules for trading subsidiaries permit donations within 9 months of the year end to be used to reduce the taxable profits for a period, but if the group is not structured in the right way, donations may need to be paid within the year which can cause issues as the corporation tax position is usually not known until after the year end.

Another significant issue can arise where trading subsidiaries are not properly capitalised. The payment of gift aid donations requires companies to have sufficient distributable reserves to be able to effectively make the payments which isn’t always the case, particularly where there have historically been tax adjustments creating a significant difference between accounting and tax profits or losses, or where losses have been made but surrendered for group relief without a corresponding payment for that group relief.

Sometimes there isn’t an immediate issue, but projections of future activity could identify problems that may arise in future causing potential unwanted corporation tax liabilities.

HMRC will also expect there to be a clear arms-length relationship between the trading subsidiary and its university parent. This has implications for shared resources and costs, including use of intellectual property, the nature and structure of any loan funding, and governance arrangements. Care is needed in these areas to avoid potential challenges by HMRC.

Many universities have overseas activities, and this often adds a whole layer of complexity and in some cases foreign taxes that cannot always be avoided. Withholding taxes on foreign income can particularly cause problems. Together with our Global Tax Solutions team we can help a university and its subsidiaries to minimise withholding tax payable, and manage the interactions between withholding taxes, group relief and gift aid to ensure the most tax efficient outcome.

From Complexity to Opportunity

"Tax efficiency is a competitive advantage. Universities that plan ahead can reinvest savings into research and innovation. Acting now is critical to avoid unexpected liabilities and strengthen financial resilience."

Steve Haywood, Tax Director

Our team understands the challenges around this and will go all in to help you review your trading activities and group structure, optimise reserves, and manage overseas tax risks to ensure your university remains tax-free. Whether you need to mitigate existing liabilities or future-proof your governance, we provide tailored solutions that work and ensure that your tax strategy is effective. If you need further information around the themes discussed in this article, contact our education team below.