Public Contracts (Amendment) Regulations 2022

Baroness Bloomfield of Hinton Waldrist Excerpts

Tuesday 13th December 2022 Grand Committee

Moved by

[Baroness Bloomfield of Hinton Waldrist]

That the Grand Committee do consider the Public Contracts (Amendment) Regulations 2022.

[Baroness Bloomfield of Hinton Waldrist (Con)]

My Lords, these regulations, which were laid before the House on 8 November, have two functions. First, they amend the domestic public procurement regulations to ensure that changes in calculation of VAT in the valuation of contracts do not place undue burdens on contracting authorities. Secondly, they will ensure that NHS trusts and NHS foundation trusts are treated consistently for the purpose of applying certain obligations which promote transparency.

Public procurement in the UK above certain financial thresholds is currently regulated by the procedures laid down in the Public Contracts Regulations 2015, known as the PCRs. These financial thresholds are set down in the World Trade Organization’s Agreement on Government Procurement, known as the GPA, and are revised at international level every two years to take account of currency fluctuations. Those revisions are subsequently implemented domestically, by amendment of the PCRs, to ensure that the UK complies with its obligations under the GPA. These thresholds for regulated public procurement are not altered by this SI.

The PCRs also outline specific, less prescriptive procedures for public procurement carried out below these thresholds in order to facilitate access to public procurement for SMEs. This takes place by requiring opportunities to be advertised on a portal called Contracts Finder and by prohibiting assessments of suitability where they are used to narrow the field, rather than as part of the assessment of bids. Below-threshold regulation also improves transparency by requiring the publication of details of the contract published. The thresholds are currently £10,000 for central government bodies, known as central government authorities, and £25,000 for wider public sector bodies, known as subcentral authorities.

This SI will implement changes only to the lower-value thresholds in the PCRs and therefore only impact on the regulation of lower-value contracts. The amendments are necessary in order to address the impact of the new requirement to include VAT in the assessment of contract value. The change to how VAT is considered in estimating the value of a contract is a result of the UK joining the GPA as an independent member following EU exit. When the UK was a member state of the EU, it was obliged to adopt the EU’s methodology for calculating the estimated value of contracts. The EU’s thresholds included a 13% unilateral VAT reduction agreed upon in 1987 as a solution to a dispute with the United States. As such, contract values were to be calculated exclusive of VAT. This was, and remains, an internal EU measure which it is no longer appropriate to apply in the UK now we are an independent member of the GPA. Last year, we therefore amended the 2015 regulations, such that contracting authorities are now required to include VAT in the estimation of contract values for the purposes of establishing whether a contract is above or below the threshold.

To ensure a consistent approach, this change was applied to all thresholds in domestic procurement regulations, including the lower thresholds. While the upper thresholds were increased to make allowance for this, the lower thresholds were not, which in effect has resulted in a reduction to those thresholds. This instrument will rectify this discrepancy by raising the lower thresholds for central government authorities from £10,000 to £12,000 and for subcentral authorities from £25,000 to £30,000. This will ensure the thresholds effectively remain the same once contract values are calculated inclusive of VAT, thus avoiding bringing additional low-value contracts within scope of the below- threshold regime.

Turning to the second function, this instrument also provides that NHS foundation trusts are to be treated consistently with NHS trusts and be regarded as subcentral authorities. By way of background, for the purpose of the below-threshold regime, subcentral contracting authorities, such as local authorities, are subject to the higher of the two contract value limits for the purposes of publishing notices on Contracts Finder. NHS trusts are considered central government authorities, being listed on Schedule 1 to the PCRs; however, following consultation it was agreed that NHS trusts would sit alongside subcentral authorities in applying the higher value limit to below-threshold procurement and this is reflected in these regulations. At the time, the term “NHS trusts” was taken to mean all NHS trusts, including foundation trusts.

NHS foundation trusts were added to Schedule 1 to the PCRs last year as a category distinct from other NHS trusts. The unintended consequence was that NHS foundation trusts must now follow the lower contract value limit of £10,000 in respect of publishing notices on Contracts Finder.

This has caused confusion within the NHS, particularly because NHS foundation trusts, being semi-autonomous organisational units within the NHS, were established to have more financial and managerial freedom than classic NHS trusts. It is therefore seen as inappropriate that they should be held to the central government threshold for publication when NHS trusts are not. This amendment will rectify that by applying the same threshold to NHS foundation trusts as is currently observed by NHS trusts.

