Tax Special Investigation: Firms running NHS care services avoiding millions in tax

First of a series: companies running care services are among many avoiding millions in tax through a legal loophole

Companies receiving lucrative government contracts to run care services looking after tens of thousands of vulnerable people are avoiding millions of pounds in tax through a legal loophole.

The firms are cutting their taxable UK profits by taking high-interest loans from their owners through the Channel Islands Stock Exchange, an investigation by Corporate Watch and The Independent has found. By racking up large interest payments to their parent companies, they are able to reduce their bottom line and cut their tax bills.

The news will increase concern about NHS reforms that are seeing private companies take more responsibility for services. It also raises questions about the Government’s commitment to tackling corporate tax avoidance, which David Cameron has said “corrodes public trust”.

Over the course of this week, The Independent will reveal how more than 30 UK companies, including some of the UK’s most recognisable brands, are benefiting from this legal tax loophole, known as the quoted Eurobond exemption. HMRC considered restricting the use of the loophole in 2012 but never took action.

The care companies known to benefit from the loophole are: Partnerships In Care (several of whose mental health facilities have recently failed inspections), Independent Clinical Services, Priory Group, Acorn Care, Tunstall, Lifeways, Healthcare At Home, Spire Healthcare and Care UK.

Margaret Hodge, chair of the Public Accounts Committee, said: “Companies have a duty to pay their fair share of tax relative to the profits they make in this country. Yet it seems every week brings a new revelation of another business that is using artificial structures to move profits out of the UK, seemingly for no purpose other than to avoid tax.

“The case of these private health companies, which The Independent has brought to my attention, I find particularly depressing. These are companies who get their income overwhelmingly from taxpayers’ money, for the purpose of providing a vital public service, yet do not appear to be making their fair contribution to the public purse.”

One of the companies, Partnerships in Care, managed to turn what would have been a hefty tax bill into a tax credit in 2012, according to accounts filed at Companies House. It owes £321.9m to its owners Cinven, a European investment firm. By paying interest of £29.7m on these borrowings in 2012, it helped to turn a healthy operating profit of £31.7m into a pre-tax loss, leaving the group with a tax credit of £629,000.

Meanwhile, several of the company’s secure hospitals for mental health patients have recently received damning inspection reports. A spokeswoman for the company acknowledged that it had recently received two “major warning” notices from the Care Quality Commission but said that in 93 per cent of inspections of their hospitals between July 2012 and August 2013, they were assessed as compliant or requiring only minor improvement.

Although the interest rate on the loans taken by these care companies is subject to scrutiny by HMRC, they are all significantly higher than the rates they are paying on loans from third parties such as banks – meaning they can reduce their profits and therefore their tax bills, while the parent companies still receive a steady flow of cash back into their accounts.

Tunstall, for example, is paying a 16 per cent interest rate on its borrowings from its owners the Charterhouse and Bridgepoint private equity funds – compared with the 5 per cent average rate on its bank loans.

The company, which provides over-the-phone care services to almost every council in the UK and the new clinical commissioning groups, avoided up to £19m in UK corporation tax in 2012, after £76.1m in interest on the loans from its owners virtually wiped out its operating profit, leaving it with a tax bill of only £548,000.

HMRC would usually deduct a 20 per cent “withholding” tax on interest payments going overseas. But as the loans are issued through the Channel Islands Stock Exchange, the exemption means they leave the UK tax free. If their owners had provided funds to the companies by investing in shares instead of issuing loans, any dividends would be paid after the companies’ profits had been taxed. Other operating expenses could also influence their overall tax bill.

Other companies previously found to be using the loophole include Global Radio, owners of radio stations including Classic FM, Capital and Heart, and water companies including Northumbrian, Yorkshire and Thames Water.

British Private Equity and Venture Capital Association director general, Tim Hames, said: “The Quoted Eurobond Exemption is designed to encourage inward investment by global investors, many of them pension funds who are exempt from tax. Those investors who are not exempt pay tax on the interest. Removing the exemption would mean less investment coming into the UK, and into social care providers where it is desperately needed. HMRC reviewed this matter last year but accepted the investment case for its retention.”

