Having to pay tax is usually a good problem to have – it usually means you’re making money. But, in Social Care, there’s a pressure on all costs and if, like us, you’ve just paid HMRC a combination of PAYE and NIC that equalled 10% of your monthly turnover (that stung…), you might be tempted to try and pay less tax.
There are a number of ‘tax mitigation’ schemes I’ve seen recently that have not passed my sniff test as being too risky / aggressive for my liking. I wanted to share them and let more knowledgeable minds than my own consider their merits more broadly.
Making employees Members of LLPs to avoid paying NICs
I’ve seen LLPs used as part of property fund structures and also to house management teams, largely because, if you are a Member of a LLP, you don’t pay NIC on your income, whilst the LLP itself is transparent for tax purposes.
I’ve seen structures proposed where all employees of a CQC registered entity are moved into a LLP and are made Members. This then presents a series challenges.
First, there is a logistical challenge of keeping up with updating all the Member changes on Companies House. Social Care has a significant rate of staff churn – committing to update Companies House with these Member changes each payroll is yet another bureaucratic task that really isn’t needed. Also, Members do need to consent to another member joining the LLP – you cannot introduce a Member to an LLP or assign an interest in the LLP without the consent of Members.
Second, demonstrating that the Members are making decisions about the operations of the LLP is challenging. Members have to be involved in the management of the LLP, with the ability to take part in the management of the LLP. Exclusion from management could result in members bringing claims for unfair prejudice.
The Members will have to get together regularly (twice a year is probably the bare minimum for a property fund LLP; an operational business like an LLP holding employees of a Care Home must surely have more frequent meetings than that) and demonstrate that they all are contributing to the strategic discussion and decisions of the LLP. This means providing detailed information to them about the operations of the LLP, which may mean disclosing certain information about the operations of the Registered entity that may not be preferrable.
Equally, any difference arising on ordinary matters connected with the business must be decided by a majority of members. Meeting this threshold may not be possible, especially if the Members are foreign nationals with limited understanding of what they are being asked to do.
There are then the duties that the Members have to the LLP. Would every Member of a LLP made up of Care Assistants consistently give full information to the LLP about all things affecting the LLP? Would all members of the LLP be able to account for profits from a competing business, where those Members work in that competing business?
Finally, this structure means that the Members can demand strategic changes to the operations of the LLP. This could include demanding higher income for services provided to the Registered Provider and, if the Registered Provider refuses, the Members of the LLP could refuse to provide these services, risking the viability of the Registered Provider. This lack of control of the employed workforce is, for me, the biggest risk of this structure.
Recovering historic operational VAT
A recent HMRC notice sent feathers flying through Social Care where it became apparent that they were considering stopping the creation of VAT groups of CQC-Registered entities and allowing them to partially recover VAT.
A key part of this VAT recovery strategy includes Providers novating contracts from CQC-registered entities to a non-CQC registered entity, with the contractual agreement of their Local Authority / NHS funders. Providers are then recovering partial VAT, based on the percentage of revenue that they have novated to the non-CQC registered entity.
It transpires that certain VAT advisers have been advising clients that, at the date of novation of contracts, the VAT group can recover VAT on operating costs incurred for 4 years prior to the date of novation.
It seems to me (and likely to HMRC) that recovering VAT based on historic revenue that was VAT-exempt, or charging VAT only invoices from a new entity on contracts that were historically VAT-exempt and, in any event, related to another entity, is likely to be deemed as an aggressive tax strategy.
Claiming R&D in Social Care
Brexit had several unintended consequences. One was around R&D Tax Credits which, apparently, were funded via the EU. When we left the EU, HMRC was at pains to tighten the rules around R&D Tax Credits because, suddenly, they were responsible for paying them.
Social Care was previously presented with a number of R&D advisers suggesting that the development of individual Person Centered Care Plans qualified for R&D. Whilst this may have been accepted previously by HMRC, post-Brexit it most certainly was not!
Sadly, this led some Providers to submit claims inappropriately and their contracts with their advisers were worded in such a way that the advisers avoided liability, with HMRC’s penalties and fines being directed solely at the Provider.
Summary
Social Care is a sector starved of funding. An additional £10,000 could be the difference between investment happening or not. But the strings that could come with that could be significant – we’ve all got stories of HMRC investigations…
It’s also a sector that has very clear morals and values. You don’t get into Care unless you Care – doing the right thing, being seen to be that ‘fit and proper’ person, is as much a part of who we are as our CQC rating.
So this is where I leave it to you, the advisers. How can you be more transparent to your clients and give them the ‘black and white’ advice? Your value, as that trusted adviser, is perhaps more important than ever.