Shared services involve public bodies identifying common functions that can be delivered more efficiently through a single shared service entity. FE colleges can benefit from cost savings, improved scalability, and competitive advantages through shared services. A company limited by guarantee is typically the best structure, providing limited liability and flexibility to hire staff and enter contracts. Setting up a shared services company requires establishing the corporate entity, transferring relevant staff and assets under employment law, and addressing pension and tax implications.

1. FE - Shared Services
1 Shared Services
1.1 Shared services are about encouraging public bodies to identify common functions within their own
organisation (or with other public bodies) and having those functions delivered as a single shared service
with greater efficiency. Functions range from fairly modest sharing of back office, admissions or internal
audit services through to more radical sharing of key assets and even shared educational provision.
1.2 The benefits of shared services for FE colleges include, amongst other things:
1.2.1 greater efficiency in service delivery and increased productivity;
1.2.2 cost savings;
1.2.3 improving the scalability of systems and gaining the ability to offer otherwise unsustainable
services;
1.2.4 gaining a competitive advantage; and
1.2.5 improving relationships with other institutions through cooperation, which could lead to further
collaboration in the future.
2 How can shared services be structured?
2.1 If two or more FE colleges wish to undertake shared services we suggest that they use a separate
corporate vehicle. Outline details of the various structures are detailed below. On balance, we suggest
that a company limited by guarantee is the most appropriate corporate structure. This has the advantages
of:
2.1.1 being a simple and well understood corporate structure for not for profit arrangements;
2.1.2 having its own legal personality, giving it the opportunity to hire staff and enter into contracts in
its own name as well as opening up a wider array of financing options;
2.1.3 giving the members the advantage of limited liability; and
2.1.4 operating on an arm's-length basis from both the customer and supplier organisations, making
it easier for a team dedicated to delivering the service away from the pressures of the
respective members.
2.2 Other structures include:
2.2.1 unincorporated associations - these have no legal personality and so there is a potential
problem with personal liability for the members of the management committee. This said, the
unincorporated association is very flexible and there would be no need to file information at
Companies House (ie Annual Returns and Accounts);
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2. 2.2.2 limited liability partnership (LLP) - the LLP may hold property and limit its liability but the
main problem is that every member is an agent and has authority to bind the LLP. It should
also be noted that there are potential limitations on the use of partnership structures in the
public sector.
2.2.3 company limited by shares - the company would have all of the advantages of a company
limited by guarantee but the drawback is the need for equity investment;
2.2.4 industrial provident societies - these give a wide membership an equal stake in the
organisation and an equal say in management and other affairs;
2.2.5 community interest companies - are vehicles for non-charitable social enterprises and must
satisfy a community interest test at formation and continue to do so for as long as it exists
which can somewhat limit what the entity may do.
2.3 There are limited situations in which very small scale shared services can be operated with no corporate
structure. For example, the joint employment by two colleges of an internal auditor. We suggest that the
joint employment structure is only suitable for very small scale and limited situations.
Given the fact that the company limited by guarantee is the most commonly used structure for shared
services, the remainder of this note focuses on this model. If you would like information on the alternate
structures we can provide further guidance.
3 What are the procurement issues?
3.1 One of the large advantages of shared service companies is that they enable, in certain circumstances,
public authorities to avoid the need to tender contracts publicly. This principle was established by the
European Court of Justice and is known as the Teckal exemption and the circumstances that need to be
met are that:
3.1.1 the service provider carries out the principle part of its activities with the relevant public body;
3.1.2 the public body exercises the same control over the service provider as it does over its own
departments; and
3.1.3 there is no private sector ownership of the service provider or any intention that there should
be any.
3.2 The reach of the Teckal exemption has recently been demonstrated in the Supreme Court decision in Risk
Management Partners v London Borough of Brent. The court allowed the exemption to apply where a
number of London boroughs joined together to form a captive insurance company. The court held that the
Teckal exemption will apply as long as the members collectively “control” the Company. It was confirmed
that “individual” control was not necessary for the exemption to apply. No injury would be caused to
European and UK policy objectives if public authorities were allowed to participate in the collective
procurement of goods and services, as long as no private interests were involved and they were acting
solely in the public interest in the carrying out of their public service tasks.
3.3 Care however needs to be taken when structuring such arrangements to ensure the narrowly construed
exemption will apply to any shared services vehicle. In particular the presence of significant private sector
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3. stakeholders or an intention to seek a substantial volume of income from private sector customers are
likely to mean the exemption would not apply.
4 What are the tax advantages?
4.1 There is the possibility that the member of the shared services company will be able to make VAT exempt
supplies. Broadly speaking, it is not the corporate form of the vehicle which determines whether the entity
will operate in a VAT exempt environment. Rather it is a question of whether the services which the entity
supplies can be fitted into one of the categories of VAT exemption.
4.2 In terms of VAT grouping this can only be applied to bodies corporate. VAT supplies are disregarded
when made between companies in a group. For a VAT group to exist one member of the group must
control all the others Therefore it is not well suited to a membership organisation with multiple parties,
none of which have overall control.
