Internal or 'captive' companies

An internal company set up by the institution to provide a service could be thought of as falling somewhere between a bought-in service and an in-house service. In legal terms, relationships between the parties should be the same as for a bought-in service.  A written contract, supplemented by a SLA would accordingly be required between the institution and the captive company.

However, in practical terms the captive company may adopt the role of an internal service provider, in which case the relationships and responsibilities may be more akin to those described under "In-house Services".  In essence the relationship will depend on whether there is any (no matter how small) external influence or control on the service provider by an external body:

  • If the institution uses its own administrative, technical and other internal resources to carry out the in-house service and it exerts the same controls similar to that which it exerts over its own internal departments, then it will be exempt from the public procurement rules. If, however, there is any involvement in the equity share capital by a private undertaking [regardless of how small the percentage] or it has any ability to influence, control or veto the actions of the captive company this will invalidate the ability of the institution to claim exemption under the public procurement legislation. The requirement would then have to be advertised and awarded under the procurement rules.

The decision to create a captive company to deliver a service should not be taken without carefully considering the following points:

  • Is the value of the service over the PCR services threshold?
  • Should VAT be added if charges are made for the service?  If no VAT charge is made, the institution could be subject to legal challenge.
  • Why create a captive company if an existing commercial supplier could provide the service?  The quality, cost and overall value for money of the service provided by the captive company must at least equal what is available from a commercial supplier.