While preparing a business in the care sector for sale, it is crucial to understand how employment tax risks when selling a business can affect the transaction. Issues such as National Minimum Wage compliance, worker status, agency labour and payroll reporting are common areas of scrutiny within the care industry. Any problems identified during the due diligence process could ultimately affect the valuation of your care business, delay the sale and create compliance risks with HMRC.
This article from our transaction and advisory services experts highlights the key employment tax due diligence risks within the care sector that businesses should address ahead of a sale. By identifying issues early, you can strengthen your compliance position and prepare your care business for sale more effectively, presenting a higher value business to prospective buyers.
National Minimum Wage compliance
National Minimum Wage (NMW) is more than just a rate; it is a calculation based on several factors. Due to the nature of the work, care sector businesses are particularly exposed to accidental underpayments, making National Minimum Wage compliance a vital area of focus. Ensuring your NMW position is correct is essential before entering into any sale process, as this is one of the most challenged areas during due diligence and a common source of NMW risk for care providers.
- For salaried employees, or anyone being paid an annual salary, what has the NMW calculation been based on? Has it been based on the number of actual working days in the year?
- Common causes of underpayment for all employees, but predominantly non-salaried workers, are:
- requiring employees to provide their own uniform, or specific clothing, for work (for example, when you have a uniform policy that must be adhered to) but not reimbursing them for the cost of this
- deductions from employee pay for items such as DBS checks, fees for pay advances or the cost of uniforms
- failure to increase rates of pay, particularly for apprentices or trainees
- unpaid working time such as inadvertent overtime, career changeover time, training time, time travelling between appointments, break time that should be counted as work time (e.g. where they are required to stay onsite during breaks) and requiring employees to arrive at work before a shift starts
- the enhanced elements of enhanced premium rates of pay being included in the calculation of NMW
- for live-in carers, failure to operate Daily Average Agreements (DAA) correctly and in line with NMW requirements
- failure to consider payments from employees to employer for accommodation as part of the NMW calculation.
Different categories of workers have specific definitions for NMW. The correct calculation depends on the category an individual falls into, which requires careful review.
Agency workers and tax compliance
Many care providers rely on agency or temporary workers, which can introduce tax risks. If your business uses agency labour, you could be liable for underpayments of tax in relation to these workers if compliance is not managed correctly. This is an important part of agency worker tax compliance in the care sector and buyers will expect to see evidence that risks have been reviewed and addressed.
Carrying out tax compliance checks across your supply chain can highlight any issues that need to be resolved before a sale.
Employment status and IR35 considerations
Businesses in the care sector often engage individuals on a self-employed basis or through personal service companies (PSC). These arrangements can generate employment status and IR35 risks if not reviewed properly.
This is another area where buyers will expect evidence that you have considered your obligations. Clear and well-documented IR35 care sector guidance can help demonstrate that you have taken reasonable steps to manage the risks.
Key questions include:
- Has the business considered whether these individuals should be employed for tax purposes?
- Is there evidence of such considerations?
- Is the business above the threshold to be classified as a “small” business for IR35 purposes?
- Do any company directors submit invoices to the company for payment outside of the payroll?
PAYE and reporting obligations
Accurate and timely PAYE reporting is fundamental as you prepare your business for sale. Any gaps or errors can indicate wider compliance issues and may influence the valuation of your care business during negotiations.
Key considerations include:
- Are all employment tax-related returns completed by the due date? For example, payroll RTI returns, P11D & P11D(b), PSA.
- Does the PSA contract accurately cover the categories of items included on the PSA return?
- Have Globally Mobile Employee Notifications (s.690 applications) been submitted for any employees who spend their working time both in the UK and overseas?
- Where payrolling benefits, are you registered with HMRC for all benefits you payroll?
Benefits and expenses reporting
Buyers expect evidence that all taxable benefits and expenses have been identified and reported correctly. This is an area where small oversights can accumulate and result in significant liabilities.
You should consider:
- Have you had any employment tax support to ensure that you are capturing and reporting all taxable benefits and expenses?
- Have you considered everything provided to employees and/or directors for appropriate benefit reporting? This may include (but is not limited to) events, meals out, vouchers and small gifts.
- Have you considered whether any employee expenses are taxable and should be reported to HMRC?
Salary sacrifice compliance
Salary sacrifice arrangements are common in the care sector but not always executed correctly. Errors can affect both NMW compliance and tax treatment, resulting in additional employment tax risks when selling a business.
Ask yourself the following questions:
- Have contractual changes been implemented to allow for the salary sacrifice arrangements for all participating employees?
- Have checks been undertaken to ensure the salary sacrifice deduction does not bring employees below the NMW?
- If pensions are available under salary sacrifice, has your pension provider been notified?
Other payroll-related risks
A number of additional payroll areas can also create risk during a sale if not managed correctly:
- Terminations payments/settlement agreements – have these been calculated correctly historically?
- Overseas – do you have any overseas movement of employees and has this been considered for payroll purposes?
- Construction Industry Scheme (CIS) – have you considered whether this is relevant, for example, when renting out your own facilities?
Next steps for business owners in the care sector
A robust employment tax position can make a significant difference to the value of your business and the duration of the sale process. Addressing these employment tax risks when selling a business early can help protect the valuation of your care business and reduce delays during the due diligence process.
Our employment tax and transaction advisory experts can help you identify risks and strengthen your position as you prepare for due diligence. Get in touch with us today to find out more about our specialist services.
