Tax Strategy and Planning: What are the latest issues impacting the care sector?

Where do you see the opportunities for businesses in the care sector in terms of tax exposure?

Scott Harwood re VAT opportunities:

For care home providers, the restructuring scheme is now well known, where you can convert your business from providing tax exempt welfare services to taxable services so you can reclaim your input costs/VAT tax. The sector has become more comfortable over the last 5 years and seen greater uptake, with HMRC getting comfortable and many schemes being signed off provided they aren’t pushing the boundaries. Good planning with full sight of HMRC can provide real benefit for the sector.

Also seeing a lot around the VAT costs around temporary workforce. Even if you do the restructuring scheme, quite often you have a largely VAT exempt business for self-funded individuals, so mitigating VAT costs remains essential. Lots of opportunities for care operators, eg to reduce the cost of temporary staff by using direct engagement models, buying in welfare services rather than welfare people, and challenges to HMRC’s prior interpretation to VAT on construction work for care homes, generally they get the zero rate on works but there’s still quite a lot of VAT cost in communal areas. So good opportunities around VAT for care providers.

Charlie Barnes re workforce legislation opportunities:

Positive opportunity around the recent legislation introduced re holiday pay and how that is calculated for casual workers, whether employed via an agency or directly, which means that care providers can now roll up holiday pay at the rate of 12.07%. A recent Supreme Court case  had resulted in inflated holiday pay costs for casual workers and agency workers and a greater administrative burden on care provider payrolls. The new legislation simplifies the calculation process and mitigates the additional costs which arose from this case. The use of agencies to supply temporary workers continues to provide some benefits in the models that Scott referenced.

Peter Graham re capital allowances opportunities:

Government has introduced generous tax reliefs for capital expenditure, including super deduction which applied to expenditure from 1 April 2021 to 31 March 2023 – 130% tax relief for items such as bathrooms, beds, furniture and carpets. Whilst this relief has expired, we’re still helping clients with expenditure carried out in that period. It has now been replaced with full expensing – whilst only receive 100% relief on the same expenditure, essentially still receive same amount of tax relief as super deduction as the tax rate has gone up to 25%. Important to go through your expenditure and make sure you’re not missing out on those tax reliefs. Capital allowances claims can be complicated, so if you’re involved in a construction project or extending your buildings, it’s important to analyse payments in as much detail as possible to optimise for capital allowances. And there is also an opportunity for care home acquisitions, especially when buying a not-for-profit organisation where you can potentially claim all the capital allowances on that acquisition. Important to get your adviser involved when you are making an acquisition to ensure maximising capital allowances. Always worth getting a second pair of eyes looking at your capital allowances, with our experience and volume of work in the sector, we can quickly tell if you have the right level of claims or there is more that can be claimed.

Rob De La Rue: How can technology help businesses with their tax strategy?

Impactful technologies to improve efficiencies and automate are now readily available and affordable to most businesses. This is not just AI, automation technologies combined with the benefits of AI has brought about a tipping point and we can expect to see rapid change over the next 5 years. Rapid advancements have already been seen in the care sector such as AI enhanced diagnostics or improved booking systems for appointments, case management and enhanced shift booking tools. The technology behind these enhancements is also applicable to finance teams and managing tax. A lot can be done to support above mentioned tax reliefs and underlying tax processes. It’s good to start with smaller projects, a task in Excel that could be easier where tools, such as Alteryx, can automate. This helps with controlling and managing processing tasks to free up time. Automation tools are no harder to use than Excel once get to know them. Important to know how to introduce safely and this is where RSM can help.

What are the key tax risks that should be managed?

Charlie Barnes: holiday pay and national minimum wage (NMW)

The biggest issue with NMW is the financial penalties (up to 200%) and naming and shaming enforced by HMRC, who’s viewpoint is to represent the workers. If they find that there has been an underpayment, settlement with HMRC is not an option and a notice of underpayment is issued to the employer setting out the arrears owed to all workers/ex workers, which must be paid within 28 days along with the financial penalty. Risks are around common areas as set out in the naming and shaming list published by the Department for Business and Trade. It’s also important to consider who is supplying you with temporary labour and whether they are complying. Whilst you’re not liable, you are associated with those suppliers and therefore should undertake the necessary due diligence of your supply chain.

You can control your own risks by including payroll controls to check that salary sacrifice arrangements are factored into your calculations It’s the post salary sacrifice payment considered for NMW. Have an up-to-date time and attendance recording system, don’t rely on a manual process, as recommended by HMRC. HMRC now follow up on inspections to check that you’ve implemented their recommendations. Need a top-down approach which is consistent across your sites and training for all line managers. Policies and procedures should be built into internal mechanisms.

