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Published 24 October 2018
Following NHSI's statement requesting that providers pause current plans to create new subsidiaries or make changes to existing subsidiaries, they have now issued the awaited consultation.
NHSI are aiming to publish updated guidance and implement the new regime in December 2018.
As Trusts will be aware, under the current reporting requirements NHSI only review transactions which meet the reporting and review thresholds set out in the Transactions Guidance, with the level of scrutiny dependent on NHSI's perception of risk.
The consultation recognises that there are "circumstances where subsidiary companies are appropriate and can help drive innovation", however, it is clear that NHSI want to ensure that only those which create value for the healthcare sector proceed going forward, noting, in particular, that VAT savings should not be the primary driver creating subsidiaries.
The NHSI proposal is that the current framework for reviewing transactions i.e. the Transactions Guidance is extended to capture:
1. the reporting of subsidiaries as transactions (regardless of size, structure or purpose); and2. material changes to existing subsidiaries.
If the new regime is implemented the following steps will apply where a new subsidiary is to be set up or a material change is due to be made to an existing subsidiary:
1) business case to be provided to NHSI with full details of the proposals (including legal, governance, financial and operational impacts) and all inherent risks;
2) a panel at NHSI will review the business case and determine whether it is (i) material; or (ii) significant. The definitions of "material" and "significant" are as set out in the Transactions Guidance. For NHS Trusts the business case must demonstrate to the Secretary of State that the subsidiary is income generating prior to NHSI confirming its classification;
3) if the panel classifies the business case as "material" a full review will not be required, but the Trust board will need to confirm a number of statements, which include the following:
a) the business case is clear that the subsidiary (or material changes to it) will create genuine value for the Trust;b) the business case stands in the absence of any VAT savings;c) the business case clearly sets out why a subsidiary structure is preferable to other structures; andd) clear governance arrangements have been considered to confirm how the subsidiary will be established, managed and monitored;
4) if the business case is classified as significant, a separate review process will be trigged as with all other transactions which are considered significant under the Transactions Guidance.
What may constitute a "change" to an existing subsidiary is not clear, however, at this stage we would expect this to catch material changes, for example, extending the scope of services provided by a subsidiary to a Trust. NHSI have recognised that "material change" needs to be defined and we expect that this will be included in the final issued guidance following feedback on the consultation.
We recognise that some trusts may have advanced plans and do not consider pausing plans to be a viable option due to the stage their project has reached pending the outcome of the consultation. Trusts in this position should consider their next steps very carefully.
We are advising a number of clients in relation to the formation of wholly-owned subsidiaries and would be happy to discuss individual situations before a decision to pause or not pause is made and/or NHSI is contacted.
We will keep you updated as to the outcome of the consultation and the updated Transactions Guidance.
The consultation closes at 5pm on 16 November 2018.
London - Walbrook
+44 (0)20 7894 6411
+44 (0)20 7894 6020
+44 (0)191 404 4093
+44 (0)20 7894 6531
+44(0)117 918 2324
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