Peter Ware, Partner

The Procurement Act 2023: One year on — what does it mean for Local Authority Companies?

The Procurement Act 2023 came into force in February 2025, and one year on, its implications for local authority companies are still working their way through governance structures and legal frameworks. The Act arrives at a critical moment: insourcing is firmly back on the agenda as councils grapple with financial pressures, the high-profile failures of arm's length vehicles have sharpened political and public scrutiny, and questions about value for money and accountability are louder than ever. Whether an authority is maintaining, rationalising, or reconsidering its company portfolio, understanding what the Act demands, and what it enables, is no longer optional.

A mixed landscape

Generally, the story of LACs over the past decade has been one of genuine ambition and, at times, painful failure. High-profile collapses such as Brick by Brick (Croydon's housebuilding venture) and Robin Hood Energy (Nottingham City Council's energy supplier) have underscored the very real risks that come with poor decision-making at the point of establishment and in the ongoing governance of these entities. Significant public money has been lost, and reputational damage has been considerable.

Yet the picture is not uniformly bleak (or generally bleak!). Companies such as Norse Group and Scape Group have demonstrated that, when well governed and strategically focused, LACs can deliver genuine public value, drive efficiency and provide services at scale that individual authorities simply could not achieve alone.

This mixed landscape has prompted many councils to fundamentally rethink their relationship with their company portfolios, some insourcing, some closing vehicles altogether, and others turning to the private sector. It is entirely the right moment to be asking these questions.

The Procurement Act and the Teckal Exemption

For those authorities that do maintain LACs, particularly shared service vehicles rather than trading companies, the Act introduces important changes that require attention. The vertical arrangement exemption (the codified successor to the "Teckal" exemption) permits direct contract awards to a controlled entity without competitive tender, but only where strict conditions are met.

Crucially, the Act further codifies arguably tightens those conditions. The controlled entity must pass an 80% activity test, calculated by reference to attributable turnover over a rolling three-year period. Where a company has diversified its income streams, perhaps by design, to improve financial sustainability, it may now find itself at risk of falling outside the exemption. Authorities should be stress testing their companies' turnover profiles against this threshold as a matter of routine.

The Act also introduces an important anti-avoidance provision: where a commercially operating LAC benefits from an exempted contract, any relevant sub-contract it lets for the purpose of performing that contract must itself comply with the Act's procurement requirements. Authorities need to ensure their companies understand this obligation and have procurement frameworks in place to discharge it.

Finally, private shareholding of any kind is an absolute bar to the exemption. Any LAC with even a minority private partner must look to alternative procurement routes.

What should authorities be doing now?

For authorities maintaining shared service LACs, the immediate priorities are clear: audit the company's activity split, review its governance arrangements, and ensure sub-contracting obligations are understood. The Act has not closed the door on LACs, but it has shone a fresh light on compliance.

Looking ahead: the next 12–24 months

The Act is one year in, but its full implications are still crystallising. Key pinch points to watch:

• The 80% threshold is becoming a live risk. As LAC income profiles shift, the rolling three-year turnover test will increasingly move from theoretical concern to active compliance issue. Build reviews into governance calendars.
• Sub-contracting will face greater scrutiny. Practical understanding of the Act's anti-avoidance provisions within LAC management teams is inconsistent, and internal audit and external challenge are likely to intensify.
• Insourcing carries its own legal risks. Authorities that restructure without properly reconstituting their company arrangements risk creating unlawful direct awards.
• Private shareholding must be avoided. Where LACs consider external investment, the absolute bar under the Act means direct award arrangements are not sustainable and so different arrangements will be necessary.

Conclusion: The strategic stakes

The Act has raised the bar, and the consequences of falling short are serious procurement challenge, contract voidance, and reputational exposure at a time when public confidence in local government spending is already under pressure.

Compliance is only the floor, not the ceiling. The biggest risk is complacency; the biggest opportunity is using this moment to build arm's-length structures that are leaner, better governed, and genuinely aligned with strategic ambitions. The question is whether authorities are ready to have that conversation.

Written by Peter Ware, Browne Jacobson March 2026