Health and Care Winter 2019 by Hazlewoods

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Winter 2019

SPOTLIGHT ON CHILDREN’S RESIDENTIAL CARE SERVICES

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Children’s residential services in England In this article, the Hazlewoods Health and Care team review data obtained from local authorities in England relating to children’s residential care services and fee rates.

MARKET OVERVIEW The Children’s Social Care Data in England 2017 to 2018 report published < £11 / hour by Ofsted highlighted that, of the 12 million children in England in 2018, around 1% were either in care (73,000) or on a child protection plan (50,000).

WEEKLY RATES North East / £4,047 North West / £3,713

< £12 / hour

The number of children in care has continued to increase over a number of years, putting pressure local/authorities < on £13 hour to provide placements. Whilst the majority of these placements come in the form of foster arrangements, a number of children are residential settings, including children’s <placed £14 within / hour homes, secure units and semi-independent living accommodation.

Yorkshire & The Humber / £3,730

£4,047

West Midlands / £3,818 East Midlands / £3,939 South West / £3,672

< £15 hour has increased each year since The number of children’s homes/registered

South East / £3,606

2016. This has been driven by increases in the number of independent £16 / hourof local authority-run provisions ’for-profit’ provisions,< with the number steadily decreasing over the same period. Of the provisions available, almost 90% are smaller units (1 to 6 beds), with the most common provision being 3-4 bed units.

East of England / £3,666 Greater London / £3,734

£3,713

Demand for children’s social care services is growing, largely due to a rising child population. That said, political pressures on the government continue to increase focus on permanent care through either adoption, special guardianship orders or long-term fostering, particularly given the relative low cost of such provisions in comparison to residential settings.

d etails of lowest, highest and average weekly rates paid to independent children’s residential care services for 2018/19;

t he percentage increase in weekly rates to independent providers compared to the previous year; and

£3,939 £3,818

FREEDOM OF INFORMATION REQUEST We contacted local authorities requesting information under the Freedom of Information Act 2000 specifically focused around the following: >

£3,730

£3,666

£3,606 £3,672

t he number of looked after children as at 31 March 2018 and, of those, what proportion are looked after by independent providers.

The analysis included below looks at the responses to our requests in further detail.

£3,734

LOWEST, HIGHEST AND AVERAGE INDEPENDENT WEEKLY RATES FOR 2018/19 10,000 8,000 £

6,000 4,000 2,000 North West

South West

Yorkshire & Humber

West Midlands

Highest

Lowest

North East

Average

% INCREASE YEAR-ON-YEAR IN WEEKLY RATES CHARGED BY INDEPENDENT PROVIDERS 35

LOOKED AFTER CHILDREN IN RESIDENTIAL CARE AT 31 MARCH 2018 2.8%

2.8%

3.0%

2,500

2.2%

2.0%

20 1.5% 15 1.0%

0.8%

0.6%

0.4%

0.5%

90%

85% 71%

2,000 NO. OF LAC

NO. OF RESPONSES

2.1%

2.5%

AVERAGE % INCREASE

2.6% 2.4%

1,500

62% 52%

66%

70%

80% 70% 60%

53% 48%

50% 37%

40%

1,000

30% 20%

500

10%

Yorkshire & Humber

London

South East

North West

Up to 5%

West Midlands

6% -10%

North West

South West

11%+

East Midlands

East of England

Average

FEE INCREASES Of the 141 responses received, 100 reported no increase in fee rates year-on-year, representing almost threequarters of responding local authorities. Of the remaining 41 responses, 25 reported a year-on-year increase of up to 5%, whilst 8 responders reported increases exceeding 10%. The latter may, in part, be driven by interpretation of the data request, which may simply be determined as the overall increase in cost year-on-year, which may be a function of the majority of placements being made on a spot basis (and often short-term), meaning inflationary increases are not necessarily automatic. The data received does appear to indicate a certain level of traction as far as rate increases are concerned. However, considered against the ever-increasing cost pressures resulting from wage inflation, pensions and regulatory fees, it generally suggests a continued squeeze on provider margins in the majority of locations.