There is no impact on the Procurement Bill; having just seen that Bill through its Third Reading, I am pleased to be able to say that. This SI simply amends the existing legislation. The regulation of below-threshold procurement in the Procurement Bill is intended to continue the position that will be reached by this SI and will set the lower value limits at £12,000 and £30,000 respectively.

I commend these regulations to the Committee and beg to move.

[Baroness McIntosh of Pickering (Con)]

My Lords, I welcome this opportunity to raise an issue that arose during the passage of the Procurement Bill through the House. I congratulate my noble friend the Minister on introducing the regulations before us, which I support.

All I seek is an assurance and confirmation from my noble friend that, with these limits being lower than the limit to which we are subscribed under our independent membership of the GPA, produce from local growers, farmers and agricultural producers will be accepted in preference to those coming from the EU or other countries. Basically, it is about trying to support home-grown food and our farmers as they embark on a more sustainable way of farming.

I understand that, because the Procurement Bill is very specific, we are signed up in the same way as we were to the EU’s thresholds when we were part of it and cannot bid for such contracts over $136,000. Can my noble friend commit to the fact that we will be able to encourage our farmers to supply local hospitals, as in this case, but also military defence establishments, schools, prisons and all other public procurement contracts to ensure that we source more of our food for these establishments locally than has previously been the case?

[Baroness Chapman of Darlington (Lab)]

This is really just about making a change in order to keep things the same. We certainly agree with the decision about NHS trusts and foundation trusts but I have a question about services or goods that are VAT-exempt and the Government’s thinking on them. There also seems to be a delay in this issue coming about and it being rectified. I wonder whether that may has disadvantaged some businesses, particularly small businesses, over that period.

I notice that, when consideration of this instrument was raised in another place, my colleague, Flo Eshalomi, asked specifically why it has taken the Government nearly a year between introducing the new regulatory scheme on 1 January 2021 and attempting to fix this inconsistency. When the Minister responded, he did not answer that at all. I am concerned, as it is troubling that something so straightforward and uncontentious was allowed to drift for so long. What does the Minister make of that? Does she have an assessment of what the impact of that might have been?

[Baroness Bloomfield of Hinton Waldrist (Con)]

I am grateful to all noble Lords who spoke in this short debate. I will answer the noble Baroness, Lady Chapman, first. I do not have a satisfactory response to her question about why this instrument was not laid sooner. We simply laid it as soon as parliamentary time allowed. I recognise that, as that was almost a year, this is not entirely satisfactory.

My noble friend Lady McIntosh asked about farmers. I applaud her commitment to the farming community. I assure her that the principles of non-discrimination still apply to below-threshold contracts. This does not have a bearing on procurement from the farming community, as such. She raised those issues very effectively during the debates on the Procurement Bill; I am sure that they will continue to be discussed as that Bill goes through the other place.

The noble Lord, Lord Scriven, asked about exemptions from VAT and about asterisks. I am told that asterisks are typical and that the SI will come into force in line with the articles in it—basically, as soon as it has been signed.

On the question about VAT from both the noble Baroness, Lady Chapman, and the noble Lord, Lord Scriven, there are two reasons why we use 20% as standard. It aligns the methodology for estimating contract values for the purpose of applying thresholds with GPA parties, such as Japan and the USA, which are not part of the EU and therefore do not have the EU 13% VAT reduction that was agreed in 1987. Also, when contracting authorities are estimating their contract values, the £10,000 threshold will no longer be reduced to £8,333.33, assuming a 20% VAT rate is applied. That is why we are raising the thresholds to £12,000 and £30,000 respectively: it maintains the lower threshold at £10,000 before 20% VAT is added, taking the value to £12,000; and similarly £25,000, before 20% VAT is added, taking the value to £30,000. We are aware that VAT is not always set at £20,000 but it will not be less than this figure, hence why we assume this rate.

In short, as I have said, the instrument makes two brief but important corrections to the regulations governing the below-threshold regime. It will adjust the lower-value procurement thresholds upwards to reduce the burden on contracting authorities and ensure that NHS foundation trusts are placed on an equal footing with NHS trusts in respect of the application of these thresholds. The changes to the lower thresholds will be made under the affirmative procedure using the powers in Section 39 of the Small Business, Enterprise and Employment Act. This regulation-making power permits the Minister for the Cabinet Office or the Secretary of State to

“impose on a contracting authority duties in respect of the exercise of its functions relating to procurement.”

I am grateful for noble Lords’ support for this statutory instrument; I commend it to the Committee.

Motion agreed.