Worth considering the impact of the new legislation introduced at the start of this year for your organisation.

Holiday pay and entitlement reforms from 1 January 2024 – GOV.UK (www.gov.uk)

Employers must factor in regularly paid overtime for anyone employed on permanent basis for 4 weeks of holiday entitlement each year. Opportunity to reflect on how much overtime is being worked in your organisation, whether it must be included in the holiday pay calculation, and whether it may be worth engaging more temporary workforce rather than more overtime.

Scott Harwood: VAT risks

There are two main risk areas for the care sector currently. First, around temporary workforce. HMRC is building their investigation team on the temporary market, seeing many investigations around recruitment business, care homes or umbrella agencies. HMRC are finding a lot of fraud or borderline fraud cases, for example in small providers and mini umbrellas. HMRC is focusing heavily on processes and checks within businesses, and considering introducing statutory due diligence checks for when using umbrella agencies in your supply chain. HMRC is now using their powers more, including the corporate criminal offence, where there is risk to you if you’re knowingly entering into fraud and do not have sufficient due diligence checks. If recruiters aren’t charging you VAT, it is important to ask why to avoid any accusations of complicity.

Secondly, around the restructuring scheme with VAT savings for welfare providers, there are cases where boundaries are being pushed too far. It’s not just as simple as removing the CQC link to your organisation, you need to liaise with your commissioners, ensure contracts march, so everything needs to be aligned. We are seeing it being done too aggressively retrospectively and HMRC are starting to challenge this in the courts. So, do take advantage of these planning areas, but it’s important to do it properly.

Peter Graham: R&D risks

HMRC has a strong focus on tackling R&D non-compliance. Nursing and care homes coming under a lot of scrutiny, as the sector has been targeted by less scrupulous providers submitting claims with low technical merit. We are seeing more businesses in the sector targeted by HMRC on the validity of their claims. There are valid claims, but it’s important to speak to a professional adviser to check your claims are robust and can be supported.

Rob De La Rue – how technology can help manage governance and tax risks:

We are seeing lot of activity in this area. Care is a highly regulated sector in a highly regulated economy. Managing tax risk increasingly involves risk management of tax processes. For example,

corporate criminal offence (CCO) rules impose an automatic criminal penalty for the company if somebody working in the organisation (including contractors etc) helps a third party to commit tax fraud. The only protection available in this circumstance is to ensure you have a defence file prepared and which demonstrates that you have undertaken appropriate risk reviews and have compliant policies, training and procedures in place to guard against the facilitation of tax fraud. You should also consider your supply chains to ensure those companies working with you have similar levels of robust controls.  These rules apply to all UK businesses regardless of size.

In addition to the CCO rules, there are additional requitements such as the UK Senior Accounting Officer regime for larger businesses with revenues over £200m or those with large amounts of assets.  If you work in a large business where these could apply, then it is important to review and understand the full range of tax governance regulations which could apply.

Tax governance regulations are an increasing focus area of HMRC and a common review area in M&A due diligence reviews.

Having a good process and good technology around the management of risk will help make compliance much easier and reduce the likelihood of unexpected costs later on.  For example, Governance Risk and Compliance (GRC) systems such as RSM InSight 4GRC can be set up to help manage risk registers, track actions, and demonstrate your processes. These systems work across operational and tax risks.  It is for this reason we created RSM Tax InSight, which helps organisations keep on top of all their internal and external tax processes whilst at the same time brining the power of GRC technology to simplify the process and reduce the time it takes to professionally manage tax risk in a business.

What about the future tax landscape?

Scott Harwood:

Making tax digital is in place. In other jurisdictions, such as Italy and China, there is real-time transactional reporting to authorities, which is what HMRC want to work towards. Currently you just submit returns via an API link, but HMRC really want full transactional oversight so they can use AI big data to correlate transactions with tax returns and corporate tax.

Rob De La Rue:

There is a wider government roadmap on Making Tax Digital. VAT has gone first; income tax is next which is due to land around 2026 and then corporation tax is expanded probably from at least 2030.  We expect this direction of travel to continue regardless of the outcome of the forthcoming elections.  This trend also mirrors a wider shift in approach to more real-time tax reporting as new technology facilitates more detailed and faster tax returns to be delivered.

With advent on new technologies, it’s also in the interest of businesses to become more digital to gain efficiencies and focus their time on higher value tasks.  Whilst forthcoming regulations are important to note, it is this opportunity which is really driving businesses to explore how to use technology to streamline their tax requirements – well ahead of the mandatory deadlines.

Scott Harwood:

Our clients have reported real benefits from automation to save time and increase efficiency/accuracy. It’s worth thinking ahead and putting sensible steps in readiness.