Independent Clinical Services did not respond to The Independent’s requests for comment and its owners Blackstone declined to comment. A spokesman for Spire and Partnerships in Care said that the arrangements “are common across the private equity industry” and interest levels were “reviewed and agreed with HMRC”.

Spokespeople for Healthcare at Home, Lifeways, Priory Group, Care UK and Tunstall pointed out that the companies were fully compliant with UK tax laws. A spokesman for Acorn did not deny using the tax loophole but said the analysis was inaccurate because it was “based on incomplete information”.

An HMRC spokesman said: “In March last year we ran a consultation to consider aspects of the taxation of interest including the circumstances in which the exemption from withholding tax on quoted Eurobonds would apply.

“The proposed amendment to the exemption would have applied to companies whether their customers were in the public or the private sector, but in the light of concerns about the possible negative impact on inward investment it was decided to keep this complex area of tax law under review.”

Partnerships in Care

Owner: Cinven is a leading European private equity firm. Since the firm was founded in 1977, it has completed transactions valued at more than €70bn (£59bn).

Services: The vast majority of its £171.1m revenue comes from the NHS for specialist hospitals dealing with mental health issues, learning disabilities and substance abuse.

Several of the company’s secure hospitals for mental health patients have recently received damning inspection reports, which criticised poor patient safety, critically low staffing  and a lack of respect  for basic dignity.  The Dene, a medium-security psychiatric hospital in West Sussex, failed all seven categories of a recent inspection by the Care Quality Commission  and enforcement action was taken. Annesley House, a psychiatric hospital run by the company in Nottingham, failed four out of  five areas inspected, with growing numbers  of whistleblowers alleging that patients were treated in a “disrespectful” and “degrading” way.

Duty of care: The companies under scrutiny

Partnerships in Care

Owner: Cinven is a leading European private equity firm. Since the firm was founded in 1977, it has completed transactions valued at more than €70bn (£59bn).

Services: The vast majority of its £171.1m revenue comes from the NHS for specialist hospitals dealing with mental health issues, learning disabilities and substance abuse.

Several of the company’s secure hospitals for mental health patients have recently received damning inspection reports, which criticised poor patient safety, critically low staffing  and a lack of respect  for basic dignity.  The Dene, a medium-security psychiatric hospital in West Sussex, failed all seven categories of a recent inspection by the Care Quality Commission  and enforcement action was taken. Annesley House, a psychiatric hospital run by the company in Nottingham, failed four out of  five areas inspected, with growing numbers  of whistleblowers alleging that patients were treated in a “disrespectful” and “degrading” way.

Total owed to owner: £321.9m at 10 per cent

2012 interest to owner: £29.7m

Potential tax avoided in 2012*: £7m

Healthcare at Home

Owner: Vitruvian Partners is a European private equity firm.

Services: Britain’s largest home healthcare provider, sending in nurses to people’s homes. The vast majority of its £837.6m revenue comes from the NHS.

Total owed to owner: £140.8m at 12 per cent

2012 interest to owner: £11.5m

Potential tax avoided in 2012**: £1.2m (after HMRC disallowed  the rest to be deductible)

Independent Clinical Services

Owner: Blackstone is the world’s largest manager of alternative assets, whose senior executives earn millions of dollars a month.

Services: One of  Britain’s largest independent providers of nursing staff to  the NHS.

Total owed to owners: £144.6m at 10 per cent

2012 interest to owner in 2012: £13.5m

Potential tax avoided in 2012: £3m

Spire Healthcare

Owner: Cinven

Services: Private hospitals

Total owed to owner: £756.7m at 12 per cent

2012 interest to owner: £81.2m

Potential tax avoided in 2012: £20m

Lifeways

Owner: August Equity Partners (taken over by Omers Private Equity, 8 June 2012, after most recent accounting period).

