eversheds report - september 2102

man_002\3527495\3 11 September 2012 whitesm

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

man_002\3527495\3 2 11 September 2012 whitesm

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


‎4.27 Data Protection ............................................................................. 21

‎5 MEMBER’S SUBSCRIPTION COMPANY .......................................................... 22

‎5.13 Governance .................................................................................. 24

‎5.16 Procurement ................................................................................. 24

‎5.18 HR Issues/Pensions ....................................................................... 24


‎5.21 Data Protection ............................................................................. 25

‎6 ADDITIONAL COMMENTS ........................................................................... 26

‎6.5 VAT Grouping ............................................................................... 26

‎6.7 Charity/Grant Funding ................................................................... 26


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


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


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


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.


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.


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


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,


“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


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


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


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


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


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.


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.


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


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.


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


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.


4.26 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


held by the consortium – and in any event, all their own records would be

deemed held on their behalf by the consortium.


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.


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.”


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


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.


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.



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.


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).

eversheds report - september 2102

Education

sharing of services

procurement issuesseptember

sharing of certain

house services

vat grouping

vat exempt basis

legal functions

uk law