Recent communications from NHS England indicate that providers should be thinking about creating wholly owned subsidiaries if they do not already have them, HFMA says.
The Working together in 2025/26 to lay the foundation for reform letter from the new NHS chief executive Sir Jim Mackey stated that NHS England had adjusted its approval approach to subsidiary transaction assurance to reduce the burden on providers.
This encouragement from the centre has got many NHS providers thinking about subsidiaries and what the benefits of creating them are. They are used for a variety of functions including estates and facilities management, pharmacy services, transport services and procurement.
The legal powers to create subsidiaries are included in the NHS Act 2006 and differ between NHS foundation trusts and trusts. Foundation trusts have the powers to form subsidiaries for core NHS healthcare provision and for income generation purposes. Trusts have more limited powers and can only form or participate in subsidiaries for the purposes of income generation and, even then, with some restrictions.
So what are the benefits? Subsidiaries can offer a range of employment and pay flexibilities not available to NHS staff and which can be attractive to some staff groups. They can be used instead of outsourcing to the private sector to enable providers to reinvest savings back into the NHS. Also splitting off the management of a subsidiary from the rest of the NHS organisation can bring benefits in terms of operational autonomy, focus, speed of decision making, creative problem solving and having a more commercial focus.
One of the big financial benefits comes from the VAT regime currently in place.
Of course, subsidiaries should not be established purely as a way gaining an advantageous tax position – the Treasury’s Public money and management prohibits that. But organisations will take the VAT regime into account when developing businesses cases to support decisions around the creation of subsidiaries. The benefit is that subsidiaries are outside of the NHS VAT divisional registration, meaning that they can reclaim VAT that NHS bodies themselves cannot.
This is where care needs to be taken. The Treasury has plans afoot to change the arrangements. There has been a review of the public sector VAT (section 41 of the VAT Act) rumbling on since late 2020, but the current message from the Treasury is that ministers are on board with the proposal and there will be a data collection this summer which will be used to make adjustments to budgets.
The proposal is that the current arrangements will be replaced with a full refund model – the details are not finalised yet, but it is expected to be similar to the arrangements that local authorities currently follow. However, the new arrangements will be fiscally neutral. This means that the budget that the Department of Health and Social Care (DHSC) currently receives to reflect the VAT that is not currently recovered by NHS bodies will be transferred to Revenue and Customs because it will have to pay the VAT back to those bodies going forward.
At the DHSC level, this may be relatively straightforward, but the DHSC and NHS England will have to allocate that cut in central budget to the group bodies. The impact of the change in arrangements will vary depending on factors such as whether they have a private finance initiative scheme, the number of managed service contracts they hold, and their arrangements with subsidiary bodies. One of the problems that the HFMA’s VAT Sub-committee raised in our response to the 2020 consultation was that those that have subsidiaries and other arrangements to efficiently manage their VAT position are likely to be worse off under these arrangements.
There is no date for implementation yet, but a letter sent to affected bodies in December 2024 implied that budgets for 2026/27 and 2027/28 could be adjusted based on the data collection planned for this summer. We think that it is unlikely that it will happen so quickly, but finance staff should be aware that change is on the horizon.
Those considering creating subsidiaries should assess whether the financial benefits are still there once the VAT regime changes. Which of course they will be, as the VAT benefit was never the driving factor, was it?
Date: 22 April