Care homes in the UK are owned by around 5,500 different providers, with as many care homes being owned by small operators, including sole proprietors, as by the ‘Big Five’ operators with portfolios of more than 80 homes.
This diversity of ownership helps the care home sector to be dynamic and responsive, offering client choice despite the sometimes stultifying pressures of tick-box regulation. It is also the case that few of these thousands of care home operators are alike in terms of their ownership and business structures, and this can make these businesses less tax-efficient, make performance evaluation more difficult and so make them less attractive targets for potential purchasers.
It’s easy to see how these differing business structures have come about; the ascendancy of private provision in the 1990s, following the effective exit of local authorities as care providers, saw the emergence of new operators and a prolonged period of acquisitions and mergers running alongside a vigorous drive to replace tired facilities with “fit for the future” new build. Transaction types were many and varied, financing arrangements were equally various and the resulting business structures, all put in place for rational reasons, became less rational as groups grew and tax rules changed.
However, unwieldy and tax inefficient as these care home businesses may be, there is sometimes resistance to change the structure. Jock Waugh, managing director of VAT recovery specialists Kieran Lynch, says a lack of ‘tax savviness’ has allowed many piecemeal ownership structures to continue well past their shelf lives.
“In the ’90s there were a lot of family-owned care homes held in partnerships or individual names; usually partnerships with husbands and wives, and then the next generation became involved,” said Jock.
“A lot of these family-owned operators became incorporated as a kind of ‘OpCo/PropCo’ set up. Then, as the sector developed and became more sophisticated and these small groups began to grow, the better accountants moved them into more sensible structures, but there is a lot of historic stuff out there that families have been reluctant to shift. This can make it difficult when it comes to putting in a VAT group application, and we’re trying to make sense of who has a controlling interest.
“We are now seeing a flurry of activity where accountants have begun to look at these historic structures and are realising that changes are needed; that there needs to be a holding company, a proper operating company and the property company needs to be taken out.
“Increasingly with restructuring for VAT recovery, people are doing this with an eye to a future exit, and they’re adding value, buying small groups at four or five times multiple and then implementing the VAT arrangements and so increasing the value of the balance sheet. VAT recovery is a cashflow driver and the VAT savings resulting from a restructure will help drive future sale prices and improve leverage with the banks, but in order to arrive at that point, an operator really needs to get all their ducks in a row. We find we are having to park-up some clients’ applications for VAT groups for maybe six months while they get their house in order in terms of their corporate structure. That is frustrating because there is a following gestation period while HMRC approve the application so the process might take 12 months before VAT recovery can be in place.”
So, while diversity is undoubtedly one of the care sector’s strengths, perhaps it’s time for some operators to re-evaluate the tax efficiency of their current business structure and begin making the changes sooner rather than later.
Thinking about restructuring for VAT recovery? Contact Kieran Lynch on 0114 262 2127
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