Welcome to ‘Did You Know?’,  Hempsons’ publication designed to keep you informed about the latest legal developments, legislation, and noteworthy case law across our sectors.

This edition will be a spotlight on NHS SubCos, or Wholly Owned Subsidiaries.

NHS Foundation Trusts have relative freedom under the NHS Act 2006 to establish SubCos, not only for income generation but also to carry out functions on its behalf. NHS Trusts currently have more limited opportunities. This edition of ‘Did you know?’ is primarily aimed at Foundation Trusts, but may be of interest to NHS Trusts, too.

We hope you find the articles in this edition both interesting and useful. If you need any legal assistance, have questions, or wish to discuss any of the issues covered, we would be delighted to hear from you.

If contracting authorities are looking at setting up an NHS SubCo, consideration will need to be given to the requirements of the Procurement Act 2023.

Historically, an NHS SubCo has been established as a “Teckal” company, more recently under regulation 12 of the Public Contracts Regulations 2015.  The Procurement Act 2023 now requires consideration of the vertical arrangement tests in the Act – if these vertical arrangement tests are met, the arrangement is an exempted contract, i.e. the Procurement Act 2023 does not apply when awarding the NHS SubCo a contract.

Care should be given to how the NHS SubCo is structured so as to meet these tests. The exemption is available where a contracting authority (or two or more contracting authorities acting together) (referred to as the ‘contracting authority owner’), i.e. the Trust, contracts with a person (referred to as the ‘controlled person’), i.e. the NHS SubCo, over which the contracting authority owner has the form of control set out in the Act.

Consideration needs to be given to ensure that the right level of control is exercised, as well as ensuring the other elements of the tests are met, for example there is a limit on how much activity the NHS SubCo can undertake for organisations other than its contracting authority owner.

It is possible to establish multiple NHS SubCos – provided these are structured compliantly, the arrangements between the Trust and its NHS SubCos, and between those NHS SubCos themselves, will not be caught by the Procurement Act 2023.

The NHS SubCo itself will, however, be a ‘contracting authority’ for the purposes of procurement law.  It is important to note, however, that an NHS SubCo is not a ‘relevant authority’ for the purposes of the Health Care Services (Provider Selection Regime) Regulations 2023 (the PSR).  Therefore, the PSR does not apply to an NHS SubCo.  Instead, an NHS SubCo can support its Trust in complying with the PSR, but the contract would need to be in the name of the Trust.

We have advised a number of Trusts on the procurement aspects of establishing NHS SubCos, ensuring compliance with the detailed procurement law tests, alongside the financial aspects of any arrangement.

Recent announcements from NHS England have again turned attention to Trusts establishing SubCos. However, the freedom is not absolute, and consideration needs to be given to both the governance issues on establishing an NHS SubCo (looked at below) and the arrangements in place once established (which we consider under the commercial part of this edition).

The latest NHS guidance on establishing subsidiaries was updated in February 2024. Whether recent announcements will lead to changes is unknown, but unless changed, Trusts will need to base any plans on existing guidance. An important aspect of the guidance is understanding there are thresholds mandating reporting of plans to NHS England for approval. However, and importantly, there is a requirement for all “novel, contentious or repercussive” plans to receive approval.

For the NHS, the phrase “novel, contentious or repercussive” has not been specifically defined. However, the same phrase has recently been explained in the context of school freedoms where in March this year guidance set out that:

• novel transactions are those of which the academy trust or college has no experience or are outside its normal course of business
• contentious transactions are those that might cause debate or criticism by Parliament, the public or the media
• repercussive transactions are those likely to set a precedent or cause pressure for other academy trusts, colleges, or  the wider public sector to take a similar approach and hence have wider financial implications

Similar considerations will apply to NHS Foundation Trusts. The NHS guidance recommends that Trusts liaise with NHS England early to determine whether the formal thresholds or the “novel, contentious or repercussive” trigger is engaged requiring formal sign off of plans. This will only be determined on a case by case basis.

Depending on what the NHS SubCo is going to be undertaking, there may be a number of external approvals required, for example CQC registration or registration with the MHRA (depending on whether the services provided include relevant regulated activity).

