The last 3 years has shown a major trend of NHS Trusts creating subsidiary companies, known as Subcos or Wholly Owned Companies (WoCs).  

As trade union negotiators and campaigners have shown, this has been done to get tax advantages despite the hype and even downright lies about it being in order to improve services.  

Staff affected are generally low paid, and disproportionately women and from BAME backgrounds.  They are often regarded by NHS Trusts as “other” as they deliver vital but poorly recognised services like cleaning, catering, portering, and other jobs covered by the facilities management description.  Local campaigns have succeeded in stopping some of the proposed subcos – but the appetite of the NHS to get the free money involved sadly continues.

Now there is hope this may end.

For many years health authorities have been encouraged to contract out services to the private sector, despite the lack of evidence that this brings any benefits to patients.  It is usually a device to cut terms and conditions of those employed to do the work.  

Early on it was realised that many of these services would be subject to VAT if they were outsourced and the non-reclaimable VAT could act as a disincentive to contracting-out.

To get around this, it was therefore decided to compensate health authorities by a direct refund mechanism [in section 41(3) of the VAT Act 1994]. 

The Treasury issues a Direction, commonly known as the ‘Contracting Out Direction’ which lists both the authorities that are eligible to claim refunds of VAT, and the services on which VAT can be refunded.  The list includes the services being pushed into subcos by NHS Trusts.  It is complicated and open to abuse and spawned a mini-industry of tax advisers and consultancy.

What NHS trusts found was an unintended consequence.  

What is a Subco / wholly-owned subsidiary?

As a gross oversimplification … 

Trusts paid VAT on various services and consumables and could not recover it – that was the funding model.  But some found that if they formed a subco, which is in legal terms a private company, then that gave an indirect and entirely artificial route to get that VAT back.  

For many this was unacceptable tax avoidance.  But the NHS management, desperate to find anything to mitigate gross underfunding, turned a blind eye. They argued that so long as the tax benefits were not the ONLY benefit then this organisational trick was acceptable.  

So trusts, advised by their highly paid external consultants, wrote their business cases making bogus claims about “service improvements,” or the ability to offer “more flexible conditions” – just to pretend that tax was not the ONLY benefit.  

In the real world, research by UNISON showed that tax changes contributed between 80 – 90% of the claimed value of benefits.

By 2018 pressure from trade unions, and a couple of major disputes, forced the NHS management to at least bring in some level of scrutiny of the cases to form new subcos, but this fell way short of actually stopping it and bogus cases still got through.

However, the Government, perhaps after huge pressure from trade unions and the Labour party have apparently recognised this as undesirable: and they are planning some tax changes which are likely to end the tax dodging.  

The Treasury is now consulting on a proposal for dramatic simplification.  In essence this will mean that NHS organisations will be able to recover all the VAT they pay (known by the catchy Treasury title as The Full Recovery Model) – and the funding model for Trusts will be adjusted to make this cost neutral.  

They get less funding, but pay less back in VAT.  This solution has long been the one that trade unions argued for in the NHS, where the problem has festered.

The change is likely to come in early next year, but no details of this are yet available: nor is the likely reaction of the NHS management clear.

Trade Unions are cautiously welcoming this proposed change, as it destroys any reason for a subco, and so protects the work force from unwelcome forced transfers of NHS staff into the private sector, with loss of NHS terms, conditions and pay scales.

But there’s a catch.

As trade unions also point out, the dramatic simplification may also make outright outsourcing less complex to manage and so marginally more attractive.  

The scale of the gain would however probably be too small to actually affect decision making: and anyway outsourcing now has such a bad track record that even Tories are thinking it may not be a good idea. 

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