The COUNCIL beg leave to report to the University as follows:
1. Statute G, II, 4 refers to deductible items which may be set against a College's contribution to the University. The purpose of this Report is to rectify an error which occurred as a result of amendments to the Statute in 1974.
2. Concerns were expressed in early 2005 to the Assessment Sub-Committee of the Finance Committee regarding the total income of the Colleges Fund and the treatment of transfers made to sinking funds as a deductible item for the purpose of University contribution. The Bursars' Committee were consulted and agreed that the current arrangements in respect of sinking funds were unsatisfactory. Since then the Assessment Sub-Committee have conducted a detailed examination of the matter and have recommended to the Finance Committee that Statute G, II, 4(iv), which governs the deductibility of transfers made to sinking funds, should be amended as described in this Report. The Finance Committee have endorsed that recommendation.
3. The Council are aware of a larger review that the Bursars' Committee are conducting into the whole system of University contribution. They believe, however, that they should nevertheless proceed with the limited change proposed in this Report, even though that change may in due course be superseded by a more substantial amendment of Statute G, II.
4. The history of the matter is as follows. The Universities and College Estates Act 1925 defined a statutory framework for transactions involving land owned by the Colleges. (The Act also applied in identical terms to land owned by the University.) The proceeds of the sale of land (referred to in the Act as 'capital money') were held by the Minister of Agriculture on behalf of the College concerned. Capital money might be spent on the purchase of land or securities, or on the improvement of land. The proceeds of the sale of securities purchased with capital money were themselves capital money. Thus the nature of capital money, once it attached, could not be lost.
5. The Minister was given various powers under the Act. In particular, where the Minister considered that provision should be made for replacing within a limited time capital money applied under the Act, he was required to direct such provision to be made. That provision, by way of regular payments of income over a defined period into a sinking fund, was converted to capital money to replace that which had been spent. An example of that process can be seen where a College purchases for a premium a leasehold interest in land. When the lease expires, the asset will disappear and the value will be gone. Thus the Minister would require the establishment of a sinking fund to replace, by the end of the period of the lease, the premium spent in its purchase.
6. Statute G, II, 4(v) (as it then was) of the 1926 Statutes in their original form provided for the deductibility of
any sum which the Ministry of Agriculture requires to be paid out of income for the purpose of being held by it, or invested, as capital.
The wording of the subsection has been amended in various ways since then, but the basic principle of the deductibility of transfers made to sinking funds has continued throughout.
7. The Universities and College Estates Act 1964 introduced substantial deregulation of transactions in College land. For most purposes the role of the Minister was abolished and each College was empowered to hold capital money and act on its own behalf. The judgment of the College was substituted for that of the Minister in relation to sinking funds. However, section 3 and Schedule 2 of the 1964 Act provided that Colleges should be obliged to maintain sinking funds existing at the time of that Act.
8. The Council of the Senate addressed the implications of the change as it affected University contribution in their Report, dated 31 January 1966, on amendments of the statutory provisions governing the financial relations between the University and the Colleges and on the establishment of a Colleges Fund (Reporter, 1965-66, p. 1049). They proposed a new Statute G, II, 4(iv), to replace the existing Statute G, II, 4(v), which would allow as deductible
any amount which the College sets aside out of income for the replacement at the end of the lease of capital money expended in the purchase of leasehold land or in the purchase of the interest of a lessee under a lease from the College, if the Financial Board considers that amount to be a reasonable provision for this purpose.
9. The relatively narrow terms of that provision are to be noted. It applied only to two forms of sinking fund: one established on the purchase of a leasehold interest, described in paragraph 4 above, and one established in the case of the purchase of a surrender of a lease granted by the College. (In the latter case, as the land would have returned to the College at the end of the period of the lease, the capital money spent on the surrender would then effectively have been lost.) Moreover, for the purpose of deductibility, the sinking fund provision was made subject to the approval of the Financial Board.
