Download - Eversheds Report - September 2102
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Association of Colleges (“AoC”)
Report on Shared Services VAT, Employment, Pensions and Procurement Issues
September 2012
Eversheds LLP 115, Colmore Row Birmingham B3 3AL United Kingdom
Tel 0845 497 1423 Fax 0845 497 1903 Int +44 121 232 1000
DX 13004 Birmingham
www.eversheds.com
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CONTENTS
Clause Page
1 INTRODUCTION ......................................................................................... 3
1.1 Background ................................................................................... 3
1.7 Executive Summary ........................................................................ 3
2 THE CONSORTIUM MODEL - EU SERVICE SHARING EXEMPTION ..................... 7
2.1 General ......................................................................................... 7
3 THE CONSORTIUM MODEL - CORPORATE VEHICLE ....................................... 10
3.5 Governance .................................................................................. 11
3.10 Procurement ................................................................................. 11
3.25 Pensions ...................................................................................... 15
3.31 Freedom of information .................................................................. 16
3.33 Data Protection ............................................................................. 16
4 THE CONSORTIUM MODEL - UNINCORPORATED ASSOCIATION ...................... 17
4.6 Governance .................................................................................. 17
4.11 Procurement ................................................................................. 18
4.22 Pensions ...................................................................................... 20
4.25 Freedom of information .................................................................. 20
4.27 Data Protection ............................................................................. 21
5 MEMBER’S SUBSCRIPTION COMPANY .......................................................... 22
5.13 Governance .................................................................................. 24
5.16 Procurement ................................................................................. 24
5.18 HR Issues/Pensions ....................................................................... 24
5.20 Freedom of information .................................................................. 24
5.21 Data Protection ............................................................................. 25
6 ADDITIONAL COMMENTS ........................................................................... 26
6.5 VAT Grouping ............................................................................... 26
6.7 Charity/Grant Funding ................................................................... 26
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1. INTRODUCTION
1.1 Background
1.2 Eversheds has prepared this report to advise the Association of Colleges (“AoC”)
on a number of core issues surrounding the sharing of services within the
education sector.
1.3 The primary aim of this report is to review certain models presented by the AoC
to Eversheds in order to determine whether either would realistically allow for
services to be shared between colleges on a VAT exempt basis, whilst at the
same time take account of relevant governance, procurement, HR, pensions and
freedom of Information/Data Protection issues. This report also comments
briefly on other potential VAT mitigation schemes explaining briefly whether they
are likely or not to succeed.
1.4 This report is subject to legal professional privilege. The content and our duty of
care extends only to AoC. We acknowledge that AoC may wish to share the
content of this report with third parties in particular with college members.
Where this is the case Eversheds duty of care or any conclusions reached will not
extend to those third parties.
1.5 This report covers VAT and no other taxes. In addition, governance,
procurement, HR, pensions and Freedom of Information/Data Protection issues
are considered. We have not been instructed to advise on, and have therefore
not considered, specific circumstances surrounding any particular AoC member
college.
1.6 The advice in this report represents our interpretation of current law and
guidance in the UK which is subject to change from time to time. We have not
undertaken to update our advice in future or to advise you of any changes in law
(or in its interpretation) or practice which might affect our advice.
1.7 Executive Summary
1.8 Under UK Law, the provision of education (or of goods or services which are
“closely related” to the principal supply of education) is generally exempt from
VAT and, therefore, the sharing of certain “front of house” services should be
possible without incurring any adverse charge to VAT. However, the sharing of
other services such as accountancy functions, HR, information technology and
legal functions (for example) (“back office functions”) would generally be subject
to VAT.
1.9 Amongst other questions, we have been appointed to comment on two particular
models which allow for sharing of back office functions. Fundamentally, the AoC
wishes to explore whether these models may provide the ability to allow for the
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back office functions to be shared on a VAT exempt basis. In basic terms, the
models can be summarised as:
1.9.1 a members consortium, which delivers services at cost to college
members of the consortium on a VAT exempt basis by relying on the
EU service sharing exemption (as described in section 2) which has
recently been enacted in UK law (“the Consortium Model”); and
1.9.2 a member’s company, which provides VAT exempt services to its
members in return for a membership fee (“the Corporate Model”).
1.10 For the reasons outlined in this report, the use of the Consortium Model would
appear to offer the most appropriate model that would be acceptable to HMRC
should colleges wish to seek to share “back office” functions on a VAT exempt
basis. In particular, a Consortium Model comprising a members unincorporated
association would (when considering VAT in isolation) appear to achieve the
most probable opportunity for services to be shared on a VAT exempt basis.
1.11 It must be noted that the use of the Consortium Model is reliant upon the EU
service sharing exemption which has only recently been enacted in the UK. The
UK legislation lacks detail (and in effect introduces the EU legislation with very
few amendments) and detailed guidance to accompany the legislation has only
recently been published.
1.12 In certain cases however, an individual Consortium Model consisting of an
unincorporated association may, dependent upon the individual circumstances,
result in the member colleges as a whole employing the employees that are
being shared. In such circumstances, joint employment may exist. The sharing
of the staff (and any recharges) between joint employers is disregarded for VAT
purposes, thus allowing for the sharing of staff without a VAT cost irrespective of
the application of the EU service sharing exemption thus allowing colleges to
consider a Consortium Model at this time. Specific advice regarding the
employment status in individual circumstances would however need to be
sought, as determining legal certainly over the responsibility for employees and
their employment status is a challenging exercise.
