Care News AUTUMN 2021
Welcome As Autumn arrives, thoughts turn to change and new beginnings - the weather is turning cooler, the leaves change colour, and children across the country are beginning a new school year or possibly even a new school. With this in mind the theme of this edition of the Care Newsletter is ‘change’, and is filled with articles related to changes in a care business. If you are considering starting in the sector we have top tips on CQC registration and financial viability, and Julie Hopkins has written a special piece on entering the domiciliary care market. If your strategy is acquisition, our colleague Mark Hickman from Chandler & Co explains how these can be funded. The status of your care business is a further consideration, and I have outlined the pros and cons of charitable status. The care sector as a whole is going through a period of change, with the Care Quality Commission’s new strategy announced earlier in the summer and, of course, the compulsory vaccination of care home staff in England. At the time of writing the Impact Assessment of this policy had not be completed and, with the regulations coming into force on 11th November, the effect on staffing within care homes has yet to be seen. But I think we can all agree that it is unlikely to help our sector, which is already dealing with funding challenges and high staff vacancies.
Michelle Ferris Head of Charities and Care, Albert Goodman
MARKET OUTLOOK: FUNDING Julie Hopkins, Albert Goodman’s Care Sector Business Developer and Consultant, shares her thoughts on the funding outlook for the sector.
Government funding programmes have helped care providers protect capital and rebuild through the pandemic, and now we are on the road to recovery, subject to variant management. Providers are now taking the next step, which can be a combination of rebuilding working capital, or expanding organically or through acquisition. In order to grow your care business, it will be important to access capital and demonstrate to your funders that you have a resilient and agile proposition. An experienced team, and strong business plans that are regularly revisited, will add weight to growth and business continuity plans. On the other hand, as funding options change and compliance evolves, some providers are deciding to bring forward their succession plans. This involves careful tax and retirement planning, to ensure the most efficient and practical business structures. It is also important to keep
abreast of Government consultations as they seek to fund the pandemic going forward, since this may also have implications for succession and retirement planning. The market is also seeing an increase in the grouping of care providers with less than 25 beds, in order to maximise bed capacity for funding strength. This is alongside corporate providers expanding their new development programmes, and an increase in supported living provision. Domiciliary care and live-in care continue to expand, with independent providers and the growth of the franchisee offering across the UK. Demand for care provision continues alongside the growth in strategic investment from stakeholders, as we await the Government’s funding plan for social care. Watch this space!
Market Outlook: Property Michael Hodges, Managing Director - Care Consultancy at Christie & Co, gives his assessment of the care home property market. After a challenging time for the care sector, which was exacerbated by a second wave of the virus, we are seeing promising signs of recovery in the care business property market. Demand for care homes remains strong across all buyer groups, as it was pre-pandemic, but the second wave of the virus delayed some care homes coming to the market as owners grappled with COVID-19 outbreaks and occupancy challenges. In our recent care operator sentiment survey, 45% of respondents said their occupancy has recovered, yet 39% said their occupancy levels were below 80% which shows that there is still a way to go before the sector returns to pre-pandemic levels. The strength of buyer demand, coupled with a relative shortage of stock, means that pricing is holding up well, with multiple offers being routinely received. There is improving appetite across the spectrum, with the top end being fuelled by strong investor interest which is cascading through the rest of the market. The strength of investor interest reflects a variety of factors, including the return to the market of a number of funds which paused acquisition activity last year. There is a notable requirement to deploy a significant level of capital and, this year, we have also seen significant interest in the healthcare sector from overseas investors. One example is SCPI Pierval Santé, a specialist healthcare real estate fund based in France which entered the UK market in June with the acquisition of a portfolio of prime care home investments let to Care UK, a deal which Christie & Co was pleased to broker on behalf of the vendor, Legal & General. The development market continued largely unabated through 2020, as developers and operators took a longer-term view off the back of the forward-looking demographic demand drivers, and the structural undersupply of future-proof care beds in the UK. Development activity remains robust thanks to the high demand from a range of institutional, sector specialist and overseas investors for new build care homes, let on long-term leases to good quality operator covenants. As with the going concern market, a relative shortage of opportunities has resulted in strong interest and a compression of yields for such forward funding opportunities. We expect this trend to continue as new capital enters the market, with many investors actively targeting healthcare due to its strong needs-driven underpin and operational real estate exposure. Multiples and pricing for care businesses have remained largely unaffected by the pandemic, however operational challenges have impacted many operators’ financial performance. 45% of sentiment survey respondents believe values would increase during 2021, with 33% expecting little improvement. Lenders are closely monitoring occupancy levels and supporting operational performance across their client groups, with indications that many providers fared better than expected. For more on the care business property market in 2021, read Christie & Co’s mid-year review https://www.christie.com/news-resources/publications/july-2021/care-mid-year-review-2021/
Lenders supporting the care sector -
challenging times but positive signs Liz Woollett, Director at Chandler & Co, looks at the current lending situation for the care sector.