10. In the Discussion of the Report (Reporter, 1965-66, p. 1273) three points were made by Mr T. C. Thomas, Senior Bursar of St John's College, on the proposal:
| (i) | Although the 1964 Act had abolished the power of the Minister to require sinking funds, the Act preserved existing requirements. Why should those requirements be subject to the judgment of the Financial Board as to their reasonableness for deductibility to be allowed? |
| (ii) | Existing sinking funds required by the Minister under section 29 of the 1925 Act should continue to be deductible. (Such sinking funds were of a different nature than those covered by the Council's proposal and applied in relation to capital money received, rather than spent, by a College.) |
| (iii) | The duty of the Minister under the 1925 Act to consider replacing capital from income had been transferred by the 1964 Act to the College. Why should not deductibility be allowed where the College decided on it, 'subject,' added Mr Thomas, 'to the Financial Board being satisfied that the amount is a reasonable provision for the purpose'? |
11. The Council accepted Mr Thomas's first two points, but rejected his third. They amended their proposal to allow as deductible
any amount (a) which the College sets aside out of income for the replacement at the end of the lease of capital money expended in the purchase of leasehold land or in the purchase of the interest of a lessee under a lease from the College, if the Financial Board considers that amount to be a reasonable provision for this purpose, or (b) is required to set aside as a result of a decision taken by the Minister under Section 29 of the Universities and College Estates Act, 1925.
12. In 1968, the Bursars' Committee asked the Financial Board to consider again, in somewhat more restricted form, Mr Thomas's proposal to reinstate the deductibility of payments to sinking funds under section 29 of the 1925 and 1964 Acts. The Committee drew the Board's attention to the loss to Colleges from the enforced sale of freehold reversions under the Leasehold Reform Act 1967 and asked for deductibility to be allowed in such cases. But the Board were unpersuaded that there was sufficient case for relaxation of the rule.
13. Had the Statute remained in its 1966 form, then none of the subsequent problems regarding the deductibility of transfers to sinking funds would have arisen.
14. However, the Council of the Senate, in their Report, dated 22 April 1974, on University funds (Reporter, 1973-74, p. 844) proposed a further change of Statute G, II, 4(iv) to what is essentially its present form:
any amount (a) which the College sets aside out of income for the replacement at the end of the lease of capital money expended in the purchase of leasehold land or in the purchase of the interest of a lessee under a lease from the College, if the Financial Board considers that amount to be a reasonable provision for this purpose, or (b) which the College sets aside in accordance with the Universities and College Estates Acts 1925 and 1964.
The Council's reasons were set out very briefly at paragraph 4 of the Report:
… [The Council] have noted that Statutes F, IV, 1, F, IV, 2(b), F, IV, 3, F, IV, 5, and G, II, 4(iv)(b) contain references to the Universities and College Estates Act 1925. All these references have been rendered obsolete by subsequent legislation contained in the Universities and College Estates Act 1964. The Council therefore propose the repeal of Section 2(b) and of Section 3 of Statute F, IV and appropriate amendments of Statutes F, IV, 1 and 5 and G, II, 4(iv)(b).
The purpose of the reference to the 1925 Act in Statute G, II, 4(iv)(b) (namely that it should apply only to pre-1964 Act sinking funds that had been continued in force by the 1964 Act) was wholly overlooked. No reference was made to the 1966 Report, or otherwise to the legislative history of the matter. In fact, far from being rendered obsolete by the 1964 Act, the 1925 Act reference in Statute G, II, 4(iv)(b) had been added post-1964 specifically in response to the 1964 Act.
15. The consequence has been to extend the scope of deductibility far beyond the intention in 1966, and beyond its previous historical scope. Thus improvements to College buildings are now brought within the scope of deductibility under Statute G, II, 4(iv) (limited only by the total cost of the works), notwithstanding that specific provision was made in the 1966 Report to allow limited deductibility for the purpose by way of transfers to a College Building Fund under Statute G, II, 4(vii). In addition, misunderstandings have arisen, both on the part of Colleges and on the part of the Finance Committee, in treating or allowing as deductible sinking funds that go beyond the scope of the Estates Acts. That applies in particular to sinking funds where property is purchased for, or transferred to, operational use (where there is no case to transfer income into a sinking fund to replace capital, because no capital has been lost) and to indexed sinking funds (allowed by the Finance Committee since 1993) which are outside the scope of the Acts, and thus of the Statute, in so far as they make provision beyond the replacement of the capital money actually spent.