1.13 The Corporate Model may allow for the delivery of services to college members
on a VAT exempt basis in return for a subscription fee, provided that the primary
purpose of the company falls within a specific list of aims eligible for VAT
exemption to apply to services provided to members. In order for “back office”
services to fall within the VAT exemption, they must form part of the primary
aim of the company. We consider however that this route is open to challenge
on a number of technical grounds, and we would recommend that Colleges seek
specific confirmation from HMRC prior to proceeding with any arrangement
involving the delivery of services in return for a membership subscription. In
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summary, we do not consider that this route should be recommended by the
AoC to its members due to the need to potentially override UK legislation and
rely on the European VAT Directive in order to reach a desired outcome.
1.14 Outside of the Corporate Model and Consortium Model, we do not consider other
options exist that allow for service sharing on a VAT exempt basis and, overall,
we consider that the Consortium Model offers the only viable option which tracks
with our understanding of wider UK opinion from a variety of sources.
1.15 The adoption of the either a Consortium or Corporate Model will create
challenges for the delivery vehicle and its members, particularly in terms of
governance and staff. In each case these challenges will need to be assessed
and advice should be sought on the management of associated risks. The
following issues are examples of the type of issues that the parties will need to
consider at the outset:
1.15.1 is it prudent to enter into a relationship whereby a college is dependent
upon a third party (e.g. another college or delivery vehicle) for the
delivery of critical back office functions?;
1.15.2 how will differences in college infrastructure, e.g. IT platforms, be
managed by the shared services vehicle?;
1.15.3 how will quality of service be maintained to an acceptable level when
job losses are likely to achieve the desired economies of scale and
there will be competing demands for the resources that remain?;
1.15.4 who will be responsible for the management of staff and the costs of
potential dismissals (particularly redundancies)?;
1.15.5 how will employment litigation risks be managed?;
1.15.6 will the shared service vehicle be in a position to offer staff access to
public sector pensions?;
1.15.7 what is the impact of the procurement regime on sharing services?;
and
1.15.8 what happens if a college member wishes to terminate the service
sharing arrangement?
1.16 Care will need to be taken to ensure that the cost of putting in place a
mechanism to manage the issues identified above does not outweigh any
perceived financial benefit through use of the models.
1.17 The decision by a college to cease to undertake specified activities on its own
behalf and have them carried out by another party, whether it be under the
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Corporate or Consortium Model, is also likely to amount to a relevant transfer for
the purposes of the Transfer of Undertakings (Protection of Employment)
Regulations 2006 (“TUPE”). As TUPE creates an automatic transfer of staff,
TUPE planning will be vital.
1.18 If shared services are to be provided via an unincorporated association under a
Consortium Model, particular issues will arise around where liability for the
employees performing the service will lie. Depending on the circumstances, the
employer might be all of the members of the management committee,
the
members of a sub-committee, individuals, the College members of the
association (as mentioned above) or a combination depending upon who is
deemed to have assumed the responsibility of entering into the contracts. Each
case will turn on its own facts.
1.19 Finally, from the governance perspective there are advantages and
disadvantages to each of the potential solutions. The Corporate Model has
advantages in terms of ring fencing risk, and if it is desired that the services be
provided by dedicated staff from dedicated premises which are respectively
employed by and vested in the delivery vehicle. It is also more straightforward
than an unincorporated association in terms of documentation, although the
specimen memorandum and articles for North East Shared Services provided to
us with the invitation to tender would need to be updated in light of the
Companies Act 2006. An unincorporated association would allow the benefits of
s.166 Education and Inspections Act 2006 to be secured, so allowing for some
limited delegation to the delivery vehicle of the powers of member college
governing bodies. Neither Model, however, allows member colleges to avoid the
need for their governing bodies to satisfy themselves that it is in their college’s
overall interest to adopt the shared service arrangements. This could be
problematic if the range of services provided is wide given that it will not be
possible for member colleges to “pick and mix” services.
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2. THE CONSORTIUM MODEL - EU SERVICE SHARING EXEMPTION
2.1 General
2.2 The EU VAT Directive includes an exemption which has now been adopted in UK
law. The UK law, which applies from 17 July 2012, states that the VAT
exemption applies to:
"the supply of services by an independent group of persons where each of the
following conditions is satisfied (a) each of those persons is a person who is
carrying on an activity (“the relevant activity”) which is exempt from VAT or in
relation to which the person is not a taxable person… (b) the supply of services is
made for the purpose of rendering the members of the group the services
directly necessary for the exercise of the relevant activity (c) the group merely
claims from its members exact reimbursement of their share of the joint
expenses, and (d) the exemption of the supply is not likely to cause distortion of
competition".
2.3 Broadly speaking, the UK legislation allows for groups of independent persons to
share services on a VAT exempt basis provided that:
2.3.1 the independent persons carry on an activity which is either VAT
exempt or “non-business” (e.g. education);
2.3.2 the services are directly necessary for the persons to be able to carry
on their VAT exempt/”non-business” supplies (e.g. of education); and
2.3.3 the services are recharged at cost;
2.3.4 the treatment of the services as VAT exempt does not create a
distortion of competition.
2.4 The wording of the UK legislation, and the recently published guidance, suggests
that a number of independent colleges may come together to form some form of
entity or association (the cost sharing group), under which those colleges share
services between one another at cost on a VAT exempt basis.
2.5 In coming together to share services, the colleges may form for example a
company limited by guarantee or shares, or an unincorporated association (each
model is described in sections 3 and 4 below).
2.6 Whilst the UK legislation does not specify the legal form of the cost sharing
group, the recently published guidance states that a corporate entity will qualify
as a “cost sharing group” for the purposes of the exemption.
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2.7 We have identified a number of key issues surrounding the recently enacted UK
legislation, which are equally applicable irrespective of the form that the delivery
vehicle takes. Some of these issues have been clarified by the recently
published guidance, and reference to the guidance is made below.