OUTLOOK The trend for reductions in the number of available places within local authority settings looks set to continue. This, coupled with the dual pressures of an expanding population and increasing levels of intervention by local authorities, offers opportunities for independent providers to expand provision. Those providers who have the flexibility to expand and innovate to meet those demands, whilst at the same time achieving scale and cost efficiencies, will thrive.

0 North West

South West

London

East of England

LAC in Independent Resi Care

West Yorkshire East Midlands & Humber Midlands

LAC Other Resi Settings

North East

South West

% OF TOTAL LAC IN INDEPENDENT SETTINGS

Average weekly rates across the regions ranged between £3,600 and just over £4,000 and, rather surprisingly, the North East region came out on top whilst the South East region was lowest. At £3,734, London is perhaps lower than might be expected, however the data used by the local authorities to collate responses may well include out-ofcounty placements. The recent LaingBuisson Children’s Services UK Market Report notes a clear shift from ‘in area’ to ‘out of area’ placements in recent years, with 43% of looked after children in residential care being placed outside of the relevant council area at 31 March 2018, reflecting a shortage of suitable places in the locality.

% Independent

LOOKED AFTER CHILDREN Across the West Midlands, 85% of looked after children are supported by independent providers, with the next highest region being Yorkshire & Humber at 71%. Conversely, only around a third of looked after children across the east of England are within independent settings. Given the trends discussed previously, we would anticipate the proportion of looked after children in independent residential care to increase in the future. The LaingBuisson report notes a strong upward trend in the volume of homes (rather than places) in the last two years as many independent sector providers have expanded to meet higher demand.

An area which, according to LaingBuisson, offers significant scope for demand growth is extension of transitional care for young people into adulthood (labelled as ’Staying Close’ for residential care), with eight pilots having been launched for this in 2017 and 2018.

BUY AND BUILD ACQUISITIONS James Oyuke, a student at Birmingham Business School undertaking an MBA of Global Banking and Finance, has recently investigated ‘buy-and-build’ strategies for his dissertation, with the sponsorship of Hazlewoods. This article takes a closer look at the results of his investigations, including strategies employed by investors (typically private equity firms), and the key characteristics for effective execution of those strategies. WHAT IS ‘BUY-AND-BUILD’? Buy-and-build is an inorganic growth strategy involving buying assets (companies) at low multiples and merging them onto a bigger platform that will be valued at a higher multiple at exit. A “platform” acquisition is initially sought, with smaller add-on acquisitions then made to complement and grow the portfolio. This strategy has gained prominence in the lower mid-market, and is increasingly being pursued by private equity (PE) firms as the primary approach to generating investor returns. Whilst very much PE-driven (due to the level of capital available for fund managers to deploy), this strategy is also being implemented by corporate investors on an increasing scale.

HOW DOES THIS CREATE VALUE? This strategy creates value for investors in three ways: >

c apturing scale economies as the investments grow in size;

m ultiple arbitrage – increasing the value of a company between buying and selling it; and

d ebt tax shields that derive from the high leverage used in the deals.

Scale economies can be achieved through numerous synergistic benefits, including: >

b etter utilisation of central and back office staff across an enlarged group (thus reducing the impact of fixed costs on total profits);

c reating opportunities to expand diverse care offerings into new regions (within a multi-disciplinary group); and

i ncreasing ’buying power’ to reduce costs with suppliers and providers across the group.

Multiple arbitrage is achieved by acquiring add-on businesses at relatively low multiples. The value of these businesses are effectively automatically enhanced by virtue of being part of a larger group which can achieve a higher multiple on exit, thus instantly creating value within that business. WHY THE HEALTH AND CARE MARKET? There are several key industry characteristics that determine whether buy-and-build is an appropriate strategy to adopt. These include: >

a high level of fragmentation, allowing consolidation of numerous, smaller players into fewer, larger players who can attract higher valuations. Despite high volumes of consolidation over recent years, the health and care market remains highly fragmented and ripe for further consolidation;

c ompetition being mainly based on tenders;

p rofitability which, although generally seeing a squeeze across the industry, still offers good returns for the right provision; a bility to operate in multiple geographies; a vailability of the right platform company, the characteristics of which are discussed further below; and s ufficient volume of add-on targets (which are generally abundant in quantity across the sector, although not always in quality).

the right cultural fit with the

investing PE firm (or other acquirer) and an aligned philosophy to enable smooth integration at an operating level; >

demonstrable success and potential

for future growth; and >

standardised operating procedures.