In addition to considering the external requirements and approvals which may be needed, the Trust will need to consider its own constitutional requirements. The NHS Act 2006 left it to NHS Foundation Trusts to determine whether to include a “significant transaction” definition in the constitution and, if so, what a “significant transaction” was. The Constitution should be reviewed at an early stage to determine whether formal consent is required, although updating the Council of Governors on plans would be normal for all such transactions.

We can assist Trusts to navigate the external and internal approvals process to establish new NHS SubCos, alongside the other issues which need addressing.

Once a Trust has navigated the establishment of an NHS SubCo, and has determined what functions it will be carrying out on its behalf, the process of the transfer to the SubCo gets underway.

However there are several issues to be considered. Firstly, who is running the SubCo? Usually these bodies are established as companies limited by shares. As such they are a separate legal body, and will need to have its operations managed by a board of directors. Who are they? What decisions are left to the NHS SubCo Board, and what requires escalation to the Trust Board? What should the Articles of Association say about these matters?

When you have determined what the NHS SubCo is undertaking, and who is managing this, you will need to document the arrangements. There should be clarity on who is responsible for what aspects of the function delivery. It was recently reported that a Foundation Trust had poor or non-existent contract management in place due to a fractured relationship with its own subsidiary^[1].

Putting in place appropriate contractual documentation is important, but actually understanding what this says and who is responsible both in theory and in practice is essential. If an NHS SubCo is managing supply chains and procurements, is it acting “as principal” or “agent” i.e. is it entering into the contracts itself with delivery to the Trust, or is merely arranging for suppliers to the Trust. Who signs off waivers (if appropriate) for a single supplier appointment without a procurement?   Who is responsible for failures in the supply so arranged?

We have assisted Trusts and their NHS SubCos with a number of variants of internal governance and reporting, and relationships with third parties, including putting in place the appropriate contractual documents to reflect these.

[1] HSJ, 21 May 2025, Trust’s contract management ‘poor or non-existent’

The creation of Wholly Owned Subsidiaries (NHS SubCos) offers NHS Foundation Trusts operational flexibility, financial efficiencies, and VAT advantages. However, this strategy also brings significant employment law implications that must be carefully managed to avoid legal risks and workforce unrest.

Staff transfers to NHS SubCos are governed by the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE). TUPE preserves employees’ existing terms and conditions, including continuity of service. However, changes post-transfer are only lawful if justified by economic, technical, or organisational (ETO) reasons entailing changes in the workforce. Failure to comply can lead to claims of automatically unfair dismissal.

NHS SubCos often hire new staff on different terms from those transferred under TUPE, diverging from the Agenda for Change (AfC) framework. This can create a two-tier workforce, where new hires receive less favourable pay or conditions – damaging morale, provoking union resistance, and raising equal pay concerns.

Under HM Treasury’s New Fair Deal, staff compulsorily transferred to NHS SubCos retain access to the NHS Pension Scheme via a direction or determination from the Department of Health and Social Care (DHSC).

Crucially, the DHSC now permits new starters in Trust-owned NHS SubCos to access the NHS Pension Scheme, provided the SubCo is wholly NHS-owned and the roles support NHS-contracted services. If approved, a direction or determination will define the eligible “class of persons.” While this policy helps reduce pension inequality and supports workforce cohesion, participation remains optional. Some NHS SubCos opt not to offer NHS pension access to new starters due to cost; employer contributions to the NHS scheme exceed 20% of salary, compared to around 5% for typical SubCo-arranged pensions.

While TUPE mostly preserves collective agreements, union recognition within SubCos may need renegotiation.

It is notoriously difficult to change contractual terms of transferred staff and so most NHS SubCos work on the basis that they will need to maintain them.

The benefits of an NHS SubCo can be significant but it is important for trusts to have a realistic approach to workforce issues which then arise.

Hempsons has over a decade of experience advising NHS organisations on setting up and running NHS SubCos. We help determine lawful structures, develop business cases with VAT advisers, and advise on workforce, governance, procurement, and compliance.

Our support includes TUPE, pensions, industrial action, data protection, and contract transfers. We manage company formation, draft key agreements, and guide you through regulatory and operational challenges. Whether establishing a new NHS SubCo or expanding an existing one, we help NHS bodies deliver efficient, collaborative services – cost-effectively and in line with NHS policy.

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