Reading more and more articles about the unsustainability of the care sector and how taxes need raising and/or a staffing crisis solved by letting in people to do low-waged jobs I was reminded again of the corporate boondoggling that makes me look at such claims with a rather jaundiced eye.
I noted this some months ago, prompted by a report in the Times about a large care home operator in the UK avoiding corporation tax by spiriting profits away abroad. The article was based on a report by the reputable Centre for International Corporate Tax Accountability and Research which is here and I had a look at publicly available data around the ‘Sunrise’ companies mentioned with some interest as my parents had been in one of the homes they run.
From Sunrise Senior Living Group (the actual UK care home company) most recent accounts, ‘cost of sales’ had left a hefty gross profit…
Most of the £41m cost of sales went in £38m of wages and salaries, but at an average of ~£23k for all staff (which will include supervisors and managers) is well under the UK median, and even more so bearing in mind that their care homes are in some of the most expensive parts of the Home Counties in Surrey and Berkshire.
But the £27m gross profit is turned into a thumping loss largely by the rent the company pays for the care home properties. The cost of those leases was near £23m, equivalent to 65% of the wage bill. For ballpark comparison, Tesco’s rent costs are about a sixth of its wage bill
The CICTAR report notes only that the rent was ‘presumably’ paid to related parties,
but I had to hand a dataset published by Land Registry that lists all overseas-owned properties in the UK which shows that the care home properties in question were indeed all owned by Sunrise ‘property companies’ in Luxembourg.
On top of this spiriting-away of profit via paying inflated rents to associated companies abroad, another £5m disappears in ‘administrative expenses’ to an associated company in the UK.
In their annual accounts Sunrise are no different from the rest of the sector in bemoaning their difficulty in recruiting and retaing staff. But amusingly they said that the pandemic might mean that rather than raise wages or anything they can take advantage of people unlucky enough to have lost jobs elsewhere!
Of course Sunrise is but one UK care home operator, but the private care sector has seen increasing consolidation in the hands of corporates like this, and such profit-washing seems likely very common. The five largest operators in the UK by number of beds are believed to be
Using publicy-available Companies House accounts again, all of these seem to pay to associated companies ‘administrative expenses’, rent, and repayments on high-interest loans. Typically these associated companies are domiciled abroad in tax havens or other low tax jurisdictions. Having shuffled income away through these mechanisms, the companies then appear to be operating at minimal profit or at loss and thus presumably quite unable to offer better pay or terms and conditions to their staff .
HC-One Ltd as a care home operator had turnover in the year ending September 2019 exceeding £300 million. The company employed near 11,000 care staff with a wage and salaries cost including admin staff of just under £200 million, giving an average wage per worker of £17,700. The highest-paid director in some contrast received £800,000. Cost of sales was pushed up by lease payments to associated companies, depreciation, and interest payments at 9% on loans from associated companies to leave an operating profit of £20m which was reduced to nil by then paying that amount in Administrative expenses to another associated company. The associated companies appear to be domiciled in the Cayman Islands and Jersey.
Barchester Healthcare as a care home operator had turnover in the year ending September 2019 of £676 million. The company employed 15,000 care staff with a wage and salaries cost including admin staff of £314 million, giving an average wage per worker of £19,893. The highest-paid director in even greater contrast received £2 million. Cost of sales was pushed up by lease payments of over £100m to Barchester’s owner Grove Limited (who handed them on to its own owner Limecay Limited who handed it on to its own owner Limecay International Limited registered in the British Virgin Islands) to bring gross profit down to £90m of which £50m was paid in Administrative expenses to an associated company in Jersey, and further interest payments to associated companies left a mere £22m in pre-tax profit.
Care UK has a particularly opaque structure, but care home operations appear to be primarily carried out by a company now called Care UK Holdings which had turnover in the most recent year of £353 million. The cost of sales appears to have included £50 million in operating lease payments leaving a gross profit of £32 million which was reduced to nil by £33 million of the usual ‘Administrative expenses’, and further ‘financing costs’ then led to a pre-tax loss of £60 million. The company employed a monthly average of 16,000 staff during the year with a wage and salaries cost including admin staff of £180 million, giving an average wage per worker of little over £10,000. This is even lower than HC-One and Barchester, and is possibly a function of greater reliance on part-time staff and they note that further wage costs are incurred on agency staff. The lease payments seemed to be made to associated companies under variations on the name Silver Sea which were domiciled in Luxembourg. Care UK is majority-owned (78%) by the Bridgepoint asset management group.
BUPA appears to use a slightly different structure. Instead of using essentially one company to operates all the care homes, there are a number sitting side by side each operating groups of care homes. But the same basic profit-eroding features seem to be used. For example BUPA Care Homes (ANS) Ltd which managed 1,900 beds managed to make a thumping loss of £22 million on turnover of £102 million (with £62 million staff costs) after lease payments to associated companies reduced gross operating profit to £10 million and then on top of that £5 million administrative expenses, £10 million interest and £21 million ‘Other operating expenses’ were seemingly all paid to or through associates.
Four Seasons Health Care is in administration and so not comparable through similar simple analysis of company accounts. However the reasons for it being in administration result from previous attempts at financial engineering when the care home business was bought by Guy Hands’s Terra Firma investment fund back in 2012, upon which it was loaded up with debt in the form of 10-year loans made by Terra Firma subsidiaries through tiers of companies in Guernsey and Luxembourg at a fixed rate of 15%, which onerous obligations caused the care home operating business to go bust. This Guardian article gives a summary overview https://www.theguardian.com/news/2017/nov/08/private-equity-terra-firma-care-home-four-seasons-loan
The issue isn’t necessarily restricted to corporates in any case: there were a spate of press stories a few years back about smaller operators similarly putting their properties into associated companies they or their partners owned so that they could move profit away from the care home business itself for more favourable tax treatment.
Indeed, in a recent article in the Telegraph, a Mr Butcher who owns a number of care homes in the north of England was wheeled out to voice pleas to be allowed to bring in more people from abroad to fill even his low paid roles as upping his wage offer wasn’t getting more staff.
Here’s recent accounts for one of his operating companies. Employment costs are the major part of his cost of sales as the properties are owned freehold. Upping everyone’s pay by 10% (including managers and directors) would cost about £200k
But as so often, and just like for the big players in the sector, most of the gross profit is disappeared away, here in ‘administrative expenses’ of near £1 million, not far off 50% of employment costs. What could they possibly be for and to whom do they go?
In the circumstances of such very widespread corporate boondoggling I wonder quite what sort of representations are made to government by the sector, and who makes such representations. At the larger end of the private sector at least, and certainly at some points lower down the scale, care-home operating businesses seems to generate very significant profits. Quite sufficient to pay staff rather more than they get at present if only so much money did not disappear in ‘costs’ that are merely payments to associates so that they accrue as profit only outside the sector and in many cases abroad.
While I wouldn’t want to tar everyone with the same brush, there’s clearly a lot of it about, and there would be some irony in taxes being raised so as to keep up untaxed profits or indeed if more workers from abroad were brought in so as to keep up flows of money abroad.