Setting up a trading company

Partnership iStock 000006695073XSmall 146x219Philip Roberts examines some of the key legal issues that local authorities need to consider when setting up a trading company.


The Chancellor's u-turn on tax credits and police service cuts may have grabbed the news headlines but the Autumn Spending Review 2015 still does not disguise the fact that local authority budgets are continuing to shrink in size. Against this backdrop councils are looking at entrepreneurial ways of generating additional income. One important option is to sell services commercially through a trading company.

Vires

One of the initial considerations is whether the council has the necessary legal power to establish and operate a trading company. There are a range of potential powers that could be relied upon to do this, depending on the nature of the anticipated trading activity and client base.

In certain circumstances, depending on the power being relied upon, there may be a legal requirement for the trading activity to be carried out through a company. However, even where there is no such legal requirement, there may be other reasons for setting up a company, eg ring-fencing liability, streamlined decision-making processes or the creation of a distinct trading brand.

Legal form and corporate issues

Although typically referred to a trading "company", there are a number of legal forms that could potentially be adopted, each of which brings different advantages and disadvantages.

Common legal forms include:

  • Companies limited by shares;
  • Company limited by guarantee;
  • Community benefit society;
  • Community interest company.

Other corporate considerations are likely to include whether single or multiple companies should be established and whether there will be a holding company. Consideration will also need to be given to the extent of control by the council over the company, including the role of members.

Finance

A key issue for the trading company will be its source of working capital and any other financial requirements owing to the nature of the trading activities. Due consideration should be given to whether the council would be prepared to on-lend any general fund prudential borrowing. The effect of the prudential borrowing on the council's balance sheet would need to be signed off as complying with the Prudential Code by the Council's s.151 officer. Any loan arrangements would have to be framed so that they do not amount to state aid.

State aid

The process for establishing the trading company is likely to involve the transfer of premises and assets from the council to the company. The council may also provide some services to the company, such as IT, HR or finance.

Any such support must be provided in accordance with State aid requirements. Commercial competitors will be looking closely at the impact of the company's activities on their market share and will be alive to any public support that appears to give the company an unfair advantage.

The most straightforward way of ensuring State aid compliance is for any council support to the company to be provided on a commercial basis. However, where the support is being provided at no cost or on non-commercial terms, there are a range of potential exemptions that could potentially be relied upon, in particular the De Minimis exemption and the General Block Exemption Regulation.

Procurement

Procurement could be relevant in a number of different ways.

Is it intended that the company will sell services to the council? Any such arrangement could be subject to the procurement regulations, which could trigger the requirement for the council to conduct a tender process. It is possible, however, for the council to avoid a tender process if the "in-house" exemption can be relied upon. This exemption (sometimes referred to as the "Teckal" exemption), involves a number of tests regarding the activity, control and ownership of the company.

It is also possible that the procurement activities of the company itself (ie any contracts for services, supplies or works that are awarded by the company) may be caught by the public procurement regime. Careful analysis will be required to determine whether the company falls within the definition of a "contracting authority" which would potentially bring it within the scope of the public procurement regime.

Staff

Where the trading company is staffed by existing council employees, there is the possibility of a TUPE transfer. In addition, the Cabinet Office Statement of Practice on Staff Transfers in the Public Sector (COSOP) may apply, which gives rise to further issues, in particular "Fair Deal" pensions considerations, which entitle the transferring employees to pension protection.

Philip Roberts is a commercial associate at TLT. He can be contacted on 0333 006 1057 or This email address is being protected from spambots. You need JavaScript enabled to view it.