Setting up a subsidiary maximises benefits and mitigates risks

In recent months, trusts have come under fire over their use of wholly owned subsidiaries, most recently in last week’s comment piece by Karin Smyth. The debate has been highly charged, both nationally and locally. This is understandable when issues such as staff terms and conditions, privatisation and financial savings are under scrutiny.

However, our view is that the debate needs to be more nuanced – after all foundation trusts have been successfully operating subsidiary companies since 2010. They set them up for many reasons and there is a danger that current criticism levelled at some FTs is undermining the sector’s legitimate use of this option. What we need to do is maximise the benefits of setting up a subsidiary and mitigate the risks, rather than undermine or prevent trusts from using them.

Benefits of subsidiaries

First, let’s be clear that this is not about tax avoidance. Although a subsidiary brings some tax advantages, the Department of Health and Social Care stipulates that trusts cannot use them solely for VAT gains. Financial savings, including from VAT, will form part of the business plan, but there are a number of reasons why setting up a subsidiary makes good business sense.

These can include generating additional income to support patient services, managing estates more strategically, and running pharmacy services more efficiently. And this is about creating a level playing field with private health companies, which for a long time have made VAT savings in areas like pharmacy. Some suggest closing down the VAT loophole, but removing this as an option for the NHS would actually create a competitive advantage for private organisations and an incentive for outsourcing.

Financial savings, including from VAT, will form part of the business plan, but there are a number of reasons why setting up a subsidiary makes good business sense

Second, this is not just about trusts trying to make savings by moving staff to different terms and conditions. Terms and conditions of existing staff are protected under the current Transfer of Undertakings (Protection of Employment) Regulations (TUPE).

Typically, staff will be consulted about the transfer to a new subsidiary and have a right to submit a formal objection. New staff may join under different conditions but this is not simply about removing rights from new staff. No one has produced evidence to show that new staff in subsidiary companies are employed on cheaper terms than staff subject to TUPE.

Trusts will either look to match existing terms and conditions (and some have requested access to the NHS pension scheme as part of their subsidiary company), or be able to offer a more flexible and competitive salary package to attract those in to the NHS. The key for many trusts setting up these organisations is for staff to feel as much a part of the NHS family as they were before, which is as much about staff engagement, culture and communication as the terms and conditions they are on.

The key for many trusts setting up these organisations is for staff to feel as much a part of the NHS family as they were before

Third, some have been concerned that attempts to set up a wholly owned subsidiary takes an institution-centric approach at a time when we need to focus on driving towards systems and partnerships. Our view is that wholly owned subsidiaries entirely support the emerging vision, and in many cases are supporting system working.

For example, we know of several foundation trusts planning to set up subsidiary companies to facilitate the vertical integration of services with primary care, in line with the new models of care outlined in the Five Year Forward View. GPs would be employed by the subsidiary and represented on its board, rather than becoming salaried employees of the trust. This arrangement meets both parties’ needs: the GPs are part of the trust but still have the legal separation and self-determination they are looking for.

Managing subsidiaries

It is the case that some trusts are setting up subsidiaries to take over some elements of their back office operations, such as estates and catering rather than work more strategically across their sustainability and transformation partnerships.

But STPs are still maturing, and most simply do not have the capacity to integrate these services across a wider footprint. Setting up these subsidiary companies at an organisational level does not preclude system integration in the longer term, and there are some FTs already looking to set up companies to do just this across their STP.

We support NHS Improvement’s work to introduce self-certification, so that boards can show how they have considered and mitigated all relevant risks when setting up a subsidiary

The provider sector is under immense financial pressure, facing an underlying deficit of around £4bn this year. The Carter Reports into operational productivity set trusts a clear requirement to use their non-frontline spend more efficiently and effectively, and clearly wholly owned subsidiaries are one way of doing this. This is not privatisation; this is setting up entities that are fully owned by NHS trusts.

The alternative to this is, however, privatisation by outsourcing to the private sector, taking the resource and staff out of the NHS family entirely. Concerns have been raised that there are no protections to stop assets being transferred out of a subsidiary, and this needs to be properly considered as part of any proposal, but the same applies to any trust-owned asset. This option is not a step towards outsourcing, but is an alternative to it.

Of course, this approach isn’t completely risk free. It requires extensive planning, due diligence and communication with staff. This is why we support NHS Improvement’s work to introduce self-certification, so that boards can show how they have considered and mitigated all relevant risks when setting up a subsidiary. Focusing on proportionate regulation and communication is key to setting up subsidiaries effectively and responsibly.