16. The Council are satisfied that the matter should be rectified and propose that Statute G, II, 4(iv) be amended to return to the form originally proposed in 1966. The Council are advised that a small number of pre-1964 Act sinking funds under section 29 of the 1925 Act remain in existence. Deductibility for payments to those funds will be preserved in Statute T.
17. The Council further propose that the change should be effective in relation to University contribution calculated for the year 2006-07 and thereafter, if the amending Statute is approved by the University and by the Queen in Council.
18. The Assessment Sub-Committee have consulted the Bursars' Committee in formulating their proposals. It has been suggested in response to that consultation that a review should be made of the lower bands for contribution and the per capita allowance relating to buildings repairs and improvements under Statute G, II, 4(vii). The current bands (each of £250,000) and the Statute G, II, 4(vii) allowance of £250 in respect of each Fellow and each resident member in statu pupillari were defined by the Second Report of the Council on amendments of Statute G, II (Financial relations between the University and the Colleges: the Colleges Fund) (Reporter, 1998-99, p. 472). That Report had been prepared on the advice of the Fees Sub-Committee of the Bursars' Committee, who recommended that a review be made during the course of the academical year 2002-03 and every fifth year thereafter, of the rates of contribution, the lower bands for contribution, and the per capita allowance under Statute G, II, 4(vii).
19. The Council have not considered that the level of income to the Colleges Fund from University contribution would justify an increase in the lower bands for contribution and the per capita allowance under Statute G, II, 4(vii). However they accept that the change now proposed to Statute G, II, 4(iv) would enable an increase to be made. They therefore propose that the two lower bands each be increased to £300,000 and that the per capita allowance under Statute G, II, 4(vii) be increased to £300. Those increases broadly reflect inflation since 1999.
20. The Council recommend:
I. That, subject to the approval of Her Majesty in Council, the Statutes of the University be amended as follows; and that the proposed amendment be submitted under the Common Seal of the University to Her Majesty in Council for approval:
Section 4.
By replacing subsection (iv) by the following:
| (iv) | any amount which the College sets aside out of income for the replacement at the end of the lease of capital money expended in the purchase of leasehold land or in the purchase of the interest of a lessee under a lease from the College, if the Finance Committee of the Council considers that amount to be a reasonable provision for this purpose. |
By inserting the following sections:
55. The amendment of Statute G, II made by Grace 0 of xx xxxx 200X1 shall have effect in respect of the assessment of the University contribution payable by each College for the year 2006-07 and for subsequent years. Any correction necessary by reason of delay in the approval of the amendment shall be made by adjustment to the assessment of the University contribution payable for the year in which the amendment is approved.
56. There shall be treated as a deductible item for the purposes of Statute G, II any amount which the College is required to set aside as a result of a decision taken by the Minister under Section 29 of the Universities and College Estates Act, 1925.
II. That the sum of £250 specified in Statute G, II, 4(vii) be replaced by the sum of £300.
III. That the sums of £250,000 specified in Statute G, II, 10 each be replaced by the sum of £300,000.
| 20 November 2006 | ALISON RICHARD, Vice-Chancellor | BOB DOWLING | MARTIN REES |
| R. J. ANDERSON | MARK FERGUSON | G. A. REID | |
| A. J. BADGER | M. K. B. KEMPLE | DAVID SIMON | |
| Z. BARANSKI | TIM LEWIS | VERONICA SUTHERLAND | |
| RICHARD BARNES | D. LOWTHER | LIBA TAUB | |
| NIGEL BROWN | D. W. B. MACDONALD | JOAN M. WHITEHEAD | |
| WILLIAM BROWN | JAMES MATHESON | RICHARD WILSON | |
| MIKE CLARK |
1 Here will be inserted the number and the date of the Grace for the approval of the present recommendations.