2.7.1 EU legislation, and the recently enacted UK legislation, states that the
exemption relates to persons carrying on exempt activities (which
would in principle include partially exempt taxpayers as well as wholly
exempt taxpayers). The recently published guidance states that in
order to be eligible for membership, every member will need to have a
minimum of 5% exempt (or non-business) activity over a certain
period of time (being the immediate 12 months prior to joining the cost
sharing group, broadly speaking) or otherwise have an intention to
receive supplies from the cost sharing group in the following 12
months which will be used to make a minimum of 5% exempt or non-
business activity during that following 12 months. It must therefore be
noted that the UK legislation would appear to remove the ability for
fully taxable trading subsidiaries of a college to fall within the service
sharing exemption.
2.7.2 Both the EU legislation and the recently enacted UK legislation state
that the services must be shown to be directly necessary for the
exercise of the VAT exempt educational activities of the colleges. The
recently published guidance states that HMRC will apply an 85%
threshold, with all services received by members falling within the VAT
exemption (i.e. treated as being “directly necessary”) if this 85%
exempt/non-business threshold is exceeded. It should be noted that
the European Commission has officially asked Luxembourg to change
its VAT rules; currently services provided by an independent group to
its members are completely free of VAT provided that the members’
taxed activities do not exceed 30% of their annual turnover (or 45%
under certain conditions). The European Commission considers that
these thresholds infringe EU law. In light of this HMRC’s guidance
states that the 85% threshold may be subject to change and that
transitional arrangements may have to be adopted in due course to
facilitate any move to a revised position should the European
Commission challenge HMRC’s 85% threshold.
2.7.3 Both the EU and the recently enacted UK legislation provide that the
exemption will only apply where a distortion of competition does not
arise and therefore each college must consider the distortion of
competition issue in order to determine whether any VAT
exemption would create a distortion in the market place (when
compared to commercial providers, who would have to charge VAT to
colleges within the cost sharing group). We consider that the delivery
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of services on a cost basis may, by default, mitigate any HMRC
argument that the service provision on a VAT exempt basis distorts
market competition. HMRC guidance states that “as long as all the
conditions for the exemption are met… there should be little question
of the exemption distorting a market”. This is because any cost
sharing group is by definition a co-operative self-supply arrangement,
rather than a commercial outsourcing arrangement, and therefore it
does not exist or compete in a market.
2.7.4 It is accepted that the EU legislation (and therefore by implication the
recently enacted UK legislation) would not appear to allow inter-
member supplies - e.g. college to college; the drafting clearly
envisages supplies of services being made by a central entity
(irrespective of its legal form) to its members. HMRC’s guidance
expressly states that the exemption will not apply to supplies made by
members who supply services directly to other members.
2.7.5 We are of the opinion that, to fall within the exemption under the
existing EU legislation and/or the recently enacted UK legislation, the
members seeking to share services must have a common aim in
seeking to share services, but not necessarily all of the services in
question. HMRC’s guidance states that all members “ must receive…
qualifying supplies or have a realistic genuine intention to do so”. The
guidance also states that not all members have to receive the same
services, and that a cost sharing group can supply different services to
each member if that is what is required. Certain college members may
therefore require more of a particular service than other members, and
there may be occasions where a particular college member does not
require any one of the services in question.
2.7.6 The recently enacted UK legislation follows the EU legislation in
providing that the VAT exemption would only be available where the
relevant entity merely reclaimed from members an exact
reimbursement of their share of joint expenses. There should clearly
be no profit making objective and the entity should be precluded from
distributing any profit derived. In delivering the services, there may
be occasions that the entity does achieve a surplus in order to survive
or for budgeting reasons. We do not consider that this offends the EU
legislation or indeed the recently enacted UK legislation provided that
any surpluses generated are retained to be used as part of the wider
service sharing activities, or otherwise returned to members as a credit
against their share of costs previously paid to the consortium. HMRC
guidance states that “expenses” includes start-up costs and other
general overheads, but that reimbursement should reflect any
discounts received or any input tax which is recoverable. Specifically,
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“expenses” would typically include cash payments or liabilities, costs
incurred but not yet invoiced (accruals), amounts required to meet
anticipated future expenditure and also depreciation in the value of any
assets. Running a deficit or a surplus should not prejudice the
exemption provided that the “exact reimbursement” rule has been met
over a reasonable period of time, according to HMRC guidance.
3. THE CONSORTIUM MODEL - CORPORATE VEHICLE
3.1 The first variant of the Consortium Model allows for a number of colleges to
become members of a limited company (most probably a company limited by
guarantee). The company will be governed by its constitutional documents,
namely its memorandum and articles of association, and will be operated on a
day to day basis by an appointed board of directors. Note that the
memorandum and articles for North East Shared Services provided to us with the
invitation to tender would need to be updated to meet the requirements of the
Companies Act 2006 and the creation of sixth form college corporations by the
Apprenticeships, Skills, Children and Learning Act 2009.
3.2 The board administers, amongst other matters, the financial and legal affairs of
the company for and on behalf of the members. The board is therefore
responsible for coordinating the affairs of the company and the interests of the
members. As a result, the board would determine the extent to which services
are provided to any individual member of the cost sharing group.
3.3 On becoming a member of the company, a college will effectively transfer its
various functions to the company, such that the company itself is providing the
services to the college as a member of that company. The services are then
provided at the direction of the board.
Services
College A College B College C
Company Limited By Guarantee
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3.4 The company (via its board) will collect membership contributions from member
colleges for the services provided to them by the company.
3.5 Governance
3.6 The main advantage of using a corporate vehicle is that it would ring fence
potential liability arising from the delivery of the services. The company will be
a legal entity independent of the college members. The colleges will incur no
liability for the acts or omissions of the company. Those individuals or
organisations that become in company law members of the company will have
their liability limited should the company be wound up to the amount they have
guaranteed, which will be a conventional amount such as £10 each.
