Under guidance introduced in 2018, NHS providers have had to report all plans to establish or materially change a subsidiary to NHS England, without exception. In the 6 years since, NHS England has kept watch over the development of NHS subsidiaries, keen to ensure that preparations have been made for the safe and harmonious transfer of staff, the realisation of benefits other than incidental VAT savings and the mitigation of potential risks falling back on the NHS parent. NHS providers have expressed mixed views on the review process. Some have welcomed the external assurance but others have queried the thresholds and applicability in certain circumstances, and found the review timescales challenging particularly where multiple providers across an ICS are involved. In total, around 50 proposals have been reported and reviewed.

NHS England has now issued updated guidance (the Guidance), effective on 29 February. It is intended to set out a more flexible and transparent review process and draws on the accumulated experience of such proposals. Material changes to existing subsidiaries are now better defined through an expanded number of examples.

In this article, we summarise the key changes.

Reporting thresholds

The Guidance introduces thresholds for reporting based on:

• the size of assets or income. Now, only proposals greater than 10% of the parent's assets or income need to be reported; and

• the number of staff. Now, only proposals involving the transfer of 5% or more of the parent's staff need to be reported.

Only one of these thresholds needs to be triggered for the proposal to be reportable.

Overall, the intention is to strike a balance in regulatory assurance by allowing smaller, lower risk schemes to proceed without undergoing any form of NHS England review. However some subsidiary proposals will still need to be reported regardless of size:

• "novel, contentious or repercussive" proposals. These terms are not defined in the Guidance and NHS England retains discretion to determine whether proposals meet this test; and

• NHS trust income generation schemes. These are reported in order to facilitate Ministerial consent which is a legislative requirement. (FTs are not subject to this requirement).

Material changes to existing subsidiaries

The Guidance still does not introduce a comprehensive definition of 'material change' but extra examples of material change are now included which should provide further clarity. NHS England has not set out thresholds against the examples as their approach is to assess risk on a holistic basis. Providers will need to continue to take a view on proposed changes to subsidiaries in terms of activity, scale, contributions to assets, ownership and financial support (and other factors) and liaise with NHS England on all such proposals to determine if these are material or not.

NHS trusts

NHS trusts may only participate in subsidiaries for income generation purposes. They may not rely on the general legal power to form companies for core NHS delivery and this is re-iterated in the Guidance. NHS England has also ruled out NHS trusts forming or participating in limited liability partnerships (LLPs). Ministers will continue to have a role in approving subsidiaries created by NHS trusts to ensure that the delivery of core NHS services is not compromised. All NHS trust proposals are therefore reportable.

These remain key points of difference from the freedoms enjoyed by FTs.

Classification

Once reported, an NHS England panel will, as before, triage proposals to classify them as either "material" or "significant". Significant transactions are then subject to detailed review and are rated Red, Amber or Green for risk. Material transactions are all proposals which are reported but not then classed as significant. They can proceed provided the NHS provider submits an acceptable board certification (the text for which has been updated in the Guidance), and any additional evidence requested.

New Appendix 1 to the Guidance sets out risk factors that will be considered when classifying a transaction. As said above, this in turn drives the level of detail of the review. The factors reflect NHS England's experience of reviewing transactions over the last 6 years and include:

• regulatory status including CQC rating;
• financial benefits from VAT savings; and
• track record of providing the proposed services.

On their own, none of them is determinative of whether a subsidiary transaction is of material or significant risk but collectively they can point towards the overall classification.

Timescales

The previous version of the Guidance indicated a 3 week turnaround time for the classification of material or significant, with a further 4-6 week review timescale for significant transactions. The updated Guidance no longer contains indicative timescales. Our expectation is that NHS England will determine review timescales on a case-by-case basis in discussion with individual providers and in accordance with its overall pipeline.

VAT

NHS England will be looking for business cases to clearly demonstrate that the commercial rationale is not dependent on the subsidiary enabling a VAT treatment that differs from the trust’s current arrangements. The Guidance re-iterates that the majority of savings from the creation of subsidiaries should be from non-tax savings, except in exceptional circumstances.

The Guidance notes that the VAT position across Government is fluid, citing HMT's consultation on reforms to VAT refund rules and the preferred option of a Full Refund Model. Under a Full Refund Model, NHS providers would be able to recover all non-business VAT on outsourced goods and services regardless of the reason it was incurred. At present, they are only able to obtain a VAT refund on supplies of certain specified services. In any new corporate outsourcing, the potential VAT savings will be one of several commercial drivers and the absence of such savings may result in future projects being kept within the statutory body without a corporate entity such as a subsidiary being needed. 

NHS England indicates that it may further update the Guidance once HMT's position is clearer.

Workforce

Alongside the Guidance, there is a new good practice guide on the approach to staff engagement and consultation. As well as a checklist of 'things to do' at each stage of the development of a subsidiary proposal, it offers the opportunity for the NHS England review team to participate in a meeting between the NHS provider and its workforce representatives so that views can be put directly to NHS England.

Next steps

NHS foundation trusts should welcome the Guidance as it provides greater freedom to set up subsidiaries without undergoing review in some circumstances. For NHS trusts, the position remains that all proposals are reportable.

Despite the greater flexibility however, we recommend continuing to engage early with NHS England on borderline cases or where it is suspected that a proposal could be 'novel, contentious or repercussive' in NHS England's view.

Regardless of the need for reporting or review, all subsidiaries will need a clear commercial rationale and be supported by a business case and legal documentation. These will be required by trust boards for their own approval processes. DACB has extensive experience of advising NHS providers on subsidiary proposals. As a full-service firm, we can support on options for legal form, procurement implications, the necessary legal documents and navigation of the regulatory landscape.