28.10.15
Untangling knotty spin-out issues
Guest blog by legal expert Owen Willcox
A number of local authorities are considering or have already spun out elements of their adult social care services to new vehicles owned and or managed by the existing staff teams. Although adult social care is probably best-positioned in such a model, the transition can be complex and challenging.
Here are some of the key financial issues to consider:
VAT
Currently the provision of welfare services by a council is outside the VAT regime, either because the supplies are treated as non-business supplies and therefore outside the scope of VAT, or because the supplies are exempt from VAT. The council is also likely to have a beneficial VAT recovery regime enabling it to recover all of the VAT it incurs on purchases relating to the provision of welfare services – i.e. it currently enjoys the optimum VAT position.
To maximise the potential VAT implications of a spin out of adult social care services, some local authorities have established a new VAT Group structure in relation to the delivery of those services.
The group structure consists of a CQC regulated (charitable) entity and its wholly owned subsidiary, a non-regulated for profit entity. The subsidiary contracts with the council for the provision of the welfare services, but then subcontracts the physical delivery to its regulated parent company. To avoid additional cost, supplies to individual customers and personal budget holders are made by the charitable entity.
As a charity and a body regulated by the CQC, any supply of welfare services made by the entity will fall to be exempt from VAT.
In the Group structure, the council contracts with SubCo for the provision of welfare services. As an unregulated body, SubCo will charge for its services plus standard-rated VAT. Due to the council’s favourable VAT regime, it will be able to recover the VAT it is charged in full as attributable to a non-business activity.
To the extent that the Group makes supplies of welfare services to individuals, these should be contracted for and supplied by the charitable regulated entity because a private individual is unable to recover the VAT they are charged. However, by structuring the arrangements so that only the charity supplies welfare services to private individuals these supplies will be exempt from VAT.
Utilising a Community Benefit Society (CBS) as the charitable entity
If it is intended to utilise a CBS, there are some special registration requirements that must be followed.
The Financial Conduct Authority (FCA) will only register a society as a community benefit society if it is satisfied that “the business of the society is being or is intended to be conducted for the benefit of the community”.
A community benefit society which has objects that are charitable in law may be accepted by HMRC as an exempt charity and enjoy certain exemptions from taxation. A society that enjoys these benefits is subject to the legal rules applicable to charities and to certain provisions of the Charities Acts. However, at present, they do not have to register with, nor are they regulated by, the Charity Commission, although this position is under review by the government and should be monitored.
Payment mechanism
The payment mechanism (PM) is a fundamentally important part of the commercial arrangements. Among the key points to consider are: is the contractor to be paid in arrears or in advance; is a working capital payment required in advance at commencement of the contract; and will the contract payments be indexed?
The PM should contain a transparent description of how contract payments are to be ascertained and paid, and at what intervals. Likewise, for any payment adjustments (whether up or down) and the circumstances in which the contractor will be able to rely on any particular circumstances excusing it from its service delivery obligations.
There should also be a balanced payment and performance review mechanism that includes provision for adjusting the contract price if the contractor’s costs have increased by reason, for example, of nationally agreed pay increases, changes in the law and other overhead costs, such as premises-related costs.
Provision should be made for increases in the contract price for variations required by the council and for ensuring that the council cannot impose variations which would have a material and or adverse effect upon the contractor and the services.
Owen Willcox is a Partner in the Public Services Team at Geldards LLP