3.7 The existence of a separate legal entity is also convenient if the delivery vehicle
is to employ its own staff and occupy its own premises. The company will be
able to enter employment contracts, leases etc in its own right.
3.8 The charity law issue in respect of colleges’ need to ensure that the services
provided by the delivery vehicle are in its overall best interests has already been
referred to in paragraph 2.7.5.
3.9 In addition there are the following governance related points to bear in mind:
3.9.1 college corporations will not be able to delegate to the company
responsibility for strategic decisions (such as approval of their budget
and other financial decisions that might impact on the college’s
solvency); and
3.9.2 each college governing body will need to have a memorandum of
understanding with the company to regulate the relationship between
them and in particular to ensure a regular flow of information from the
company to each college governing body. It is vital that the company
does not go off entirely on a “frolic of its own”, and equally vital that
college governors do not become so involved in shaping the company’s
activities that they become in law “shadow” directors, with legal
liability the same as if they were actual directors.
3.10 Procurement
3.11 The college members are subject to the Public Contracts Regulations 2006 (the
“Regulations”) under which they are required to tender opportunities to provide
them with services. Under certain circumstances, however, a college can receive
services without those services falling under the remit of the Regulations.
3.12 One of these circumstances is when the services are being provided by an ‘in-
house’ body - known as a ‘Teckal’ body. The Teckal ‘exemption’ from the
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Regulations is strictly interpreted and the burden is on the college member or
members to prove that the exemption applies.
3.13 To be able to provide services to its members, a Teckal body must meet the
following conditions:
3.13.1 the control test: the body must be subject to the same or a similar
level of control as an in-house unit would be. There must not be
private sector involvement even if it is management as opposed to
shareholding/ownership. The body needs to be both owned and
controlled by the relevant college member or members. Case law has
indicated that the control can be overall control by the members rather
than every member having equal control which indicated that different
levels of membership could be allowed.
3.13.2 the activity test: the body must operate so that it provides the
“essential part” of its services to the college member or members. The
services do not have to be provided in equal parts to the members as
long as overall the Teckal body is providing essentially only to its
members. Wider trading activity cannot be significant in scope or
value - case law indicates that if more than around 10% of the services
are provided to non-members the status as an in-house body will be
threatened.
3.14 It appears from the details provided that the two tests can be met if:
3.14.1 regarding the control test the college members have sufficient control
due to their representation on the board and the board’s remit with
regard to strategy i.e. that the strategic and operational direction of
the company is retained by the college members. It is essential,
however, that the rules governing the structure ensure that the
colleges are able to meet each of their individual objectives and
standing orders as this is part of demonstrating that they have the
same level of control as over in-house departments; and
3.14.2 regarding the activity test, the intention that all of the services will be
provided to members is maintained. If subsequently there is non-
member trading care would be needed to ensure this remained
minimal, or to have a flexible membership structure to allow new
members to join, otherwise the Teckal exemption could be threatened.
3.15 HR Issues
3.16 Sharing services is likely to entail reducing the overall number of staff engaged
in providing the services and/or moving some or all of the staff that remain from
their locations. Any reorganisation of this type will give rise to dismissals for
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redundancy and/or attempts to change terms and conditions. This will create
costs in terms of management time and redundancy payments. It will also
increase employment litigation risks. Further, any attempt by colleges to re-
organise ahead of a TUPE transfer (see below) may be automatically unfair. If
the responsibility for reorganisation of staff falls on the company, questions will
arise as to whether it will be able to defray its liabilities via indemnities provided
by member colleges.
3.17 The establishment of a company to deliver services that were previously
delivered in house is likely to create a relevant transfer for the purposes of TUPE.
Where there is a relevant transfer, employees assigned to an organised grouping
of workers that transfers automatically transfer to the transferee on their
existing terms (with the exception of old age, invalidity and survivors' benefits
under occupational pension schemes).
3.18 Identifying the employees that are assigned to a particular group of resources
will be a question of fact in each case and issues may arise where particular
individuals have split roles and only part of the role relates to services which are
to be performed by the company.
3.19 TUPE provides enhanced protection against unfair dismissal over and above
general unfair dismissal law. Any dismissal of an employee with at least one
year's service will be automatically unfair where the sole or principal reason for
the dismissal is either:
3.19.1 the transfer itself; or
3.19.2 a reason connected with the transfer that is not for an economic
technical or organisational (“ETO”) reason entailing a change in the
workforce.
3.20 If there is a genuine redundancy situation in the hands of the company, it will
usually be possible to demonstrate the necessary ETO reason and the dismissal
will be fair provided that a fair procedure has been followed. An employee
dismissed in such circumstances will be entitled to a statutory redundancy
payment if he/she had two years’ continuous service at the date of dismissal. It
may be difficult to demonstrate the necessary ETO reason if the company seeks
to change terms and conditions, e.g. for the sake of harmonisation, as it may not
be possible for it to demonstrate the necessary changes in the workforce
required to establish an ETO reason. If transferring employees accept new posts
in the company they will be bound by the terms and conditions that are offered
in connection with such posts.
3.21 TUPE places a duty on an out-going employer to provide information
to employee representatives in advance of a transfer about the date of the
transfer, its purposes and the consequences in terms of “measures” that will be
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taken by it or by the company in connection with the transfer. In the event that
an out-going employer (rather than the company) contemplates taking any
measures ahead of the transfer, a duty to consult with employee representatives
will be triggered. Whilst there is no legal obligation on an outgoing employer to
consult about measures that the company envisages taking post transfer, there
is an obligation on the company to identify to the out-going employers any
measures that it envisages taking.
