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Maximising the benefits of tax relief

New rules and increased funding in social care could offer care operators the opportunity to benefit from a range of tax benefits and rebates. However, these opportunities will need to be carefully managed and will require a full understanding of how they can best be leveraged. Stuart Brodie, Director of Markel Tax, explains.

The funding of long-term care has been a political hot potato that successive governments have been happy to ignore to the point where the current Government has been left with no choice but to create what it sees as a workable solution.

This solution has been hailed as a fundamental shift in access to social care. It is a vision for how England will offer social care from October 2023 and how Government can limit the costs to the public. It offers opportunities for care operations to benefit from a range of tax benefits. From premises to staffing, there are taxation issues which cannot only be addressed, but that can also be used to benefit care operators’ bottom lines.

VAT – mitigating its impact

As most care supplies are exempt from VAT, the VAT incurred on expenses is a sticking cost for the majority of suppliers. As such, it is sensible to adopt mitigation strategies where these are available.

Such strategies include where property works may benefit from zero or reduced ratings, whether VAT can be eliminated from supplies of agency staff or whether the supplies of the provider can be restructured to make them VATable (thereby allowing recovery of VAT on costs).

In relation to new builds, only construction services qualify for zero-rating, and professional costs, such as architects’ fees, are standard rated. Such costs normally amount to 10-15% of the total spend; however, the tax on this can be avoided by using a design and build contract, which means that the professional fees form part of the overall supply of construction services (and the whole supply is therefore zero-rated). Be aware though that the contractor is likely to seek to make a return on the bought-in services, potentially reducing the value of the benefit.

For individual projects, this reduction in the benefit is probably acceptable, but for care providers carrying out multiple projects, it can soon add up. To mitigate this, some care groups have set up an in-house design and build company to retain more of the benefit (and also in some circumstances to allow a little flexibility in funding). If you do choose to do this, note that care needs to be taken to ensure such an in-house entity is not merely a cypher, as HMRC has been known to successfully challenge non-commercial arrangements.

Care also should be taken in sale and leaseback type arrangements to ensure that a VAT charge is not inadvertently created. This can arise when the entity to whom the zero-rated supply was made disposes of an interest in the property within 10 years. Although the recent Supreme Court ruling in the Balhousie Care case should give some comfort, the very fact it was fought all the way to the Supreme Court indicates that HMRC will look very closely at any arrangements. It is important therefore that advice is taken before disposing of any interest in a property in order to prevent a costly mistake being made.

Tax concessions for staff training

With staff key to any business, it is important to know that tax concessions can be obtained when training is organised. These concessions go above and beyond simply the costs of the training per se.

Companies can apply for tax relief if training is entirely for business purposes, including updates to employees’ existing knowledge or maintaining their membership of a professional body. In addition to the training itself, the associated costs, such as travel, food and accommodation, also fall under tax relief regulations.

Tax relief for innovative practices

Research and development (R&D) has long been the subject of a wide range of tax relief and if care organisations can show that they are truly looking to innovate, expenditure on R&D can be subject to tax relief via credits. The money received via these credits, however, must be reinvested in the company. To be eligible, companies must explain how a particular project has advanced technology in their field.

We frequently see examples of companies that don’t realise they are even eligible for tax concessions. It is common for us to meet clients who are unknowingly fulfilling all the qualifying criteria for R&D relief. They are continually developing products or processes which meet the demand of an ever-evolving market, or simply responding to a customer request to develop an existing product. The key is ensuring you can evidence that the investment in R&D is delivering innovation.

Given the level of new investment going into the care sector, we will undoubtedly see increasing numbers of care organisations looking at ways to innovate, which will in turn lead to more qualifying R&D claims.

Overseas workers

There is another tax issue that may leave care operators facing both fines and requests for additional taxation payments if left unaddressed. The ever-increasing staffing crisis in the care sector has not gone unnoticed by the Government, and while decision makers haven’t got everything right (think mandatory vaccines), the changes to the health and care visa system to make it easier for overseas workers to be employed in the UK has been seen as a welcome boost.

However, it comes with a cost, as to qualify for a visa and be included on the Shortage Occupation List will require the member of staff to be paid a minimum annual salary of £20,480. With revenue and costs still under intense pressure, care operators have increasingly sought to use contractors as a way of accessing capacity at time when there is higher need, but without the administrative burden that comes with employing a member of staff.

However, last year the Government sought to clamp down on the potential abuse of the system via enhancement to the IR35 rules. IR35 governs workers who are off payroll and was designed to ensure that companies avoid tax evasion as, in theory, they could hire employees registered as limited companies who are disguised as contractors. In effect, if care operators are utilising a worker via an intermediary that could be viewed as an employee – if the relationship between the contractor and the care operation is direct – they may be deemed to be just that and the same taxation requirements would need to be applied.

Companies can be asked by HMRC to prove their relationship with contractors at any point, which could involve looking at up to six years of contracts. Care operators need to ensure that any relationship with external contractors meets the needs of IR35 and there is clear evidence that the contractor is not a quasi-employee.

The changes to the way in which care will be funded will open up new opportunities for operators to recoup investments via tax breaks, but to do so companies and management need to understand both the opportunities and the pitfalls, and what needs to be done to ensure that they remain compliant.

Stuart Brodie is Director of Markel Tax. Email:  Twitter: @MarkelTaxUK

How do you use tax relief to benefit your bottom line?




About Stuart Brodie

Stuart Brodie, Director, Markel Tax
Stuart Brodie’s professional experience spans more than 20 years and he is also a Chartered Tax Adviser, specialising in VAT. Having represented a number of clients in the tax tribunal and through ADR, Stuart’s expertise includes VAT liability questions, deductibility of input tax, and the application of the change of use provisions. In Stuart’s role as Director of Markel Tax, he oversees the core offering to accountants, which comprises of both insurance and tax services.

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