Drift, Not Decision: Keeping the Teckal Exemption Honest as a Delivery Company Grows

A council sets up a company to run its leisure centres, its waste fleet or its building maintenance. The company is wholly owned, the directors are appointed by the authority, and the first suite of contracts is signed without a competitive process on the strength of the Teckal exemption. Five years later the company has a growing list of external customers, a board that guards its commercial independence, and a legal file containing nothing more recent than the original advice. Nothing has been decided against the exemption — it has simply been allowed to drift.

That pattern is common, and it is the reason the exemption deserves periodic, structured attention rather than a single sign-off at incorporation.

The test is continuous, not a milestone

The in-house exemption derives from Teckal (C-107/98) and is now expressed in regulation 12 of the Public Contracts Regulations 2015 for procurements under the old regime, and in the vertical arrangement provisions of the Procurement Act 2023 for those under the new one. The architecture is the same in both: the authority must exercise control over the provider similar to that which it exercises over its own departments, and the provider must carry out the essential part of its activities for the authority — or authorities — that control it. There must also be no private participation in the provider's capital.

Each of those conditions is stated in the present tense. They describe a relationship that must hold at the moment a contract is awarded, not a status conferred at incorporation and retained indefinitely. A company that satisfied the test in 2019 may not satisfy it in 2026, and the authority will not necessarily notice.

Control has to be felt, not just written

Control is frequently confused with ownership. A 100 per cent shareholding is necessary but not sufficient. What the case law asks is whether the authority exerts decisive influence over the company's strategic objectives and significant decisions — through board composition, reserved matters, budget approval, the appointment and removal of directors, scrutiny arrangements and the ability to direct how services are delivered.

Two failures recur. The first is a company whose constitutional documents confer genuine discretion on the board — a business plan it may amend, investment decisions it may take without consent, a remuneration policy it sets — so that ownership exists on paper but control does not exist in practice. The second is the opposite: an authority that controls so tightly and informally, through officer-level instructions and off-record pressure, that the arrangement looks defensible in reality but cannot be evidenced in a document. A review, or a challenge, deals in documents.

A useful discipline is to ask, for each significant decision the company can take, whether the authority's consent is required and where that requirement is recorded. If the answer depends on custom and practice, the control condition is resting on something more fragile than it should.

The activity threshold and the commercial temptation

The second condition is quantitative as well as qualitative. The regulations express the essential-part requirement through a threshold of at least 80 per cent of activities carried out for the controlling authority or authorities, and the 2023 Act retains an equivalent activity test for vertical arrangements. The measure is ordinarily turnover, though cost, headcount or hours may be more informative where pricing is not at arm's length.

This is where growth bites. A company established to serve one council, which then wins work from a neighbouring district, a combined authority, an NHS body or a private developer, is doing exactly what a trading company is expected to do — and is simultaneously eroding the basis on which its original contracts were awarded. Work for authorities that do not control the company will count against the threshold; even work for an authority within the same group requires care in how the control relationship is structured.

The arithmetic matters, but so does the measurement method. A single year's figures can flatter or distort the position. What a review should test is the trajectory: current percentage, forecast percentage at the end of the business plan period, and sensitivity to the loss of a major in-house contract. A company at 82 per cent with a growth strategy aimed at external markets is not in the same position as a company at 95 per cent with no such strategy.

No private participation means none

Private capital in the company — including minority stakes, joint venture structures and, in some cases, employee ownership arrangements — will generally defeat the exemption outright. Where a company is contemplating investment, a commercial partner or a share structure change, the procurement consequences should be assessed before the transaction, not after.

Making the documents match the position

Exemption positions are lost in the gap between how a relationship operates and how it is described. Service delivery agreements, shareholder agreements, articles of association, delegations, business plans and change-control procedures should all be consistent with one another and with the conditions relied on.

The practical points are rarely glamorous. Contracts between authority and company should record the control mechanics and any exclusivity that supports the activity calculation. Reserved matters should be drafted to bite. Board reports should carry the activity percentage as a standing metric rather than an annual retrospective. A register of exemptions should exist, identifying each contract awarded in reliance on the exemption, the legal basis and the review date. Where a company is permitted to pursue external work, the authority's consent should be conditioned on the threshold being maintained.

What a defensible review looks like

Before a delivery vehicle takes on a new class of customer, a new revenue line or an investment partner, a review should be able to demonstrate the following.

• A current, documented calculation of the activity percentage, with the method explained and the source data retained.
• A forward projection across the business plan period, including downside scenarios.
• A documented assessment of control, mapped to the constitutional and contractual documents that deliver it.
• Confirmation that no private participation exists or is proposed.
• Board and audit committee consideration, minuted, with the legal advice recorded.
• A contingency plan — compliant procurement, restructuring, or a decision not to proceed — if a condition cannot be maintained.

None of this is onerous in proportion to the risk. The alternative, discovered during an audit, a challenge or a transition, is a set of contracts awarded without a compliant route to market and a company that must either be reined in quickly or procured properly.

The point of the exercise

The Teckal exemption is not a badge. It is a description of a relationship that has to remain true. Authorities that treat it as a live governance question — measured, minuted and revisited before each commercial step — keep both the flexibility and the audit trail. Those that treat it as settled tend to find out otherwise at the least convenient moment.

This article provides general guidance and does not constitute legal advice on any specific arrangement. Authorities and companies should take advice on their own facts before relying on an exemption.