Despite the complications of lockdown, we have continued to speak with a lot of Care Home operator clients, old and new. Having been at the forefront of the pandemic, operators have been forced to remain dynamic during the hardest of circumstances and are now at the forefront of industries to face the future with this intense experience under their belt. During the last 15 months, we have found clients disappointed to see that support for acquisitions from some lenders has been difficult, especially for new entrants and purchases of Care Homes with chequered trading or compliance histories. The Government-backed CBIL and BBL schemes offered significant support to operators, although certain finance options were sadly oversubscribed. These schemes are now closed to new applications. Recent conversations with an increasing range of lenders who recognise the Care Sector (including some new faces) have underlined our confidence that there are flexible options available when you know where to look. The Recovery Loan Scheme has been launched using the extra security of the Government backing to facilitate additional funding for businesses impacted by Covid-19. Lenders using the Scheme can take a view on fluctuating trading performance since the pandemic, as the Scheme offers a guarantee for the majority of the debt*. These lenders are seeking to extend lending parameters, and we are seeing positive early signs such as 80% loan to value options and reduced requirements for Personal Guarantees. Lenders frequently share with us the value their underwriters place on our comprehensive professional proposals. Some options are available only via introducers; as renowned specialists in the sector, we welcome being offered exclusive access to early applications. Given how challenging times have been for some borrowers, we are anticipating there may be strong demand for terms from the more flexible lenders. We are already submitting a flurry of enquiries on behalf of borrowers who have been feeling unsupported by their current finance options. Some examples of recent deals agreed: 70% LTV agreed for existing operator 100% Funding Agreed for refinance and acquisition for group operator New Entrant funding agreed on competitive terms Loan Sanction for new to market lender LTVs up to 85% subject to criteria Existing operator purchase of 2nd care home 3.63% over base Existing operator purchase of 3rd care home 2.5% over base If you are considering reviewing your current financial position, please contact us. We can advise you on the full range of options available. If you would like to arrange a convenient, confidential discussion, we can arrange a video or telephone call at a convenient time for you. Please email us at finance@chandlerandco.co.uk and we will be happy to help.
*Borrowers will remain liable for 100% of debt
Starting a care business:
financial viability
It isn’t just the 5 KLOEs: Michelle Ferris, Head of Charities and Care, outlines the financial considerations the Care Quality Commission takes into account when new providers are applying to be registered.
Since 2018, Regulation 13 of the CQC (Registration) Regulations 2009 requires new care providers to submit an assessment of financial viability when applying to the CQC for registration. This involves providing assurance of the provider’s financial position in a statement letter from a financial specialist, who must be either an accountant or a bank or financial services firm regulated by the Financial Conduct Authority (FCA). The CQC provide a template for completion by the individual or the firm. The form requires the individual signing it off to either confirm that the applicant has sufficient financial resources needed to provide and continue to provide the services as described in their statement of purpose, or that the applicant hasn’t provided sufficient information for such a statement to be confirmed. Whilst this is a reasonably straightforward statement, it is interpreted by many people in different ways. Generally when signing off a stable financial viability I would look to receive confirmation that the applicant has thought about their sources of income and likely costs, and has the ability to do what they have set out to do, with the right means. For many, this can have additional benefit as it can provide a sense check as to the potential viability of their proposed endeavour. I would encourage it to be looked on in this sense, rather than a ‘tick box’ to be completed.
