Incorporating a dental practice

Whether you are selling or buying or just continuing your Practice, this explanation is for you..  

This Memorandum is a generalisation. Whether to incorporate needs to be on the joint advice of your Accountant and your Solicitor. It is based on our current understanding of the law and NHS Dental Contracts

1. TAX

If there is a healthy net profit being earned by a dentist out of his ownership of the whole or part of a Dental Practice then on advice from your Accountant, it may well be that you would pay less Income Tax as a Director and/or shareholder through Director's salary and/or dividends from the limited company than Income Tax you are paying on self assessment.  

In addition, if the practice assets are transferred to a Limited Company it may well be that for 2 or 3 years there would be a healthy Directors Loan Account in your name in the Limited Company so that drawings could be treated for a period of time as Capital not Income.  The advantages of incorporation generally that are referred to in this paragraph relate not just to dentistry but business interests across the board other than possibly property ownership.  These matters however, are strictly within the realm of your Accountants to advise. 

However, before you were to proceed to incorporate the following points should be considered that relate to Dental Practices:

2. PRIVATE PRACTICES

If the decision is made from the Accountants point of view that purely looking at Tax it is advantage to you to incorporate, then so long as there is a written legal agreement transferring assets from the dental practice to the Limited Company then no particular difficulties should be experienced in incorporation of a private practice. 

If however, it is your intention to sell your practice or part of your practice in a relatively short period of time then if you were to sell the assets in the practice to a Buyer through the Limited Company, there could a double taxation problem which would mean that the advantages short term of the income tax saving, may not be worthwhile.

As an alternative, it is possible to sell shares in the Limited Company so that the buyer would end up owning the Limited Company but some Buyers are nervous of purchasing the shares in a limited company since there can be undisclosed liabilities in the limited company that continue against the Limited Company irrespective as to who the shareholders may be. Warranties by the selling shareholders help up to a point depending on the strength of the Seller.

Changes in ownership will need to be notified to the Care Quality Commission (CQC)

3. NHS PRACTICES

a. Attitude of LAT Local Area Team of NHS

Strictly, a PDS NHS contract is not capable of transfer at all.

A GDS Contract has a clause restricting the transfer of the contract but over the years Dental Specialist Solicitors have developed a method of transferring a GDS Contract through what is called "the Partnership route"   This is largely, a legal fiction.   If you look at a GDS Contract you will see that there are clauses that permit an individual or joint owners taking in an additional partner as a Provider under the terms of the contract.     There are also provisions that joint owners may allow for a Provider to retire even if that means that the GDS contract remains in one name. 

Consequently, on completion the Vendor and Purchaser become joint Providers under the GDS Contract and there is a Partnership Agreement entered into on completion whereby 99.9% of the "Partnership" is owned by the Purchaser and 0.1% by the Seller.

After a decent interval of time, e.g. two months from completion, Notice is given to the LAT that the Seller has retired from the Partnership.

It is usual that the Seller does not get paid anything for his 0.1% of the Partnership.

Appropriate documents, such as a Partnership Agreement and a Deed of Retirement from the Partnership are entered into upon completion.

An LAT does not have to accept a transfer of a GDS Contract into the name of a Limited Company.    The Partnership Route would not be available as a matter of Law.   The LAT may agree for the transfer of the GDS Contract but if it refuses there is very little that can be done to force the issue.

Indeed recent DoH Guidelines discourage LATs from accepting new Limited Companies.

However some LATs take a more relaxed view than others.

One way in which the LAT can still exert its influence by insisting that any transfer of a GDS Contract to the new limited company must include a clause whereby the LAT can control any changes in shareholding. Again this is not universal

b. Not transferring the NHS Contract but practising as a limited company

This can be potentially dangerous. If the NHS ascertains that the GDS contract remains in the individual name rather than the Limited Company it would give the NHS the opportunity to terminate the GDS Contract for breach of contract. While this would not automatically happen, if the LAT valued the continuing role of the Practice as an NHS Practice this would not be the way to persuade the NHS to allow the incorporation. I

have come across situations where the payment agency of the NHS, the Business Services Agency (BSA) have been requested to pay into a Limited Company Bank account while the contract remains in the name of the individual.   Sometimes this is not picked up by the NHS but there risk of termination is still there which could have disastrous repercussions for the Practice and its goodwill value.

I have also seen a situation where the Practice is incorporated for Tax purposes, the GDS contract is left in the name of the individual and the NHS Payments are remitted to the individuals Bank Account.  The individual then transfers that money to the Limited Company.   This could have the risk of double Taxation, i.e. Tax as a self employed individual on self assessment on the money received from the NHS and Corporation Tax in the hands of the Limited Company.   This could be a far worse result than the intention of saving

c. Selling the Practice through a Limited Company

(i) Asset sale

As indicated above the Partnership Route may be allowed by the LAT but there is no legal right

(ii) Sale of shares

As indicated in paragraph 1 above, some Buyers are nervous of purchasing the shares in a limited company since there can be undisclosed liabilities in the limited company that continue against the Limited Company irrespective as to who the shareholders may be.

d. Buying the Practice through a Limited Company

(i) Asset sale

As indicated above the Partnership Route may be allowed by the LAT but there is no legal right

(ii) Sale of shares

Again, some Buyers are nervous of purchasing the shares in a limited company since there can be undisclosed liabilities in the limited company. Warranties by the selling shareholders help up to a point depending on the strength of the Seller

4. HYBRID - PART NHS PART PRIVATE

If the Private element of the Practice is sufficiently profitable then the Practice can be divided between incorporated Private Practice and non-incorporated NHS Practice but the warnings about share sales can still relate. Warranties by the selling shareholders help up to a point depending on the strength of the Seller

5. CONCLUSION

Decision making is not straightforward. Each case stands on its own merits. Tax savings versus the risks above are difficult to assess. A discussion with your Accountant and Solicitor would be helpful. Much depends on commercial and/or emotional decisions to be taken by the client.

Please call on 0845 603 0708 if you would to discuss your options in further detail.

Dental Solicitors

Manchester