Wholly Owned Subsidiaries in the NHS
KEEPING IT IN THE FAMILY: WHOLLY OWNED SUBSIDIARIES IN THE NHS
WHY WHOLLY OWNED SUBSIDIARIES?
There are a range of drivers for individual Trusts but in the main the drivers identified by Grant Thornton in a recent report (NHS Companies – An enterprising approach to health – 2017) are:
Whilst financial drivers may be the initial catalyst for the discussion about a wholly owned subsidiary any business case has to clearly demonstrate a service improvement and better outcomes for patients.
It is fair to say that wholly owned subsidiaries have attracted some criticism – notably from trade unions such as Unison who claim that the drivers for the new company are “exploit[ing] a tax loophole” and are an aim to privatise the NHS “by the back door”. In particular, trade unions are against the transfer of staff from the NHS to the company as those staff (whilst terms and conditions are protected by TUPE) are no longer employed by the NHS (Unison Parliamentary Briefing January 2018 – NHS Wholly Owned Subsidiary Companies).
The issue has recently been raised in the House of Commons with both written questions being raised (John Grogan MP 22 November 2017) and an Early Day Motion tabled on 16th January by Liz Twist MP which calls on the Government to block the creation of any further NHS wholly owned subsidiary companies (Early Day Motion 802).
Nonetheless the interest in subsidiaries remains strong, for the reasons set out above, and we are receiving an increasing amount of queries in relation to this topic (e.g. see HSJ articles on 14 February 2018).
THE LEGAL FRAMEWORK FOR WHOLLY OWNED SUBSIDIARIES
The first key point to note is that, at present, only NHS Foundation Trusts have a clear statutory power to establish separate companies. There is growing pressure for this same freedom to be extended to NHS Trusts but at present no changes have been made to give this aspect any clarity (a change in the law may be on the DHSC radar).
In terms of procurement law, there is no “public body to public body” exemption in procurement law – if one public body awards a contract to another public body then, if certain conditions are met, that contract has to be tendered in line with the Public Contracts Regulations 2015 (PCR).
However, case law established that there could be an exception to this where, even if two separate entities were involved, there may be no requirement for formal tendering if the arrangement was akin to an organisation awarding a “contract” to an in-house department. A long line of case law, starting with the Teckal case, eventually resulted in a change to the law so that Regulation 12 of the PCR now clearly sets out the position.
The requirements relating to the wholly owned subsidiary are:
Jointly owned companies are equally permissible provided they meet the rules above such that two or more FTs could decide to jointly set up and own a new company to deliver services to them. Joint control can be exercised where: the decision making body of the company is composed of representatives of all participating contracting authorities; those authorities are able to jointly exert decisive influence over the strategic objectives and significant decisions of the company; and, the company does not pursue any interests which are contrary to those of the controlling authorities.
ARE WHOLLY OWNED SUBSIDIARIES BOUND BY THE PCR WHEN THEY PURCHASE SUPPLIES, SERVICES OR WORKS?
The short answer is yes and no! A recent Court of Justice ruling means that, in general terms (there is a nuance here around the activity that the new company carries out and whether these are activities that are needed in order for the Trust to carry its own activities but this outside the scope of this article), the wholly owned subsidiary has to comply with the PCR whenever it makes relevant purchases and in general terms, given the control test, we would always advise that the new company adopts the same or very similar standing financial instructions as the parent Trust.
However – the company will not have to tender for relevant supplies, services or works where it obtains them from its parent – this is known as the “reverse Teckal” rule and conveniently allows subsidiaries to acquire back office services such as HR, payroll and IT from its parent Trust without having to go out to tender.
PRACTICAL ISSUES FOR WHOLLY OWNED SUBSIDIARIES
For any Trust considering the establishment of a wholly owned subsidiary it is critical to have a clear business case setting out the anticipated service improvements and benefits to patients as well as a clear communications strategy. At the present time there is no indication that the appetite for setting up wholly owned companies is subsiding. This is a very fast moving area and it is therefore important that specialist legal and financial advice is obtained to ensure that the new company is legally compliant with procurement rules, has robust governance arrangements and is financially efficient.
14 February 2018