In the current economic climate, Registered Social Landlords (RSLs) are looking to make savings in their procurement processes in any way that they can. Many of our RSL clients have subsidiary companies which can carry out work on their behalf and for third parties. Where an RSL and its subsidiary are members of a VAT group, significant savings may be made. So how should you contract with your subsidiary?

Although a subsidiary is a separate entity and, as such, contracts between the parent and the subsidiary should be caught by the Public Contracts (Scotland) Regulations 2015 (the 'regulations'), the regulations provide that such an arrangement is exempt where:

1. The parent exercises control over the subsidiary similar to that which it exercises over its own departments (the 'control test');
2. The subsidiary carries out more than 80% of its activities for the parent (the 'function test'); and
3. There is no 'private' ownership in the subsidiary.

Control

Features of this test include:

• The parent's control is similar to that which it exercises over its own departments;
• The parent is able to influence the subsidiary's decisions; case law has found that this test is not fulfilled where the control is comparable to the influence a majority of shareholders would have over the company i.e. something more is required to satisfy this test than the parent simply holding the majority of shares in the subsidiary company, e.g. the parent is entitled to nominate board members;
• If the parent's involvement is through a holding company, this may dilute the control exercised by the parent.

Function

The regulations provide that more than 80% of the subsidiary's activities must be for the parent. In other words, the subsidiary is devoted principally to servicing the parent, and any other activities are only of marginal significance.

Other Contracts

Provided the relationship between the members of the group fall within the above parameters, contracts awarded by the subsidiary to the parent, or between sister subsidiaries, are also exempt.

Conclusion

Where the tests are met, the regulations look upon the arrangement as the parent effectively carrying out work for itself, and as such, the regulations do not apply.

If you are considering how to improve the ways in which you contract with your subsidiary, please contact our team for more information or advice.