3.22 TUPE will also oblige the out-going employers to collate and provide “employee
liability information” in relation to the transferring employees. This information
must be provided to the company at least two weeks before the proposed
transfer date. If an employee objects to the transfer he/she is treated as if
he/she had resigned voluntarily with effect from the transfer date. In such a
case, notwithstanding the fact that the employment would otherwise have come
to an end, if the employer, the employee and the company agree it may be
possible for the employee to be seconded to the company to participate in the
shared services function. It should be stressed that there is no obligation on a
college or the company to agree to a secondment in such circumstances.
Secondment may only be attractive in relation to highly valued staff who will be
key to service delivery but it may be less attractive with other staff. On
secondment, any changes to an employee’s contract of employment will need to
be documented and a secondment agreement will need to be put in place
between the seconding college and the company governing how the employee
will be managed and the charge back of salary costs.
3.23 Post TUPE and post any reorganisation, the way that the company manages its
staff will be of critical interest to its stakeholders in terms of the ability of the
company to deliver against its KPIs. Poor industrial relations will hamper service
delivery and also may lead to reputational damage for the member institutions.
Individual colleges losing direct control over employees performing the services
may also lead to tension. Another potential issues is equal pay. If the company
is running all back office functions for a number of institutions and pay and
conditions derive from a single source, there is scope for equal pay claims. All
of these matters will need to be given careful attention as part of commissioning
a shared services model.
3.24 Finally, what if the arrangements does not work? Careful thought will also need
to be given at the outset as to how the arrangements would be unravelled in the
worst case scenario where a college member wishes to leave the arrangement.
Whilst TUPE will automatically transfer staff into the company as a result of
service provision change, the situation may not be so neat at the end of the a
college member’s relationship with the company. This is because, on exit, it is
likely to be more difficult to identify employees of the company who are assigned
to a particular college member. Company employees are likely to be dividing
their time between a number of colleges. It cannot therefore be guaranteed
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under TUPE that, on exit by a college member, former college employees will
automatically transfer back to their original employer. This may be
unsatisfactory for the college member and may lead the company to make
redundancies if it is serving a smaller number of colleges.
3.25 Pensions
3.26 There is no right under TUPE to remain in a public sector pension scheme post
transfer. The exclusion does not, however, apply to other benefits under an
occupational pension scheme which are not old age, invalidity or survivors
benefits. By way of example, the right to an unreduced pension on redundancy
or dismissal in the interests of efficiency for members of the Local Government
Pension Scheme (“LGPS) aged 55 or over would transfer regardless of whether
the new employer offers access to the LGPS. This is a potentially a significant
liability for the company and any proposal that does not afford access to the
LGPS post transfer should factor in these risks.
3.27 It is likely that most transferring employees will be members of the LGPS. As
the company will be under the control or influence of an FE College it will not be
automatically precluded from offering its employees, including transferring
employees, access to the LGPS either by designation as a ‘scheme employer’ (if
it is a company under the control of an FE College) or as a ‘community admission
body’ (if it is a company under the influence of an FE College). However, in
particular where admission is as an admission body, the LGPS administering
authority may demand guarantees from the sponsoring colleges as a pre-
condition condition of allowing the company admitted body status.
3.28 Assuming that access to the LGPS is granted, former college employees would
continue to be LGPS members and their pre-existing membership would be
automatically aggregated with their membership in the company.
3.29 In normal circumstances, the company would be notionally credited with assets
equal to the value of the liabilities that transfer to it. However, the treatment of
any deficit would need to be confirmed with the relevant pension fund(s) on a
case by case basis. It could be that the sponsoring colleges wish to transfer a
share of their existing deficits to the company.
3.30 Some of employees providing shared services in colleges may be members of
the Teachers’ Pension Scheme (“TPS”). The TPS rules dictate that the company
is unlikely to be able to offer access to the TPS for any of its employees. In
connection with a TUPE transfer there will be no right for a transferring employee
to remain in the TPS. This situation may be addressed by offering access to the
LGPS or by permitting an employee to via a secondment arrangement but there
may be potential dissatisfaction if continued access to the TPS is not offered.
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3.31 Freedom of information
3.32 One current advantage of the multi-member company model is that currently
under the Freedom of Information Act 2000 companies owned by more than one
public body are outside the scope of FOIA. However, the Protection of Freedoms
Bill currently before Parliament will in due course remove this exemption.
Further, each of the member colleges and any other members of the company
which are public authorities and so subject to FOIA will still hold their records
subject to FOIA – even if they relate to the company.
3.33 Data Protection
3.34 Where the company is carrying out services on behalf of members, using their
records and personal data on their behalf, each member must be able to show
that the disclosure to the company of those details is permitted by data
protection legislation and in particular is fair, lawful and justified.
3.35 Where the company acts as a data processor (it uses a member’s personal data
on behalf of such member and as its instructs), it can undertake the same use of
a member’s personal data as such member can lawfully undertake. However,
each member must by law have in place with the company, the mandatory
terms for use with a data processor in a written contract. We recommend the
relevant terms exceed the minimum legal requirements in the legislation in order
to ensure members can comply with the expectations of the data protection
regulator, the Information Commissioner’s Office.
3.36 If, however, the company acts as a data controller (it uses a member’s personal
data on its own account and decides what purposes to use it for) in relation to
the records and personal data of the members, it will be more complex to
ensure disclosure to it and use by it of those details is fair, lawful and justified
and permitted by the data protection legislation.
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4. THE CONSORTIUM MODEL - UNINCORPORATED ASSOCIATION
4.1 The second variant of the Consortium Model provides for a number of colleges to
become members of an unincorporated association. As the association has no
legal personality of its own, its activities are directed by a management
committee (made up of a number individual representatives from the college
members).
