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Self’s assessment: Virgin on the ridiculous

Overview

Richard Branson’s Virgin Healthcare has paid no tax on £2bn NHS deals, said the headline on a Daily Mirror exclusive story on 26 January.

A couple of paragraphs later, it was confirmed that Virgin did not pay any corporation tax on its healthcare arm ‘because it has consistently racked up losses since being created in 2010.’ So what is going on? Is Virgin Healthcare a ‘parasite on the NHS’ or is the tax story more complicated?

The Daily Mirror went on to say that the business employs more than 7,000 staff, and is controlled by a BVI company. Losses of Virgin Care group in the year to March 2019 were £23.2m, on turnover of £290m. The subsidiary Virgin Healthcare Services made a profit of £503k, but its corporation tax bill was ‘wiped out by losses in other group companies.’ A spokesperson for Virgin group said that all operating companies were based in the countries where they operate, and pay their taxes there.

So is this a highly leveraged group, with profits being eroded by interest charges? Are there excessive management charges, or complex tax avoidance structures? Well no, or not as far as I can tell. Obviously I’ve not done a detailed forensic investigation, although I have pieced together rather more than the Daily Mirror did.

Is Virgin Healthcare a ‘parasite on the NHS’ or is the tax story more complicated?

Analysis

I started with the accounts for what I thought would be the main care company, Virgin Care Ltd (VCL). VCL now performs back office functions for the rest of the group, with contracts being in its subsidiary, Virgin Care Services Ltd (VCSL). But in the year to March 2019, VCL had turnover of £40.6m and made a loss before tax of £27.2m: in other words, all or most of the group losses were in this company. There are significant group creditors, and it is possible that interest is charged on intra-group balances – but the loan from the parent company of £7m is interest free, so it does not seem that significant interest is being paid outside the UK. Staff costs are £44m, for 1,400 staff, suggesting average remuneration of around £30k per person (although the two directors earned £800k between them).

There is a going concern review, which states that the company made significant operating losses on the East Staffordshire contract, which has now ended.

The tax notes show that transfer pricing adjustments have been made to recognise an additional £3.2m of tax cost. The tax credit for the year, at £2.3m, is therefore significantly less than the standard rate of corporation tax on the losses, and most of the current year loss has been surrendered as group relief. There is a potential deferred tax asset of £22m which has not been recognised.

So at this level, there seems to be an operating company with no obviously unusual tax arrangements, which has made significant losses on an unprofitable contract.

What about the rest of the group? The subsidiary VCSL made an operating profit of £500k, on turnover of £249m, and received a tax credit of £3m (a point which seems to have escaped the Daily Mirror). The tax credit relates mainly to transfer pricing adjustments, which at £2.7m are most of the other side of the entries in VCL. The Mirror is wrong to say that VCSL’s corporation tax was wiped out by group relief; in fact, after the transfer pricing adjustments, VCSL surrendered group relief of £3.4m to other companies. (The accounts for VCSL can be found here.)

Taken together, VCL and VCSL account for almost all of the turnover and operating losses of the Virgin Care group. The overall UK holding company, Virgin Holdings Ltd (VHL), includes the healthcare subgroup as well as rail, brand licensing and hotels. Its accounts for the year to 31 December 2018 are available here. The group’s profit for the year after taxation was £58m, most of which (£60m) related to brand licensing, although the rail business made a profit of £23m and there were, as noted above, losses in healthcare.

There is net finance income of £4m, so profits are clearly not being eroded by interest. And there is an overall tax charge of £20m, on profits of £78m. The tax charge is almost entirely UK corporation tax, and is £5m higher than a simple 19% of profits due to significant disallowed expenses.

Conclusion

In summary, the Virgin Healthcare business appears to be making real operating losses, mostly due to a contract which it has now terminated. There are no obvious tax planning structures, and the group tax charge (and real tax paid) is higher than the statutory rate.

It appears that the Daily Mirror’s story has little if anything to do with tax, and is a thinly-disguised protest about private companies running NHS contracts. It is perfectly valid to have the view that these contracts ought not to exist, and to criticise the companies concerned for their performance or their operating or staff policies – but please don’t pretend that a loss-making company should be paying corporation tax.

Frankly, that is verging (or perhaps Virgin) on the ridiculous.

First published in Tax Journal.