Charlie Barnes:

The direction of travel for NMW is that it will increase again. The government has asked the low pay commission to keep National Living Wage set to 2/3 of median earnings – based on current wage inflation that equates to a projected 6% increase. No lowering of the National Living Wage (NLW) threshold though (currently 21). The Labour party have said they will link NLW to cost of living, so we could see age threshold reducing and increases of greater than 6%. Statutory enforcement will continue with potential for increased government funding and wider remit to cover holiday pay. Ultimately, compliance is not going to diminish. On a positive note, this should create a more level playing field and rogue operators will be found out.

Peter Graham:

The shadow chancellor has already confirmed Labour won’t change the full expensing regime or the current £1m annual investment allowance which gives businesses certainty.

Audience questions

Question for Scott: Please can you comment on how HMRC are viewing the use of the VAT nursing exemption on temporary staff through direct agency relationship vs umbrella companies?  Isn’t the VAT liability an issue for the agency and not the care provider in terms of who is responsible for accounting for the VAT?

Scott Harwood:

The nursing concession is another area of investigation by HMRC, they think some recruitment businesses have been applying this too widely. Concessions must be read and applied narrowly. Whose risk is it? The risk will be whoever applies it, for example nursing agency must apply correctly, but they may draw on information that you give them as a customer which could potentially put you into the realm of joint and several liability on a VAT footing or potentially more in the corporate criminal offence, if you have misinformed your supplier then you have failed on the correct process and encouraged misapplication of VAT. This is a due diligence check in your supply chain that must be done. Umbrella companies can’t use the nursing concession. What is acceptable is if the agency payrolls the worker and then provides nursing concession on eligible supplies of staff.

We are currently going through a R&D claim however we have not obtained any funding from this claim. a company appointed has obtained this claim and now HMRC are investigating us. has anyone had this issue and what should we do next? 

Peter Graham:

It sounds like the R&D repayment hasn’t been paid to the claiming company. The company that has done the claim should pass that on. Important to establish if it’s a valid claim in the first place and seek some advice. If claim is valid, you should be able to defend it with documentation to back up what has been claimed. If the R&D refund is going direct to the R&D agency firm and not you that is something you should be cautious about.

What is constitutes an R&D breach and what is a valid claim?

We have seen valid claims where the company has implemented bespoke software or technology but there are very few scenarios that would qualify in the sector. We have seen lots of examples where it’s clear it doesn’t qualify for R&D which is why the sector has been targeted.

We are having trouble getting HMRC written approval of our vat welfare scheme, despite notifying them of our process and having had a VAT inspection raising no issues. But some LAs are requesting written approval before we can progress. How can we get written approval from HMRC? Also, lots of ICB’s are hiding behind NHS England guidance stopping them from novating contracts. However, none of them will supply the guidance, which I understand, is that it is allowed provided that the necessary due diligence processes are in place – but it seems ICB’s are too stretched to set up and approve said processes – even when we prepare all necessary novation contracts for them. Any advice?

Scott Harwood:

We know HMRC have been reviewing and signing these off, it can be dependent on the officer you get, some will be familiar and will process it, others will ask more questions. If it’s been done properly, HMRC should, in general, have no problem with it but have the right to ask questions if they feel something is untoward.

Care England have released a list of Local Authorities who are currently accepting restructuring scheme proposals. They are free to make the decision on who they contract with. Communication is important, have conversations with relevant Local Authorities to keep them informed. Without this you may have a commercial dispute. If getting it is getting stuck with your commissioner, speak to your adviser who may be able to escalate.

Also, re contract restructuring: we have been advised (twice – 2019 and 2023) by large prof services firm to avoid in PE backed business unless a structure such as opco/propco is already in place, i.e. not undertaking a company reorganisation to be able to achieve it. Is this what was meant by “don’t push the boundaries too much” discussed earlier in the call?

Scott Harwood:

Yes, they can take this risk position, and we know HMRC are looking to challenge that particular area which is why they have attached a risk to it.

Lots of ICB’s are hiding behind NHS England guidance stopping them from novating contracts. However, none of them will supply the guidance, which I understand, is that it is allowed provided that the necessary due diligence processes are in place – but it seems ICB’s are too stretched to set up and approve said processes – even when we prepare all necessary novation contracts for them. Any advice? 

Scott Harwood:

There is still some misinformation in the NHS sector. Whilst we understand HMRC with NHS England have got comfortable with certain parameters, there are some ICBs we know that have not been made aware of that and have own thoughts on this. We have seen some more aggressive structures, where people are pushing the boundaries too far. It is a welfare planning scheme not a healthcare planning scheme, so be careful not to stray into that area which ICBs often fund as well. Again, whilst we’ve got guidance, it doesn’t mean everything is pre-approved, must feel right for the commissioner.

 

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