When do the UK public procurement rules apply?

Public Authorities and Public Undertakings under the Procurement Act 2023

The Procurement Act 2023 (the Act) came into force on 24 February 2025. It sets procedures to try and ensure public sector contracts are awarded in a fair and transparent way.

In most cases, it will be obvious whether or not a public body needs to comply with the Procurement Act or not. For example, a central government department is exactly the type of body the rules are intended to capture. But the UK’s unique constitutional structure can create uncertainty at the margins.

What does the Procurement Act say?

It says that the Act’s procurement obligations apply to “Contracting Authorities”. The definition of Contracting Authority then lists two categories of bodies that covers:

public authorities (for all of their contracts); or
public undertakings or private utilities (but only in relation to their utilities contracts).

The Act exempts certain bodies from needing to comply with it. This includes (for example) the intelligence agencies, or certain Scottish public bodies (who follow separate rules). This guidance note focuses on public authorities and public undertakings, and the difference between them.

What is a public authority?

The Procurement Act’s two-stage test for deciding whether a body is a “public authority” is whether it is:

wholly or mainly funded out of public funds, or is subject to public authority oversight; and
does not operate on a commercial basis.

Although this legislation is fairly new, Government guidance notes that there is “no intended or implied change in the scope of entities covered” compared with the previous regime, and that bodies will need to consider their own structure, oversight, funding and commercial circumstances to determine whether they meet the test for a public authority.

Previous UK and EU cases can provide some helpful guidance on what these tests might mean.

Limb 1 (first part): Wholly or mainly funded out of public funds

This test is similar to previous EU requirements that procurement rules apply to bodies “financed for the most part by the State”. An EU case from 2000 held that this included awards or grants but doesn’t include financing provided in return for something (such as a contract for research). The term “for the most part” meant “more than half” and should be assessed annually.

Government guidance gives four examples of what “public funds” might mean:

in the case of local authorities, from the revenue support grant, council tax and non-domestic rates;
in the case of museums and galleries, from the Arts Council;
in the case of arm’s length entities, from the sponsoring department; or
in the case of local authority companies, from the local authority itself.

Limb 1 (second part): Subject to public authority oversight

The Procurement Act clarifies that “a person is subject to public authority oversight if the person is subject to the management or control of:

one or more public authorities, or
a board with more than half of members appointed by one or more public authorities.”

This is similar to the old EU test that bodies be subject to management supervision by the State, regional or local authorities, or by other bodies governed by public law. It also covers bodies with an administrative, managerial or supervisory board where more than half of the members are appointed by those authorities.

An EU case from 2001 clarified that, in relation to management supervision, a key test was whether the controls in place render that body dependent on other public authorities in such a way that the latter are able to influence their decisions in relation to public contracts.

Limb 2: Does not operate on a commercial basis

The Procurement Act sets out three examples of factors to be taken into account when deciding whether a body operates on a commercial basis:

whether the person operates on the basis that its losses would be borne, or its continued operation secured, by a public authority (whether directly or indirectly);
whether the person contracts on terms more favourable than those that might reasonably have been available to it had it not been associated with a public authority;
whether the person operates on a market that is subject to fair and effective competition.

This is similar to the old EU test that, to be bound by public procurement law, the body should be “established for the specific purpose of meeting needs in the general interest, not having an industrial or commercial character.”

The logic for this was that a body that operates in normal market conditions, aims to make a profit, and bears the losses resulting from the exercise of its activity should not have to comply with the public procurement regime. An EU case from 2003 clarified that, when deciding whether a body had an “industrial or commercial character”, account must be taken of the circumstances when (and why) the body was formed and the conditions in which it operates.

Government guidance also clarifies that, when determining whether a body operates on a commercial basis, “it may also be relevant to consider the intended purpose of the entity”. This could include “if the entity was established with, or has a substantial purpose of, providing a service in the public interest e.g. to provide social housing, even though it may have a commercial side too. If so, this could mean that the entity is not operating on a commercial basis in the true sense of the term”. The guidance also notes that “[c]onversely, entities established or operating for a commercial purpose, such as local authority trading companies…are likely to be competing on the open market in all areas of their business and therefore are likely to fall within the meaning of operating commercially under the Act”.

If a public body is operating on a commercial basis, it will not be a “public authority” and so will not be within the scope of the Procurement Act – unless it is a public undertaking.

Public undertakings

In addition to “public authorities”, public undertakings and private utilities are also bound by the Procurement Act – but only in relation to utilities contracts.

Difference between a public undertaking and a public authority

A “public undertaking” is a body that is both:

subject to public authority oversight; and
operates on a commercial basis.

The main difference between a public undertaking and a public authority is therefore that a public undertaking operates “on a commercial basis” (as explained above).

For a public authority, it also doesn’t matter whether it is subject to public oversight by another public authority, so long as it is “wholly or mainly funded out of public funds”. But the “public funds” test doesn’t apply to public undertakings – to meet the first limb, the sole test is the “public authority oversight” test.

The big difference in obligations between a public authority and a public undertaking is that the latter is only bound by the Procurement Act’s requirements when it is procuring a utilities contract (rather than all its procurements).

What is a utilities contract?

The Procurement Act defines a 'utilities contract' as “a contract for the supply of goods, services or works wholly or mainly for the purpose of a utility activity”. The definition of “utility activity” is set out in more detail in section 6 and Schedule 4. In summary, it covers certain activities relating to gas and heating, electricity, water, transport, ports and airports, and oil and gas. To be a “utility activity”, the activity should not be carried out wholly outside the UK.

An obvious example of a “utility activity” would be operating a network to supply gas and/or heat to the public. A contract that seeks (for example) to build or maintain piping relating to that network would constitute a “utilities contract”, since it would be a contract entered into wholly or mainly for the purpose of a utility activity.

But take, for example, a public undertaking seeking to award a contract to furnish its offices, or for a HR platform. These would not be contracts wholly or mainly for the purpose of a utility activity, so the Procurement Act would not apply to them.

Next steps

In most cases, it will be obvious whether a body is a public authority or public undertaking. But there can be real uncertainty at the margins, especially for bodies only partly government-funded, that operate at arm’s length or operate for profit.

The consequences of getting it wrong can be serious. Not running a compliant tender process when this was a requirement could (at worst) render the entire contract ineffective and/or require payment of damages to those that have lost out.

At TLT, we have worked with a number of clients to fully understand their status under the Procurement Act and to establish their procurement strategy and governance to both support compliance and to drive efficiency and value for money from their procurement operations.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at May 2026. Specific advice should be sought for specific cases. For more information see our terms & conditions.

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