Our recent report shed light on complex company structures and tax avoidance in the publicly-funded care home industry
With the activities of Mossack Fonseca and its clients dominating the news in recent weeks, our recent report entitled Where does the money go?: Financialised chains and the crisis in adult residential care has proven to be timely. It shows how financialised chains are extracting cash from the residential care home industry through opaque business practices, tax avoidance and inflated pricing models.
Our report focuses on care home provider Four Seasons, although we suggest that the model used by this provider is replicated elsewhere in the industry. Indeed, we contend that ‘financialised chains’ such as Four Seasons promote a ‘trade narrative’ which asserts that local authorities are not paying a ‘fair price’ for looking after older people in residential care homes. They claim is that extra funding (in the order of £100 per bed per week) is needed and, due to the unwillingness of local authorities to pay for this, large chains operating in the care home sector will inevitably find themselves in financial difficulty. Our report undermines this ‘trade narrative’, and claims that care home costs are frequent driven by internal loans between companies acting under the management of private equity firms.
Now under the ownership of one such private equity firm, Terra Firma, the Four Seasons business has been weakened as Terra Firma split off the more profitable privately-funded residential accommodation (Brighterkind) and NHS-funded provision (Huntercombe) into separate business units. In fact, Terra Firma’s corporate structure has 180+ subsidiaries with many registered offshore and has changed considerably in the last 5 years, which has the effect of allowing assets and liabilities (including tax liabilities) to be shifted around and profits and losses to be constructed in different subsidiaries. The consequent impression of financial crisis at what remains of Four Seasons serves to strengthen the negotiating position with local authorities and the government in calling for what they describe as a ‘fair price’. Such is the complexity of Terra Firma and Four Season’s administrative arrangements that observers will struggle to assess the financial health of Four Seasons alone, and it is not possible to get a picture of the full corporate structure of Terra Firma or comprehensively assess how much value is being extracted from the Four Seasons chain.
This lack of transparency prevents the proper accountability which the government has a duty to ensure in a sector which relies on public money. We found that Four Seasons has not paid any corporation tax since Terra Firma acquired it. This relates above all to the debt based financial engineering used by Four Seasons. As reported in the media Four Seasons has £525 million of external debt to bond holders whose interest costs are £52 million a year; but our research shows that there is also more than £300 million of intra group debt charged at 15% which costs nearly £50 million. Four Seasons makes no profit until it has made 12% return on capital to service some £825 million of debt.
Running Four Seasons this way suits Terra Firma but it is not clear that this best serves the interests of residents or tax payers who fund around half the residents. There will be headlines this week about operating losses (after interest charges) at Four Seasons. But, the underlying issue is Tera Firma’s game of acquisition, tax avoidance, cash extraction and exit through debt based finance which is completely unsuited to what should be a low return, low risk activity in care. The result is a warped version of capitalism where losses are profits, failure equates to success, and value is extracted while risk is socialised.