Services: Specialises in supported living and care homes for people with disabilities. Recent inspection reports  from the Care Quality Commission show that several homes and services owned by the company have had problems with staffing levels and standards of care.

Total owed to owner (August):

£52m at 12 per cent

2012 interest to owner: £4.4m

Potential tax avoided in 2012: £1m

Priory Group

Owner: Advent International Corporation is one of the world’s leading global buyout firms. Services: The group looks after more than 7,000 people, caring  for older people and those with learning disabilities. Some 87 per cent of its funding comes from the NHS, or other public funding sources.

Total owed to owner: £222.7m at 12 per cent

2012 interest to owner:

£23.9m

Potential tax avoided in 2012: £6m

Acorn Care

Owner: The Ontario Teachers Pension Plan board is Canada’s largest single-profession pension plan with $129.5bn (£78bn) in net assets. It works with 80 local authorities and receives referrals  from local authority education, social  care and health departments for educating and caring for children with special educational needs. It receives the vast majority of its £110.6m revenue from public bodies.

Total owed to owner: £79m

2012 interest to owner: £16.6m at 16 per cent

Potential tax avoided in 2012**: £4m

Care UK

Owner: Bridgepoint

Services: One of the biggest providers of health and social care services in the UK. It runs GP centres, hospitals and care homes and provides support for people within the community. About 100 elderly and vulnerable people complained about the standard of home care offered since Care UK took over visits to 300 clients in Broadland, Norfolk, in July.

Total owed to owner: £116.1m at 16 per cent

2012 interest to owner: £22.8m

Potential tax avoided in 2012: Up to £5m (depending how much interest HMRC disallowed to be deductible)

Tunstall

Owners: Charterhouse and Bridgepoint

Services: Telehealth support used by many local authorities.

Total owed to owners: £557.8m at 16 per cent

2012 interest to owners: £76.1m

Potential tax avoided in 2012: £19m

* The amount of tax potentially avoided for each company was estimated by applying the rate of corporation tax to the amount of interest paid or accrued on loans from owners, with appropriate deductions where companies have disclosed them. The calculation assumes that the loan amount would be invested as equity by the owners instead.

** These companies made operating  losses in 2012 but  the additional tax credits from the interest can be offset against future years’ tax charges.

Richard Whittell: ‘A legitimate form of investment’... how the exemption works

In 1984 the Government introduced the “quoted Eurobond exemption”,  a little-known regulatory loophole intended to make UK companies more attractive to foreign lenders looking to minimise their tax bills.

When a UK company pays interest to an overseas lender it would usually have to send 20 per cent straight to HMRC. The exemption allowed banks and other investors to receive the interest without the deduction if they lent their money through a “recognised” stock exchange such as the Channel Islands or the Cayman Islands.

Almost 30 years on, the tax benefits are being enjoyed not only by third-party investors, but by the owners of UK companies, who are using it to spirit profits through tax havens, while minimising – sometimes eliminating – the company’s UK tax bill.

The loophole is popular with private equity firms, which manage money given by pension funds and others to buy companies and then sell them off at a profit.

Instead of investing their money in the shares, or “equity”, of the companies they buy, they lend the money, often at eye-wateringly high interest rates through offshore stock exchanges.

Their newly acquired companies then take the yearly interest off their profits before they have been taxed in the UK, and reduce their tax bill accordingly. Often, the  interest is not paid to the owners immediately but is accrued and added on to the original loan, increasing the amount taken off the next year. If the owners had invested the money in shares, any dividends they received would be paid after the tax had been calculated. 

Many companies which use the loophole – and there are lots of them – say this is a legitimate form of investment; and there’s no doubt it is legal. HMRC considered restricting the exemption last year.

* Richard Whittell works for Corporate Watch, a not-for-profit journalism, research and publishing group www.corporatewatch.org

* Tomorrow: The Independent reveals the company at the heart of British life avoiding tax through the Eurobond loophole – and how HMRC was lobbied not to close it

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