4.2 It may be practical for a host member to administer, amongst other matters,
the financial and legal affairs of the consortium for and on behalf of the
consortium. The host member may be one particular college.
4.3 The committee is responsible for coordinating the affairs of the consortium and
the interests of the members. The committee may therefore determine the
extent to which services are provided to any individual member of the cost
sharing group.
4.4 On joining the consortium, a college will effectively transfer its various functions
to the association, such that the association itself is providing such services to
the college as a member of that association. The services are provided at the
direction of the management committee.
4.5 The association (via its host member) will collect contributions from member
colleges for the services provided.
4.6 Governance
4.7 The lack of a legal personality is a distinct disadvantage of an unincorporated
association because the association will not be able to enter into contracts on its
host member
College B
College A
College C
• Unincorporated Association
• Members enter into Memorandum of
Understanding
• Staff employed jointly/by Association
• Board made up of member
representatives
• Member Institutions contribute towards service delivery costs
• Board/Memorandum determines service
provision between members
• Host Institution deals with day to day administrative/accounting aspects on behalf of Association
man_002\3527495\3 18 11 September 2012 whitesm
own behalf and this can lead to a high level of uncertainty. Unlike a corporate
vehicle, an association is based on there being a contract or series of contracts
between the members. It will be important for such contract(s) to exclude the
creation of a legal partnership since otherwise individual colleges could be fully
liable for the acts or omissions of other colleges even though they had no part in
the decisions in question. As a result, there is no ring fencing of liability for the
actions or omissions of the delivery vehicle as with a corporate vehicle. The
contract(s) can seek to limit the liability of contracting parties, and to provide for
indemnities for those parties not judged to have been to blame for the loss, but
such provisions are not always agreeable to parties, cannot always be enforced
and add to the complexity of the documentation.
4.8 There may also be difficulties for an association in leasing premises. A landlord
is likely to require guarantees from one or more member colleges. It may be
possible to avoid such difficulties where for example colleges provide
accommodation to the consortium on the basis of a licence or other less formal
arrangement. These arrangements may be more complex and/or less legally
robust than those available to a company. However, the extent of risk may be
limited, e.g. where the accommodation is made available by one of the member
colleges.
4.9 It may be possible for the consortium agreement to be regarded as an
agreement for a joint committee between colleges under s.166 Education and
Inspections 2006. The relevant regulations (SI 2007/1321) allow such
committees to undertake functions relevant to collaboration between the
members. However the member colleges may only delegate to a joint
committee those functions that could be delegated to a committee of the
corporation. Functions reserved to the corporation or the Principal could not be
delegated to the joint committee.
4.10 Advantages of the unincorporated association include the fact that no consents
will be needed from the SFA or YPLA, no memorandum of understanding
between the college members and the consortium will be needed over and above
the consortium agreement itself, and there will be no need for registration with
and subsequent returns to Companies House.
4.11 Procurement
4.12 As described in paragraphs 3.10- 3.14 above the services the college
members receive within this arrangement will not have to be procured under the
Regulations if the two tests for Teckal exemption apply. The control test will be
met if the Board’s remit and the Memorandum of Understanding demonstrate
that the members retain control over the strategic decisions and financial
arrangements albeit that they are administered by one of the members.
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4.13 The activity test will be met if the service provision is only to the members of the
unincorporated association. If in due course there is non-member trading, that
will need to be monitored carefully to ensure that it remains minimal and/or the
members could consider having a structure in which members can be added
after initial setup.
4.14 HR Issues
4.15 The association will not be able to employ staff because it does not have a legal
identity. Creating legal certainty over where responsibilities for employees lies
will therefore be a significant challenge. Depending on the circumstances, the
employer might be all of the members of the management committee,
the
members of a sub-committee, individuals, the College members of the
association, the host or a combination depending upon who is deemed to have
assumed the responsibility of entering into the contracts. Each case will turn on
its own facts.
4.16 As with a corporate vehicle, an unincorporated association is likely to entail
reducing staff numbers and/or changing locations. The way in which industrial
relations are managed will also be vital to stakeholder colleges. As such, the
comments in paragraphs 3.16 and 3.24 above in connection with a corporate
vehicle will apply save that there will be a greater degree of uncertainty in
connection with whom the employer of the employees may be deemed to be.
4.17 The parties may seek to agree where liability for employment matters will lie by
drafting detailed protocols and indemnities but legislating for all potential
scenarios will be difficult. The costs of setting up such a framework will have to
be factored into the decision making on whether to adopt unincorporated
association. Further, employment tribunals are likely to pay close attention to
how relationships work in practice as opposed to how they are defined in
documents.
4.18 To illustrate the difficulty created by uncertainty over the identity of the
employer, the parties may consider what would happen if an employee suffers
an act of unlawful discrimination whilst providing services under the direction of
the association’s management committee. Any employment tribunal claim is
likely to name all potential respondents, including individual members of the
management committee and the Colleges they represent. A costly legal battle
could ensue to determine which of the respondents are liable and which are
responsible for paying potentially significant compensation.
4.19 Assuming that an association commences carrying out activities for the college
members of the association that were previously undertaken in house, it is likely
that this will create a relevant transfer under TUPE. The effect of a TUPE
transfer will be as articulated in paragraphs 3.17 - 3.23 above save that the
man_002\3527495\3 20 11 September 2012 whitesm
transferring staff will become the employees of some or all (depending on the
circumstances) of the members of the association’s management committee
rather than a company. (as under the Corporate variant of the Consortium
Model).
4.20 Given the uncertainties outlined above, it may be more attractive for the
association’s members to consider retaining their employees but seconding them
to provide services at the direction of the management committee of the
association. Any secondment arrangement would depend upon agreement.
Any changes to terms and conditions would need to be carefully documented and
a secondment agreement would need to be put in place between the employing
college and the management committee.