If you need a statement of financial viability completing, please get in contact: michelle.ferris@albertgoodman.co.uk or telephone 01823 286096.
Thinking about starting up a domiciliary/live in care business? Look no further! Julie Hopkins, Albert Goodman’s Care Sector Business Developer and Consultant, offers her advice on starting up a domiciliary care business.
One of the positives to come out of the pandemic is that it has thrown the spotlight onto social care (in addition to healthcare), and associated with this we have seen a growth in the domiciliary and live-in care service offering. If you are thinking of starting a new care at home business, here are my thoughts. If you are setting up a care service which offers personal care as opposed to a domestic and companionship service, you will need to cross the threshold of the CQC registration. Without this registration you cannot offer your care service. Regardless of whether or not you require a CQC registration, you will need to consider the structure of your business (sole trader, partnership, limited company). There are pros and cons of each structure, so please speak to an accountant if you are unsure. To register with the CQC you will need to have a Financial Viability statement signed off. Michelle Ferris speaks about this elsewhere in this edition, but most of what is required you will already have as it is key business information: Your business plan will form the basis of your future branding and your service offering. Spend time on this as a strong foundation for your business. Will the start-up business be self-financed, or are you seeking additional loan finance? Consider your business continuity plan, including workforce development, training and capacity. Will your care fees be a mix of local authority rates and private rates? Give great thought to your start-up costs, an area usually underestimated, and how you are going to fund the first 12 to 24 months.
If you are considering a not-for-profit entity you should also consider whether it fits the criteria of a charity. Please see Michelle Ferris’ article elsewhere in this edition regarding the care sector and not-for-profit set up. Getting your staffing right is vital. In a post-pandemic recruitment world, consider where your staff will come from and the remuneration package that you are offering. Insurance will be a significant cost to your business, with high increases post pandemic. Carry out your research on competitor service offerings. Will there be enough demand for your services? Is there capacity in the marketplace for another care at home service? If you need a central office to work from, consider location, parking, accessibility, lease breaks if renting, and storage for PPE. Have a system to take and follow up enquiries, both for potential service users and new staff. Choose your digital bookkeeping system and make sure that it works for you, for example Xero, SAGE or QuickBooks. Remember as you start up and build your business, referrals and your ability to stand out from the crowd are key. A strong business will grow from word of mouth referrals, staff referrals, and from visits to a strong and easy to navigate website.
Consider your fixed and variable costs as the business grows.
As your business builds, encourage reviews and testimonials. Never be afraid to ask for a review, as it is one of the first pages viewed by people looking for care services.
Consider the digital software and planning packages needed to run your business effectively, and how much this will cost.
Create a focus on the benefits of your service, seek service users and families who love what you do as the business develops.
In conclusion, the success of a start-up domiciliary and/or live-in care business will also depend upon your self-belief, and your ability to set out your vision and achieve your goals. Have a positive attitude, believe in yourself, and have the belief to be successful. Good luck!
THE PROS AND CONS OF CHARITABLE STATUS IN THE CARE SECTOR Michelle Ferris, Head of Charities and Care, explains the benefits and drawbacks of seeking charitable status as a care provider.
Once a more common choice of set-up, the number of charitable entities in the care sector has fallen away in recent years. Analysis published last year by NPC, a charity think tank1, estimated that only 14% of providers and 10% of care beds in the sector were run by charitable organisations. Going forward with an increased focus on community and an ethical and green agenda, it is possible that charities will form a larger part of the sector than they do currently. So what are the pros and cons of being a charity within the care sector?
PROS Potential to attract grant funding from a wider range of sources. Being a charity opens any organisation up to more funding sources, such as charitable trusts. This can be particularly useful for capital projects. Greater attraction to future resident and staff in being a ‘community’ based entity. Ability to reclaim gift aid on donations from eligible individuals. Charities are able to register to claim gift aid, which enables an extra 25% to be claimed from HMRC on eligible donations from individuals. Significant tax breaks. One of the major pros of a charitable set up is that no corporation tax is due on trade that advances charitable objects – which can be care fees in the right set-up. There are also potential VAT advantages for those care entities who provide services but do not fall under CQC registration – such as day care for adults – if they are a charity or not-for-profit. See our later piece regarding this.