WHAT MAKES A GOOD PLATFORM? Some of the key characteristics required for a platform business to create value for investors include:

EXIT STRATEGY Secondary buyouts remain the most common form of exit following a successful buy-and-build. In such cases, a PE firm sells its interest in the investment to another PE firm, which is then likely to continue to build the group further before, itself, exiting further down the line.

a n efficient and innovative business model with the right fundamental infrastructure to support add-on acquisitions;

Trade sales are also common, although less so than secondary buyouts, since few trade buyers possess the capital required for investments of this scale.

a n experienced, capable and motivated management team;

Whilst IPOs can be used as an exit route for PE investors, this is much less frequent.

WHAT CAN WE OFFER? Whether you are an investor looking to execute a buy-and-build strategy or a shareholder looking to sell, we have an experienced and dedicated team of Corporate Finance professionals offering expertise and many years of practical experience to help you succeed. In the 12 months to 31 December 2018, we advised on 209 completed transactions valued at ÂŁ851 million, compared with 159 completed deals valued at ÂŁ843 million in 2017. We are delighted to be included as a finalist for Financial Advisor of the Year in the 2019 LaingBuisson awards.

TAX UPDATE: A GUIDE TO RECENT CHANGES FOR THE HEALTHCARE SECTOR. Below, we take a closer look at some of the recent and upcoming changes in taxation rules that may impact health and care businesses.

PRIVATE SECTOR OFF-PAYROLL WORKING From April 2020, medium and large sized private sector businesses will become responsible for assessing the employment status of any off-payroll workers with whom they engage that operate through an intermediary.

The draft legislation also introduces a ‘client-led disagreement process’ in cases where the individual or agency disagrees with the determination. This is an appeal to the end user, who will be required to review and re-assess but there will be no independent review available.

Any healthcare business which pays for a worker’s services other than via its own payroll (for example by using a care agency) could potentially be affected. The off-payroll working rules apply to people working like employees, but operating through a company (often known as a personal service company or PSC). Currently it is the PSC’s responsibility to determine whether the off payroll working rules apply when engaged by a private sector company. Where the individual is self-employed, it is always the responsibility of the engaging firm to determine employment status and operate PAYE as appropriate.

The draft legislation also provides powers to HMRC such that it can pass any PAYE/NIC liability through the chain where it is unable to collect any unpaid taxes from the party that has failed to comply.

A small business, which is excluded from the new rules, will be defined using the Companies Act definition and will, therefore, be deemed to be small if it satisfies two of the following conditions: >

annual turnover - not more than £10.2 million;

balance sheet total - not more than £5.1 million; and

n umber of employees - not more than 50.

Where there are several agencies or intermediaries in the chain, the end client is required to complete and provide a ‘status determination sheet’ and communicate this down the chain so that the agency or intermediary making the payment to the worker can deduct PAYE/NIC as appropriate. If they fail to provide a valid statement, the end client will be treated as the fee-payer and become responsible for operating payroll as appropriate.

Final legislation should be published shortly after the Budget, but we would recommend that businesses begin to prepare now and assess how they may be impacted. Some actions to consider taking may include: 1. Identify any workers engaged through agencies or other intermediaries to establish if services are being provided through a PSC. 2. Identify any existing contracts extending beyond April 2020 and determine if the off-payroll rules will apply. Talk to those workers potentially affected. 3. Establish internal processes or seek professional advice to consider whether the rulesapply to new engagements. Whilst many workers provided by agencies (especially lower paid care workers) are likely to be on the payroll of the agency rather than working via their own limited companies, to minimise the risk of becoming liable for any underpaid PAYE and NICs, it is essential that businesses put in place processes to identify any workers who are affected and deal with them correctly. We can help you to understand your responsibilities and assess engagements to determine if the new rules will apply. Please contact Katie Williams on 01242 237661 or katie.williams@hazlewoods.co.uk for further information.