4.21 The comments at paragraph 3.24 about exit arrangements in connection with a
company apply equally to the unincorporated association variant, and are
potentially more complex given the uncertainties around the identity of the
employer of the staff.
4.22 Pensions
4.23 Assuming that the association does whish to employ staff, its ability to offer
access to the LGPS to its employees will be predicated on it gaining the status of
a community admission body, i.e. a body which provides a public service in the
United Kingdom otherwise that for the purposes of gain and which has sufficient
links with a scheme employer (e.g. an FE college) for the body and the scheme
employer to be regarded as having a community interest. Thus, notwithstanding
its unincorporated status, the association may still be capable of offering LGPS
membership to employees.
4.24 As stated above the scheme administrators may require guarantees from the
sponsor colleges on the same basis as described in paragraph 3.25 - 3.30.and
Deficit issues will be dealt with on the same basis as also described in those
paragraphs. The association will not be able to offer access to the TPS for the
same reasons as stated in paragraph 3.30.
4.25 Freedom of information
4.26 A consortium which is an unincorporated association will not be subject to the
Freedom of Information Act 2000 under current law, unless it were to be
designated by the Secretary of State under the FOIA. However, some of the
formal consultation about the expansion of FOIA to non-wholly owned
subsidiaries has suggested extremely broad wording, which may catch a
consortium, unless the wording is tightened as the new legislation evolves. In
any event, each member college being a public authority would still have their
records relating to the consortium accessible under FOIA. They would not be
successful in any argument claiming they no longer held records, which were
man_002\3527495\3 21 11 September 2012 whitesm
held by the consortium – and in any event, all their own records would be
deemed held on their behalf by the consortium.
4.27 Data Protection
4.28 Where the consortium is carrying out services on behalf of members, using their
records and personal data on their behalf, each member must be able to show
that the disclosure to the consortium of those details is permitted by data
protection legislation and in particular is fair, lawful and justified. Since the
consortium is not a single legal entity but an association of legal entities, it
would be necessary to identify exactly what personal data flows to which
consortium member and for what use -for all data and all members.
4.29 Where a recipient acts as a data processor (it uses a member’s personal data on
behalf of such member and as its instructs), it can undertake the same use of a
member’s personal data as such member can lawfully undertake. However, each
member must by law have in place with each recipient, the mandatory terms for
use with a data processor in a written contract. We recommend the relevant
terms exceed the minimum legal requirements in the legislation in order to
ensure members can comply with the expectations of the data protection
regulator, the Information Commissioner’s Office.
4.30 If, however, the recipient acts as a data controller (it uses a member’s personal
data on its own account and decides what purposes to use it for) in relation to
the records and personal data of the members, it will be more complex to
ensure disclosure to it and use by it of those details is fair, lawful and justified
and permitted by the data protection legislation.
4.31 It may be complex to put in place the necessary compliance measures due to the
multiple disclosures and data flows likely to occur absent a single legal entity to
act as recipient for the data and being responsible for its onward use.
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5. MEMBER’S SUBSCRIPTION COMPANY
5.1 We have been asked to comment on whether a members subscription company
offers the ability to share services on a VAT exempt basis.
5.2 Aside from the EU “service sharing exemption” described in more detail above
which has recently been enacted into UK law, the EU VAT Directive further
provides that Member States shall exempt “the supply of services, and goods
closely linked thereto, for the benefit of their members in return for a
subscription fixed in accordance with their rules by non-profit making
organisation with aims of a political, trade-union, religious, patriotic,
philosophical, philanthropic or civic nature, provided that this exemption is not
likely to cause distortion of competition”.
5.3 The relevant UK domestic legislation is the exemption granted by Group 9 in
Schedule 9 of the VAT Act 1994, which provides that the following are exempt
from VAT:
5.4 “The supply to its members of such services and, in connection with those
services, of such goods as are both referable only to its aims and available
without payment other than a membership subscription by any of the following
non-profit-making organisations:
5.4.1 a trade union or other organisation of persons having as its main
object the negotiation on behalf of its members of the terms and
conditions of their employment;
5.4.2 a professional association, membership of which is wholly or mainly
restricted to individuals who have or are seeking a qualification
appropriate to the practice of the profession concerned;
5.4.3 an association, the primary purpose of which is the advancement of a
particular branch of knowledge, or the fostering of professional
expertise, connected with the past or present professions or
employments of its members;
5.4.4 an association, the primary purpose of which is to make
representations to the Government on legislation and other public
matters which affect the business or professional interests of its
members; and
5.4.5 a body which has objects which are in the public domain and are of a
political, religious, patriotic, philosophical, philanthropic or civic
nature.”
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5.5 We are aware that other advisers have purportedly agreed with HMRC that the
above exemption can be applied to the sharing of services between VAT exempt
bodies. This is on the basis that the provision of such services are referable only
to the wider aims of the relevant delivery vehicle (and are available without
payment, other than a membership subscription).
5.6 We should note that any previous HMRC confirmation is not transferable to other
similar projects nor can it be relied on more widely and is only relevant to the
particular taxpayer to which it is addressed. In addition, case law suggests that
HMRC are generally reluctant to allow a wide interpretation of the exemption
described above. Further, we do not consider that the particular HMRC ruling
reviewed addresses the pertinent questions and issues that require answering.
5.7 We consider that the adoption of such a model is open to challenge technically
on a number of grounds.
5.8 Firstly the “primary purpose” of the relevant delivery vehicle must be
ascertained, and that primary purpose must fall within the specified list set out
above. Secondly if the entity has multiple aims (such as facilitating the sharing
of services amongst its members) then it is its main object that counts. The
primary purpose of the entity will be what its members consider to be the most
important matter it is seeking to achieve in return for membership subscriptions,
and in addition the professed purposes must be tested against what happens in
reality.