CONS Loss of control over future direction. Charities are governed by boards of trustees, who are responsible for the overall strategy and operations of the charity. This means that no individual can control or drive future direction. Charities are also unable to pay trustees for carrying out a trustee duty, meaning that to receive remuneration from a charity you must be employed, with the ultimate control over any employment resting with the trustees. The ‘asset lock’. One of the key founding principles of charities is that they contain an ‘asset lock’. This means that any assets that become part of a charity are locked for charitable purposes indefinitely – they cannot be extracted for personal use, even on wind-down of the entity. Lack of flexibility around remuneration. Since charities have no ownership, and no share capital, the only way to take remuneration from a charity is through the payroll or to invoice the charity, which can be less tax efficient. Increased governance. Operating a charity with a board of trustees requires significant decisions to be taken by a board. This, combined with the legalities of being a charity, means that charities are more complex to run and administer. Whilst the tax advantages of charitable registration can be considerable, there is a lot that often needs to be sacrificed in exchange. The asset lock is pretty unpalatable for most individuals running an established business (why would you want to give away everything you’ve worked hard to build up?), but for new entrants into the market, or those looking to add additional locations or structures, there are some real positives to be considered through charitable registration. When considering if a charitable entity might be for you, my advice would always be to look within yourself and find your motivation for wanting to be in the care sector. If it is profit driven, then a charity probably isn’t for you. But if you are looking to drive greater purpose and community engagement through your operations, then a charity could be a good solution. If you’d like to discuss any element of charitable registration or operation within the care sector (or more generally), please get in touch: michelle.ferris@albertgoodman.co.uk or telephone 01823 286096.
1
Charity care homes (thinknpc.org)
CQC REGISTRATION - TOP TIPS If you are registering with the Care Quality Commission for the first time, there is a lot to think about. Here are our top tips when you are preparing your application, to help you get it right first time and avoid unnecessary delays in opening your home. 1. Firstly, and most importantly, do not send your application by post. CQC have asked that all applications are done online as their staff are, at the time of writing, working from home. 2. Before you apply, ensure that you have the following information ready: Disclosure and Barring Service checks, countersigned by CQC. Your Statement of Purpose. Signed Statement of Financial Viability. All requested supporting documentation. CQC advises that the above information can take weeks to assemble, and that this time should therefore be factored into your planning. 3. Allow yourself plenty of time to fill in the application form - CQC advises this can take as long as 7-8 hours. 4. Ensure that you can meet the 5 key questions. 5. There is a large amount of useful information available on the CQC website, take the time to read through it before beginning your application. 6. Ensure that your premises are ready for a site visit; and that your nominated individual and Registered Manager are available for interview.
VAT & WELFARE SERVICES
HMRC has recently released Revenue and Customs Brief 9 (2021) confirming its position following the conclusion of the Learning Centre (Romford) Limited and LIFE Services Limited cases, which examined VAT treatment of care services provided by non-regulated entities.
The technical issue VAT law exempts welfare services supplied by charities and public bodies. For others, exemption applies only if the body is regulated, and only those activities that are regulated can be exempt. Learning Centre (Romford) Limited and LIFE Services Limited (“the Appellants”) provided daycare services that were not regulated by the Care Quality Commission, and so, according to the letter of the law, cannot be exempt. Had these services been provided in Scotland or Northern Ireland, regulation would have been required and so would have been VAT exempt. The Court of Appeal (“CoA”) were asked to rule on whether VAT law was defective, such that the Appellants should be allowed to exempt their services. There was not a level playing field, because a charity in England, or private body in Scotland, could exempt daycare services from VAT, but a private body providing the same services in England cannot. The CoA decided that the law was not defective, and so the Appellants’ services were subject to VAT.
What does this mean? Non-charities that currently treat unregulated welfare, e.g. daycare, as VAT exempt should be considering their position. Charities wishing to exempt their services are not directly impacted by the case, but should of course be clear on whether their services do meet the VAT definition of welfare. Charities should however bear in mind that in some instances, charging VAT to a body that can recover VAT, (e.g. where a Local Authority is the recipient of the service) might actually be of benefit, because it unlocks input tax recovery for the charity on related costs. An unregulated welfare service that would be VAT exempt when supplied by a charity would be subject to VAT if supplied by a subsidiary (assuming no other VAT relief applies). Indeed some operators of care homes have gone further, and are contracting with Local Authorities via unregulated bodies, but sub-contracting delivery to regulated bodies. The argument is that services are subject to VAT, but the regulatory requirements are met. This loophole, whilst currently legal, is under examination.