STRUCTURES AND BUILDINGS ALLOWANCE (SBA) A new capital allowance for qualifying expenditure on commercial structures and buildings was announced at Budget 2018, applying to contracts entered into on or after 29 October 2018. Relief is given at an annual rate of 2% on a straight-line basis over 50 years from the date that the building is first brought into use. If you are incurring expenditure on constructing, renovating or converting a non-residential building, it is likely that

you will have some costs eligible for the SBA. Relief can be claimed via the business tax return along with an allowance which includes details of qualifying expenditure incurred, confirmation of dates the contract was entered into and when the building was first brought into use. For any questions around the structures and buildings allowance, please contact Nick Haines on 01242 237661 or nick.haines@hazlewoods.co.uk.

HMRC PAYE PROCEDURES We have become aware that HMRC has been focusing in on PAYE compliance and sending out a spate of â&#x20AC;&#x2122;employer compliance check questionnairesâ&#x20AC;&#x2122; to businesses without notifying agents. The questionnaire asks a number of questions including details about the business, the directors, payroll, entertaining, benefits, loans and company vehicles.

questionnaire, we would recommend seeking professional advice as inaccurate answers or failure to complete the questionnaire could result in a lengthy and costly PAYE enquiry.

This appears to be a new approach to the traditional PAYE compliance visits, saving HMRC time and money in identifying companies that may not be complying. If you receive a

For more information on the HMRC Paye procedures please contact Katie Williams on 01242 237661 or katie.williams@hazlewoods.co.uk.

We can also carry out a PAYE health check to ensure that your systems are compliant and help to minimise any consequences that may arise from an investigation.

VAT AND AGENCY STAFF We have recently seen an increase in instances of nursing agencies (or employment businesses that provide nurses and other health professionals) promoting their supplies of care staff as exempt or â&#x20AC;&#x2DC;VAT freeâ&#x20AC;&#x2122;. Whilst HMRC has an informal extra-statutory concession which allows certain supplies by a nursing agency to be made without charging VAT, this does not apply in all circumstances. The purpose of the concession is to exempt the supply of nurses, nursing auxiliaries and care assistants by state regulated* agencies. It is a requirement of the concession that the exemption will only apply to the supply of nursing auxiliaries or care assistants, where their role requires them to undertake some direct medical care, such as administering drugs or taking blood pressures. HMRC have made it clear that the concession does not apply to supplies of general care assistants

who are only involved in providing personal care or working in care homes without nursing where they do not require supervision by health professionals to provide their services. Some nursing agencies are asking care providers to sign a certificate to confirm that the supply it is receiving falls within the concession. It should be noted that this is not a supply which requires a supplier to obtain a certificate, but care should still be taken that where suppliers are insisting on such documentation that these are only provided where the specific conditions of the concession are met. If you would like us to review the appropriateness of the VAT treatment of agency provision to your business, please contact Julian Millinchamp on 01242 237661 or julian.millinchamp@hazlewoods.co.uk.

(*In England, with effect from 1 October 2010, the legal requirement for nursing agencies to be registered under the Care Quality Commission ceased, therefore for supplies on or after 1 October 2010, the concession applies to employment business that would have been required to be registered with the Care Quality Commission before that date).

MEET THE TEAM

DAVID MAIN Partner 01242 246670

JOHN LUCAS Partner 01242 246670

RACHAEL ANSTEE Partner 01242 237661

MARTIN HOWARD Partner 01242 237661

RICHARD DADE Partner 01242 246670

SIMON WORSLEY Associate Partner 01242 237661

Windsor House, Bayshill Road, Cheltenham, GL50 3AT Tel. 01242 237661 Fax. 01242 584263 www.hazlewoods.co.uk / @Hazlewoods This newsletter has been prepared as a guide to topics of current financial business interests. We strongly recommend you take professional advice before making decisions on matters discussed here. No responsibility for any loss to any person acting as a result of the material can be accepted by us. Hazlewoods LLP is a Limited Liability Partnership registered in England and Wales with number OC311817. Registered office: Staverton Court, Staverton, Cheltenham, Glos, GL51 0UX. A list of LLP partners is available for inspection at each office. Hazlewoods LLP is registered to carry on audit work in the UK and regulated for a range of investment business activities by the Institute of Chartered Accountants in England & Wales.