5.9 Further, the UK legislation refers to an “association” in certain cases, which
HMRC may allude to referring only to an unincorporated association as opposed
to corporate delivery vehicles. We consider that, although open to challenge
from HRMC, a corporate delivery vehicle would not necessarily offend the UK
legislation and neither would it appear to offend the European Directive.
5.10 Finally, the recipients of services must fall in certain cases as individuals as
opposed to corporate bodies under UK law (e.g. FE Colleges). This is the case,
for example, for the limb relating to the advancement of a branch of knowledge
or the fostering of professional expertise as referred to above. It is questionable
however whether the restriction of the recipient to an individual goes beyond the
overarching European Directive on which the UK legislation is based, but one
could expect challenge from HMRC and probable litigation.
5.11 We would be concerned that the aim of facilitating the sharing of services may
potentially overtake or supplant any primary purpose, in which case the
exemption could not be relied on (because the entity would not have as its main
purpose one of the items set out above). In addition we do not feel that this
route offers comfort to the most common issue facing members, that being the
ability for certain members to receive additional services for an additional fee
man_002\3527495\3 24 11 September 2012 whitesm
above the membership fee; the HMRC confirmation that we have seen simply
refers to additional services being made available at no charge. One solution to
this may be to implement some form of “tiered” membership structure (however
we think that any arrangements set up to allow members to “cherry pick”
specific services from a wider range would not fall within this exemption).
5.12 Any reliance on this route to VAT exempt service sharing should only be taken
forwards having first obtained direct confirmation from HMRC that such services
can be provided on a VAT exempt basis. In addition the relevant structures
should be carefully implemented in advance so as to ensure (as far as possible)
that the primary purpose of the delivery vehicle will fall within one of the stated
aims above (and will not be tainted by any wider purposes, such as service
sharing). Overall however, we consider that from a VAT angle this route is
subject to significant technical challenge.
5.13 Governance
5.14 If a members company was achievable then the advantages relate to ring
fencing risk, holding land and employing staff and are the same as for the
company limited by guarantee option. The disadvantages of a members
company are in terms of the need for SFA/YPLA consent, need for memoranda of
understanding etc are the same also. We are not so confident that SFA/YPLA
would consent to participation in a company that might have multiple aims as
well as service sharing.
5.15 As with the company limited by guarantee it would not be possible for a
member’s subscription company to be a joint committee under s.166 Education
and Inspections Act 2006.
5.16 Procurement
5.17 The comments on procurement issues for an incorporated company as set out in
paragraphs 3.11-3.14 will apply.
5.18 HR Issues/Pensions
5.19 The comments on HR and pension issues for an incorporated company as set out
in paragraphs 3.15 - 3.30 will apply.
5.20 Freedom of information
As with the company limited by guarantee, under current law a member’s
subscription company with several members would not be within the scope of
the FOIA but would come within it once the Protection of Freedoms Bill becomes
law. Each of the college and other public authority members of the company will
still hold their records subject to FOIA – even if they relate to the company.
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5.21 Data Protection
5.22 Where the new company is carrying out services on behalf of members, using
their records and personal data on their behalf, each member must be able to
show that the disclosure to the new company of those details is permitted by
data protection legislation and in particular is fair, lawful and justified.
5.23 Where the new company acts as a data processor (it uses a member’s personal
data on behalf of such member and as its instructs), it can undertake the same
use of a member’s personal data as such member can lawfully undertake.
However, each member must by law have in place with the company, the
mandatory terms for use with a data processor in a written contract. We
recommend the relevant terms exceed the minimum legal requirements in the
legislation in order to ensure members can comply with the expectations of the
data protection regulator, the Information Commissioner’s Office.
5.24 If, however, the new company acts as a data controller (it uses a member’s
personal data on its own account and decides what purposes to use it for) in
relation to the records and personal data of the members, it will be more
complex to ensure disclosure to it and use by it of those details is fair, lawful and
justified and permitted by the data protection legislation.
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6. ADDITIONAL COMMENTS
6.1 Joint Employment
6.2 HMRC have historically accepted that where staff are employed jointly between
two entities, and one entity re-charges costs to the other, no supply is treated as
taking place for VAT purposes. This has often been seen by third party advisers
as a way of sharing certain services in a VAT efficient manner, however recent
case law suggests that HMRC’s will look to considering a joint employment
contracts in great detail in order to ensure arrangements are real.
6.3 Such situations are most commonly seen where a charity jointly employs a
member of staff along with a wholly owned subsidiary of the charity. In these
cases it is generally accepted that the relationship between the two entities is
sufficiently close so as to say with some certainty that the staff member is under
the equal control of both.
6.4 However, for arm’s length arrangements, HMRC are more likely to (and in fact
do) challenge the availability of this joint employment treatment in order to
determine whether staff are in reality under the control of only one entity (for
example in the case of a service sharing arrangement, the service delivery
vehicle or an individual member).
6.5 VAT Grouping
6.6 We have considered whether members may share services within a VAT group
such that recharges are disregarded for VAT purposes. We do not feel that the
VAT grouping rules can help to achieve the desired objectives. A person needs
to “control” another in order to be eligible to form a VAT group. In a consortium
situation this would require one entity controlling all member colleges (e.g. an
umbrella organisation), which would in practical terms be very close to a full
merger of all member colleges.
6.7 Charity/Grant Funding
6.8 We have considered whether a charitable company can share services with its
members without incurring a VAT cost. We do not feel that a charitable
company, receiving grant funding from owner colleges, could treat its services
provided to owner colleges as falling outside the scope of VAT. (HMRC would see
the “funding” as consideration for the provision of taxable services, as opposed
to being a genuine grant).