The Super-Deduction and what to look out for In March 2021, the Chancellor announced the new superdeduction capital allowance, which is aimed at encouraging investment in the economy over the next two years. However, careful consideration should be taken when looking at this allowance. There are some hidden conditions which were less publicised and can mean the relief isn’t as attractive as it appears at first glance. Firstly, it is only available for companies, so sole traders and partnerships will not benefit from the relief. The allowance applies to new plant and machinery purchased between 1 April 2021 and 31 March 2023, and differs depending on the type of asset purchased. There is also no limit on the relief, provided the expenditure is incurred on qualifying assets.
So, how does the allowance work? For assets that would normally fall into the ‘main pool’ and attract the 18% writing down allowance, this allowance means that the company benefits from a deduction of 130% of the expenditure. For assets that would normally fall into the ‘special rate pool’ and attract the 6% writing down allowance, the company benefits from a 50% deduction in the year of purchase, before resuming the usual 6% deduction per year, on the balance. There are a number of assets that are excluded from the relief, including used or second-hand assets, cars and plant and machinery purchased for leasing. Be careful to check that the asset you are looking to purchase will qualify for the relief, before calculating the possible tax relief available. If a company entered into a contract to purchase assets before 3 March 2021, then it also won’t benefit from the relief, even if the expenditure is incurred after 1 April 2021 (in the qualifying period). A qualifying asset is kept separate to other plant and machinery in the main capital allowance pool. Therefore, if the asset is sold, an immediate balancing charge is created, which is subject to corporation tax. Depending on the timing of the sale, the company may also have to increase the sales proceeds by 130% for tax purposes. The Chancellor also announced increases to the corporation tax rates. Although the super-deduction might initially create an incentive to accelerate capital expenditure, this might not result in the most tax efficient position, factoring in the proposed increase in corporation tax. When making a decision about capital expenditure, it should always be based on commercial need and not just tax relief available. You should complete some calculations to aid the decision-making process. It’s worthwhile mentioning that the annual investment allowance may be available for assets which do not qualify for the superdeduction. This is capped at £1m for the year to 31 December 2021, set to reduce to £200k after that. If you have any questions on this, please contact your usual point of contact within Albert Goodman who will be able to assist you further.
End note I hope that the articles in this newsletter have given you food for thought about the future direction of your care business. We do not yet know what the effect of Government policy on compulsory vaccinations will have, or indeed how they plan to fund care in the future. What we CAN be sure of is that the demand for care will continue to grow, and we must be in the best possible position to provide it. I will close this edition with the welcome news that, at the time of writing, both the NCF’s CEO Conference in September and the Care Show in October are planned to be in-person events. After over 18 months of ‘virtual’ meetings it will be wonderful to be face-to-face again – a welcome change indeed!
Michelle Ferris Head of Charities and Care, Albert Goodman
Dates for your diary
1st October OLDER PERSONS DAY
13th-14th September
13th -14th October
NATIONAL CARE FORUM CEO CONFERENCE, LONDON
CARE SHOW, NEC BIRMINGHAM
DID YOU KNOW...? Albert Goodman can provide your care business with: Accounts and Audit compliance Consultancy for business development/growth Acquisition and sales advice Property Capital Allowance reviews (to release ‘hidden’ tax reliefs) Corporate and personal tax services for owners (compliance, advisory, restructure, succession and exit planning) Later Life Care funding solutions Corporate Finance including valuations and due diligence for acquisitions and sales Workplace pensions Payroll Bookkeeping Outsourcing App Advisory
CONTRIBUTING TO YOUR SUCCESS If you would like to discuss any matters in this newsletter please get in touch with your usual Albert Goodman contact or Michelle Ferris direct.
michelle.ferris@albertgoodman.co.uk
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01823 286096
www.albertgoodman.co.uk
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