NHS Trusts and Subsidiary Companies - what’s the worst that can happen?

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In September, NHS Improvement told NHS providers to stop creating or changing subsidiary companies, because it will be publishing a consultation in October on a new regulatory approach to subsidiary companies and, following the consultation, will be issuing new guidance.

The edict did not distinguish between NHS Trusts and NHS Foundation Trusts. This was an interesting move, because as far as FTs are concerned this is currently none of NHSI’s business unless it involves a transaction sufficiently large to meet the conditions for review. In governance terms, FTs differ from NHS Trusts in important respects, because they have an express statutory power of their own to participate in forming companies, are not reliant on powers being delegated by Monitor (as the TDA, on behalf of the Secretary of State) and are not subject to direction by Monitor (as the TDA, on behalf of the Secretary of State). This was one of those much-vaunted freedoms that foundation trusts would have to reflect their “earned autonomy”. Whilst we have yet to see the consultation, even the suggestion that there might be a “regulatory approach” signals that NHSI is considering using its powers as regulator to rein in FTs’ activity in this area.

Further confirmation is provided by the DHSC Accounting Officer System Statement (updated July 2018) which indicates that during 2018-19 the rules will be changed so that NHS Trusts and FTs are required to report on all subsidiaries “under the Transactions Guidance”, irrespective of size. Part of this may simply reflect the concern that NHSI could not reply definitively to questions asked in select committee about how many trusts had subsidiaries. Some FTs that had subsidiaries were excluding them from their accounts on grounds of materiality, so compulsory reporting would be essential if NHSI wanted to be able to answer the question with greater certainty next time it is asked.

The reference to the Transactions Guidance is also interesting. The Transactions Guidance is a framework through which proposals can be evaluated and the extent to which providers are “well led” can be assessed (by inference from the quality of the thinking underlying the proposal). As readers will know, organisations that are considered not to be well-led tend to be encouraged to find other leaders, either through replacement or through a takeover by a better run trust.

The System Statement says there are “many legitimate reasons why trusts may choose to establish subsidiary companies (bringing contracted out services back into the NHS; generation of profit to reinvest in patient care; flexibility on terms and conditions such that better recruitment and retention of staff is achieved) with the key aims of the companies being to reduce expenditure for the owner trust(s) while delivering focus on improving those services provided, and providing an additional source of income for the owners where wider services provision occurs.” So if there are good reasons for establishing subsidiaries, why would NHSI want to scrutinise them through applying the Transactions Guidance?

As reported in the HSJ, there is already upset and even industrial action in some trusts about the transfer of NHS staff to subsidiaries. This is partly the “privatisation through the back door” argument. NHSI may want to establish that companies are not being created to move staff off NHS terms and conditions to their detriment. As you would expect, the public sector unions are very much involved in encouraging opposition to such arrangements. Whilst one can understand the unions’ position, this ought not to be an issue for the individual as employment law protects staff against the erosion of their benefits without something being offered in return and NHS pensions remain available to transferring staff who continue to provide services to the NHS.

And then there is tax. It has been suggested that some NHS trusts’ subsidiaries may have been established to avoid VAT, because one of the bi-products of making big purchases through a subsidiary (construction costs, or drugs for a pharmacy, for example) is that the company can reclaim VAT where the NHS trust could not. Citing Managing Public Money (the Treasury bible for Government departments), says that accounting officers (“including NHS Improvement as the regulator”), the System Statement says that NHS trusts must ensure that companies are not established for the “sole purpose [of] tax avoidance”. However, this may be less common than you might think. Advisers are reluctant put their names to projects that are solely tax driven, as there is a high risk that they will not work (due to anti-avoidance legislation) and that they will damage the advisers’ relationship with HMRC, which is much more important to them than the fee.

Finally, there is another sentence of the System Statement that we found particularly interesting. It introduces the section on NHS providers’ subsidiaries and says that, if certain (unspecified) conditions are met, “NHS Trusts and NHS Foundation Trusts have the authority to establish limited companies where the functions performed by those companies deliver services to the establishing body(ies).” The historic DHSC view has been that NHS Trusts (as opposed to NHS Foundation Trusts) cannot establish companies to deliver services to the NHS (including themselves). We are aware of a number of contrary arguments that have been advanced to NHSI and we hope that they will prevail, as the System Statement suggests they might. If not, the new regime could mean that companies cannot be used to implement the Carter proposals where NHS Trusts are involved. Worse still, a misplaced desire to “level the playing field” to maintain equivalence between NHS Trusts and NHS Foundation Trusts could mean that FTs may not be allowed to do that either. This would be odd, as Parliament did not create FTs to be equivalent to NHS Trusts. Obviously, we are hoping that these things do not come to pass!

The author of this article, Tim Winn, will be at the NHS Providers Annual Conference this year, so please do contact him if you would like to discuss it or any of the other articles.

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