There has been an increase in incorporations of dental practices over the past few years. Whilst many incorporations have been properly done and for valid reasons, it is estimated that many more have not been. So how do you ensure that your incorporation is robust?
It is important to recognise, first and foremost, that the Limited Company (“NewCo”) is a separate legal entity and personality from the Sole Practitioner or Partnership (“Dentist). The incorporation of a practice should be envisaged as an arms’ length sale from Dentist to a quite separate party, NewCo. The fact that Dentist may be the sole Director and Shareholder of NewCo is irrelevant to the incorporation process.
For an incorporation to take place, the assets and liabilities of the practice must be properly transferred to NewCo. It follows that as a general principle, no assets which are being used by the practice in its day to day operations should be left in the clinician’s personal ownership, that is outside NewCo, although there are some exceptions. Assets which should be transferred may include, for example, dental chairs, cabinetry, autoclaves and stock.
Particular care needs to be taken with:
- assets held on finance, where the finance agreement is in Dentist’s name. Such cannot be transferred (sold) to NewCo without finance company agreement, and very often the finance company will not easily give this agreement, preferring for the liability to remain personally with Dentist.
- ensuring that the interest on any loans continues to be tax deductible where possible. For instance, interest payable on practice loans is generally tax deductible against the profits arising from that business. Interest on property loans where the property is not transferred to NewCo needs special treatment.
Another major asset which usually remains with Dentist on incorporation is the practice premises. If the property is freehold, Dentist would retain the freehold, then enter into a Lease between Dentist as the owner and NewCo as the tenant. However, this could create CGT problems, and restriction of Entrepreneur’s Relief, which requires careful thought. And if the property is leasehold, it would be normal for the Lease to be assigned by Dentist to NewCo. Dentist would be expected to guarantee the obligations of NewCo under the Lease.
The largest asset of the Dentist may well be his Goodwill. There are two aspects of this:
- It’s valuation
- It’s transfer
The valuation of Goodwill is a sensitive issue, leading as it does to a capital gains tax charge, which will be at a lesser rate than normal income tax rates (we do not comment here on the timing/saving/deferral arguments in this respect).
Goodwill needs to be valued at arms’ length market value, and this must be done by a competent specialist dental valuer. Dental practices, whether private or NHS, are unlike other businesses, and there are particular approaches which apply.
You need to be aware that there is a risk of the valuation being challenged by HMRC; the tax savings are just as apparent to tax inspectors as they are to tax advisers. And on a related note, the Sale Agreement must include a price adjustment provision, which requires careful drafting.
The Goodwill must be actively transferred to NewCo, which will be one of the matters addressed in the Sale Agreement. For an NHS Contract made between Dentist and his PCT, this must be replaced by a Contract between NewCo and the PCT. This requires the PCT to re-issue the PCT Contract, and many clinicians avoid this for a variety of reasons. However, for the incorporation of the practice to be fully valid, the Goodwill must be legally transferred from Dentist to NewCo.
The employees’ employment must be transferred to NewCo. This entails a separate PAYE Scheme to be set up, and the employees transferred to it. The transfer of undertakings regulations (TUPE) need to be followed, which gives the employees the protection of continuous employment. However, P45s must be issued and a new Scheme started. On a related note, tself-employed personnel, that is associates and hygienists, must also be transferred to NewCo. Superannuation will follow the provider, and if the Contract has been properly transferred into the name of NewCo, the superannuation deductions should follow.
Overall, incorporation of a dental practice should be done fully and completely, and it requires the use of a specialist Solicitor to draw up the Sale Agreement, the Lease, the transfer of the PCT Contract and the personnel and assist with any switches in security relating to finance changes. Dentist will need a formal valuation of the Goodwill, and accounting assistance and detailed tax advice. Dentist’s advisers should ideally work as a team to ensure that Dentist reaps all the benefits available from incorporation, and avoids the pitfalls, which may take a few years to become evident. Superannuation is a perfect example. It’s a complex area and advice must be taken. Most importantly, the accountant must ensure that the dentist’s decision to incorporate is made with a full and complete knowledge of the facts and consequences, both short and long term.
This article is based on new NASDAL guidance compiled by Johnny Minford of specialist dental accountants Minford Chartered Accountants and specialist dental solicitor, Russell Abrahams of Abrahams Dresden LLP. The guidance in full can be found at: www.nasdal.org.uk