In July 2006, amendments to the Dentists Act delivered a significant change to the dental profession, whereby dental services were able to be provided by a limited company. This led to an ever-increasing number of dentists incorporating their businesses. Although incorporating your dental practice could potentially be a beneficial venture, care must be taken that it is done legally and correctly to avoid any future consequences. ‘Flawed incorporations’ as they are known, can lead to significant penalties and fines from HMRC to recover any tax that has been misappropriated by the incorporation.
Avoiding a big mistake
A common, and possibly the largest mistake upon incorporating, is retaining the NHS contract in the personal name of the dentists but transferring the rest of the business into a limited company. Where an NHS contract is held between an individual dentist and NHS England, the contract must be replaced by a new contract between the company and the NHS. There is the potential for the NHS to use this opportunity to renegotiate the terms of the contract or block the transfer entirely – but for the goodwill to transfer in full to the company this change needs to take place.
Clause 12 of the GDS contract prohibits assignment of NHS contracts, so you cannot just shift the benefit of the contract to the limited company. A way to overcome this problem can be to set up a sub-contract agreement for the clinical services.
The sub-contract company can provide the clinical services, including nursing staff, and these services will be exempt from VAT. Care must be taken to ensure that any sub-contract arrangement is on an arm’s length basis so it cannot be attacked by HMRC under its General Anti-Abuse Rule (GAAR). For example, sub-contract agreements that account for, say, 90% of fee income would not be considered commercial and arguably must include charges for non-clinical elements. Also, there would potentially be a VAT liability which the dentist would not be able to recover.
A separate legal entity
Part of the problem upon incorporating is that it is often viewed as the same business just with a lower marginal rate of tax. Incorporating a sole trader business into a limited company should be seen as an entirely separate legal entity. Assets and liabilities should be transferred to the company correctly, making sure that any assets which are held on finance have had the finance agreements changed into the limited company name. As a limited company protects the individual from being personally liable, finance companies may be reluctant to change the finance agreement. In order to transfer the ownership of assets correctly to the limited company, a rental agreement may need to be drawn up for such assets. A similar scenario arises if the property which the practice is run from is personally owned by the individual and the company uses it. In this instance, a lease agreement would be needed. The company must have a right to occupy the building.
NHS pension scheme
Another potential area for misunderstanding is regarding the NHS pension scheme upon incorporation. Where an associate incorporates, their entitlement to the NHS pension scheme and death in service benefits disappear entirely. For a principal looking to incorporate, as long as the contract is transferred correctly, as discussed above, the benefits of the NHS scheme will transfer as well. The limitation for principals is that NHS guidance states that their pensionable income is determined by salaries and dividends paid on NHS income. If significant dividends are needed to obtain the pension entitlement, this will increase the income tax due, which may reduce the benefit of incorporation. Remember, you have many years to accrue your NHS benefits and must work within annual and lifetime allowances for deemed contributions – so a longer-term plan to provide for your retirement is a sensible one.
Local Area Team involvement
NHS England has published guidance for incorporation of dental contracts. This guidance details a few criteria that must be adhered to for the NHS to consider the incorporation request. It is important to understand that the Local Area Team (LAT) do not need to agree an incorporation request unless it can show clear benefits to the patients and for the area team. The main condition is that at least 50% of the directors of the limited company are dentists or Dental Care Professionals (DCPs) registered with the GDC. Another key condition is that if the LAT agrees to the incorporation in principle, it will be contingent upon CQC registration for the limited company.
An uncertain future
Straightforward incorporations are not as beneficial as they have been historically. Over recent years there have been a number of changes which have been to the disadvantage of the individual. There is no longer Entrepreneurs’ relief available on transferring goodwill. There is the option to claim for gift relief on the goodwill. The problem here is that you do not have the availability of a director’s loan account to shelter your income. The only real benefit arises in a scenario where some of the profits can be left in the company which allows for the tax to be deferred. The tax-savings can also be increased where the company has additional shareholders who have basic rate tax bands that can be utilised.
The future of incorporations may be uncertain. The £5,000 tax-free dividend income is only in its second year and yet in the March 2017 budget, it was announced that this amount would be reduced to £2,000. It is possible that the future path for incorporating will lead practice owners down the sub-contract route rather than full incorporations.
About the author
Sophie Kwiatkowski is an accountant with PFM Dental Accountancy – part of the PFM Dental group, which can help with everything from mortgages and financial advice to legal services and practice purchases.