Surely an all-win situation?

Cash-strapped universities are finding new money for salaries through tax concessions designed for private industry. But some staff and unions don't want it. By Maureen O'Connor

Universities are turning to a tax concession designed for private industry to squeeze more public money out of the Treasury. By introducing profit-related pay schemes, universities gain sufficient extra cash to improve salaries and make a surplus to help ease the cuts that threaten higher education again this year.

Tax concessions attached to PRPs were introduced by the Government in the Eighties as a way of allowing companies to tie pay rates more effectively to their own profitability. A change in the regulations now makes it possible for public and charitable bodies to introduce similar schemes, although their "profit", technically, is no more than the annual surplus of income over expenditure.

For staff, the result is that 20 per cent of annual pay, up to a maximum of pounds 4,000, effectively becomes tax-free. The gain for a standard-rate taxpayer will be in the region of pounds 800 a year; for those paying the higher rate, even more than that.

The money can be paid to employees monthly, with a final bonus payable at the end of the year when the institution or company has shown that its target profit has been reached. The big attraction for employers is that the tax saved, estimated to be running currently at some pounds l.5bn a year, can be shared between employees and employers. It is this provision that is proving so attractive to the universities.

PRPs are being promoted by the Universities and Colleges Employers Association as a legal way of easing the financial strain. With the Funding Council predicting that about 70 universities could be in deficit by the year 2000, it is not surprising that 80 were represented at a UCEA seminar in the spring at which the consultants Price Waterhouse explained how to set up a PRP scheme. By this term one college of higher education had a scheme up and running and several universities are on the point of introducing one.

First off the mark was the North East Wales Institute of Higher Education in Wrexham, where a combination of financial crisis and new senior managers with experience in industry got PRP accepted by the necessary 80 per cent of the staff last year. The scheme has proved so popular that more than 84 per cent of staff have now joined in and are awaiting their first end- of-year bonus in December.

A number of big universities are not far behind. Umist, in Manchester, has just gained the approval of eligible staff who will receive the first benefits, the equivalent of a 3.9 per cent increase in salary, in their October pay-cheques, backdated to August. Umist reckons that the university will also benefit directly to the tune of pounds 600,000.

It is not always plain sailing for universities putting their toe into the pool. Some staff ballots have rejected the idea outright. The University of the West of England in Bristol got into a muddle this month when it tied a "no-redundancy" clause to its proposals for a PRP scheme. Angry staff assumed that this perk would only apply to staff who joined the scheme, according to deputy vice-chancellor Rob Cuthbert, whereas the university intended it to apply to everyone.

Mr Cuthbert expects the overall saving in tax at UWE to be in the region of pounds 2m a year, pounds 1m of which will go to boost staff pay packets and pounds 1m to the university. He expects to get his 80 per cent vote very soon.

If all this sounds as if Christmas has come early for university employers and staff, it has to be said there is a distinct feeling among finance officers that if the practice takes off, the Treasury may have second thoughts. They will be listening to Kenneth Clarke's Budget next month with even greater interest than usual.

In the meantime the lecturers' unions, the AUT and NATFHE, are not happy with PRP developments. They have several concerns, not least that these schemes inevitably give more to those that have than those that have not. The low-paid gain very little, which is why the ancillary staff union Unison is adamantly opposed to the whole idea. People on the highest rates of tax gain most.

The unions also are concerned that removing part of a salary will complicate employees' rights to pensions, and other benefits which depend on total, and in some cases, final salary.

The universities respond that pension schemes can be adjusted to take account of PRP without damage to staff entitlements. Guarantees of a return to basic salary and conditions at the end of a scheme can be written into the rules, too. In the meantime, NE Wales Institute is advising staff to opt out of PRP in the year before they retire.

There is also the issue of risk. Theoretically, at least, institutions that set a target "profit" can, in some circumstances, end the year with a deficit, in which case employees' bonuses might be vulnerable. Conversely, if most of the PRP has been paid monthly, employees will keep that money, leaving the institutions to pick up the tax bill for the failed scheme.

The experts argue that good accounting ensures that PRP schemes do not "fail". To which critics reply that if there is no possibility of a "loss", the schemes are less incentives to profitability than a straight subsidy to employers.

NATFHE also argues that PRP schemes in the private sector have damped down pay awards. Part of the attraction to universities, they suggest, is that PRP provides a sop to staff offered lower than inflation pay rises. With staff being asked this month to ballot on the latest pay offer, PRP schemes can be seen as part of a much larger game.

And there are issues at stake that extend far beyond the universities. The TUC is campaigning for tax relief on PRP schemes to be abolished completely, arguing that the money would be better used by the Treasury to fund public services directly.

But in the short term, the incentives are attractive and whatever the unions advise, staff are voting for PRP in substantial numbers.

According to Peter Mitchell, personnel policy adviser to UCEA, "there is no catch at present for employees or employers, both of whom could benefit significantly from PRP schemes, although it is a matter of conjecture as to how much longer such benefits will be available."

Profit-related pay: how does it work?

For an employee earning pounds 15,000: Without PRP With PRP

Basic pay pounds 15,000 pounds 15,000

Salary reduction Nil pounds 3,000 Taxable pay pounds 15,000 pounds 12,000 Tax pounds 3,750 pounds 3,000 PRP Nil pounds 2,625 Take-home pay pounds 11,250 pounds 11,625

Gain: pounds 375

Saving to employer: pounds 375

Note: 1996/7 tax rates will produce slightly lower benefits.

Source: Universities and Colleges Employers' Association