4.3 The most promising route to VAT exemption is via the exemption provided in Article 132(f) of the Principal
VAT Directive, which has direct effect in the UK although it is not currently provided for in UK VAT
legislation. This exempts from VAT the supply of “services by independent groups of persons, who are
carrying on an activity which is exempt from VAT or in relation to which they are not taxable persons, for
the purposes of rendering their members the services directly necessary for the exercise of that activity,
where those groups merely claim exact reimbursement of their share of the joint expenses, provided that
such exemption is not likely to cause distortion of competition”.
4.4 In the 2011 Budget, the Chancellor did nothing about the much-discussed VAT exemption for shared
services. Instead there was a brief notice which stated that “Consultations will continue on the options for
implementing the VAT cost sharing exemption into UK legislation”.
5 What are the corporate governance issues?
5.1 Some of the basic issues that will need to be considered will include:
5.1.1 who will be the members and how will they be represented?
5.1.2 who will be the directors and will each member have the right to elect a director?
5.1.3 can the same person represent a member entity as a director and a member?
5.1.4 under what conditions may a member leave the Company and in what circumstances must the
members resign?
5.1.5 how will conflicts of interests be dealt with between member entities and the Company itself?
5.1.6 will there be an additional members‟ agreement which would include contractual obligations
between the Company and its members to manage risk and govern the activities of the
Company?
6 What are the employment issues?
6.1 The movement of activities from member colleges to the shared services company will be subject to the
provisions of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (“TUPE”).
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4. 6.2 TUPE will operate to transfer to the shared services company those employed by each member college in
relation to the services to be delivered by the company. Identifying who this applies to will be more
complex for those employees not wholly involved with the transferring services. In addition, staff seconded
by a college employer to the shared services company could still be caught by TUPE even though their
employment apparently remains with the college.
6.3 TUPE operates to transfer automatically to the shared services company all the terms and conditions of
the transferring staff (with the exception of certain pension provisions – see further below) and all rights
and liabilities in relation to them (except criminal liabilities). The effect is that the shared services company
will step into the shoes of the relevant college employer and will be treated as having always been the
employer of the transferring staff.
6.4 The member colleges and the shared services company will have to fulfil their respective obligations to
provide particular information to trade unions or staff representatives and, in certain circumstances, will be
statutorily obliged to consult with trade unions or staff representatives. In order to help effect a smooth
transfer and manage industrial relations it is good practice in any event to consult with transferring staff
and recognised trade unions in relation to the transfer.
6.5 Although TUPE affords broad protection to affected staff, this will not prevent the shared services
company, with proper reason, following a fair procedure to reorganise and restructure staffing
arrangements or to implement redundancies to effect cost efficiencies. Member colleges should give
thought to how the shared service company‟s costs relating to such action will be funded.
6.6 When entering this sort of shared services arrangement, member colleges should not only consider how
the liabilities for transferring staff should be manage and apportioned but should also look to the future and
consider how staffing responsibilities and liabilities will be managed when any college decides to exit from
the shared services company.
7 Are there any pension issues?
7.1 It is likely that the member colleges‟ existing staff who will transfer to the shared services company will
already be members of the LGPS or TPS. Most employees are, understandably, sensitive about the
preservation and continuation of valuable pension rights when their employment is transferred.
7.2 It is possible that the LGPS will grant admitted body status to the shared services company, in which case
the shared services staff‟s membership of LGPS will continue, with the company making contributions to
the scheme.
7.3 If the shared services company is to include education provision, for any teachers moving to the company
continuing membership of the TPS might not be permitted by the TPS Regulations; this point should be
explored with Teachers‟ Pensions. A denial of TPS membership for the shared services company would
mean either not employing teachers through the company or providing them with relatively expensive
private sector pensions to compensate for their exclusion from the scheme (see below).
7.4 For those employees who move to the shared services company but do not remain active members of the
LGPS or TPS, under TUPE the shared services company has an obligation to provide at least specific
minimum pension arrangements. It is likely, however, that the transfer to a shared services company will
be caught by specific rules relating to public sector transfers which require the shared services company to
provide the transferring staff with a broadly comparable pension entitlement to the one which they enjoyed
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5. with their college employer. This is part of the „Fair Deal‟ policy, which could be revoked following review
by the Government.
7.5 In relation to the LGPS, the ultimate disbanding or winding up of the shared services company could
trigger a charge for any accrued deficit.
8 How do I set up a shared services company?
8.1 Setting up the company itself would be a fairly simple process. As with any company, the application to
register will need to be filed (form IN01) along with the Memorandum and Articles of Association and the
filing fee. These will be submitted to Companies House. The incorporation should take less than a week
and an additional fee can be paid for incorporation on the same day of receipt of the relevant paperwork.
8.2 The Colleges should also agree a members‟ agreement between each of the members to clearly set out
their rights and responsibilities as members of the Company.
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