Internal agreements not subject to procurement rules

Posted by Simon McCann on
The High Court has today decided that a Memorandum of Understanding between the Treasury and HMRC on one side, and National Savings and Investments on the other, to deliver the Government’s tax-free childcare scheme was not a public contract, and therefore not subject to the procurement rules. The judgment (by Mrs Justice Andrews DBE) also found that NS&I’s use of its existing “back-office” outsourcing arrangement with Atos was not a “material” variation which had to be re-procured.

The background was that the Treasury and HMRC made an agreement (set out in a Memorandum of Understanding) with NS&I to deliver the TFC scheme. They could have put this out to tender for delivery by a commercial operator, but took the view that it would save costs to deliver it within government. NS&I then proposed to deliver this by entering into a variation to its existing outsourcing contract with Atos. Edenred, which currently delivers part of the assisted childcare scheme (which is delivered via tax breaks to employers who part-fund childcare), challenged on the basis that –

  • The MOU between HMT, HMRC and NS&I amounted to a public contract which should have been tendered; and
  • The variation of the outsourcing contract between NS&I and Atos was a material variation to that contract which should have been tendered.

The Court however found that the MOU was not a public services contract because –

  • The Crown (i.e. the executive part of central government) is indivisible – i.e. it is a single legal entity. It does not matter that each of HMT, HMRC and NS&I are defined as contracting authorities – this deals with their relationships with external bodies such as private contractors, not internally with each other. In addition, HMRC was a non-ministerial department of HMT and NS&I was an executive agency of HMT – they were not legally distinct from it.
  • The definition of a “public contract” requires two separate legal entities. Two departments of the same body cannot therefore contract with one another.
  • The MOU was not a true contract since, whilst it was detailed and contained obligations on both parties, it could be “torn up in a day” without legal repercussions.

Therefore the arrangement was completely exempt from the procurement rules and the Court did not need to look at whether any exemptions applied (the Government had also argued that the “Hamburg” collaboration exception applied).

As regards the alleged variation of the contract between Atos and NS&I, the Court examined the original OJEU notice and found that it contained specific references to inclusion of further “business to business” support services for other government departments. It also allowed considerable “headroom” in the estimated value of the contract to allow for expansion in the services provided. The judge therefore found that this was a variation which was apparent to bidders at the time as forming part of the tender opportunity and so was not a material variation.

Edenred’s claim was accordingly dismissed on both grounds.

The judge made a number of comments (following the Court of Justice of the EU’s remarks in “Hamburg”) that government bodies have to be free to decide how best to use their own resources. It was clearly relevant that the proposed arrangement was intended to make large cost and efficiency savings and in the present economic climate, this case provides further support for shared service and similar innovative arrangements. 

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