Plugging the leaks in the UK care home industry – Strategies for resolving the financial crisis in the residential and nursing home sector
This report identifies where each pound that goes into the care home industry ends up by using a forensic study of the accounts of over 830 adult care home companies, including the 26 largest providers. The companies examined have a combined income of £10.4bn, representing 68% of the total estimated market value for independent providers in 2017.
The report’s key findings are:
1. There are significant levels of leakage across the care home sector and the type of care home business impacts the amount leaking out.
- For 784 small and medium-sized care home companies £7 of every £100 received goes to profit before tax, rent payments, directors’ remuneration, and net interest paid out. For the 18 largest for-profit providers the level of leakage is more than double at £15 of every £100 received.
2. There are significant differences in the level of leakage amongst the largest 26 care home providers.
- For the 8 largest not-for-profit providers the level of leakage is £8.60 out of every £100 received, and amounts to £93m a year
- For the 5 largest for-profit providers (Private Equity owned or backed) the level of leakage is £9.06 out of every £100 received, and amounts to £159m a year.
- For the 13 largest for-profit providers (Non-Private Equity) the level of leakage is £19.49 out of every £100 received, and amounts to £401m a year.
3. Some of the largest 26 providers use complex company structures to maximise leakage and hide profit extraction.
- 6 have an offshore owner in a tax haven; 18 split up their operating and property companies; 9 use sale and leaseback; and 12 purchase services or supplies from a related company. The significance of each of these is discussed in the report.
4. The largest 26 providers pay out significant amounts in rent payments each year, often to related companies which are based outside of the UK’s tax jurisdiction.
- 7 of the 18 largest for-profit providers spend between 15-32% of their income on rent payments, totalling £264m a year.
- The 8 largest not-for-profit providers spend £2.34 out of every £100 of their income on rent, compared to the £11.07 out of every £100 received for the 18 largest for-profit providers.
5. Debt repayments are a significant area of leakage for some of the largest 26 providers.
- The problem is especially serious in relation to homes operated by the 5 largest for-profit care home providers which are owned or backed by Private Equity. Collectively their debts amount to £35,000 for each care bed they own, and they pay interest costs of £102 per bed per week; this means that 16% of the weekly fees paid to these providers by local authorities or individuals for residential care goes towards paying off debt.
6. Much of the debt loaded onto the care homes by the largest for-profit providers is owed to related companies that are often based offshore and at high rates of interest i.e. a form of hidden profit extraction which also avoids tax.
- Across the 26 largest care home providers a total of £261 million of the money they receive to provide care goes towards repaying debt. Out of this £117 million (45%) are payments to related companies which is a known way of avoiding tax and hiding profits.
7. Splitting the care home business into separate operating and property companies raises other public interest concerns, including the ability of a care home operator to pay compensation for causing harm, and potential tax avoidance.
8. Leakage is also occurring through management fees and related company transactions.
Based on these findings we make the following recommendations:
Recommendation 1: A Care Home Transparency Act – care home providers should be mandated to disclose where their income goes.
Recommendation 2: A new form of care regulation is required to prevent care home companies with unsatisfactory financial models from providing care in the UK.
Recommendation 3: Capital should be made available by the government for the provision of new care homes.
Plugging the leaks in the UK care home industry – Strategies for resolving the financial crisis in the residential and nursing home sector
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