To incorporate or not to incorporate?
Changes to the 1984 Dentists Act came into force on 31 July 2006, finally allowing dentists who in the past were only able to operate as sole traders and partnerships, to trade as a limited company or a limited liability partnership.
Since this policy change, almost every dental practice owner/partner will have considered incorporation at some point in their practice’s growth. Should they incorporate or not? And if they do incorporate, what are the financial, legal, administrative implications for the new practice, its directors/partners? And are Tax and NI implications the only consideration?
What is a limited company?
A Limited Company is a separate legal entity to that of Sole Practitioner or Partnership; a dental practice that incorporates will therefore need to be formally restructured as such, even if the practitioner is a Sole Director or Shareholder.
All assets and liabilities of the existing practice must be transferred to the new Limited Company which effectively takes ownership of all equipment, dental chairs, cabinetry and other practice items.
Any assets held on personal finance loans/agreements in the dentist’s name must be restructured and transferred fully to ownership of the new Limited Company. Some finance companies may not readily wish to give up their existing loan agreements but they cannot simply be passed on to the new Limited Company as standing orders.
There are Asset Transfer exemptions, which include cars and practice or property loans in the personal name of the dentist. Tax deductible interest against profits from practice loans need scrutiny to ensure the new Limited Company loan still offers tax deductible benefits.
Freehold property is a separate asset and treated independently on incorporation. There are Capital Gains Tax implications to consider. For example, the dentist may own the freehold and lease the property to the Limited Company, its ‘tenant’. Or the leased property may be assigned to the Limited Company by the dentist, who would have to satisfy its guarantee obligations under the Lease contract.
It is worth remembering the formal framework of a Limited Company means your company accounts are published and accessible online. This formality is legally binding and whilst you (and any shareholders) own the company, the assets owned by the company do not belong to you personally.
Crucially this is the practice’s biggest and most important asset, both in terms of valuation and transfer. Accordingly, the unique status of dental practices, with their private and NHS contracts, and the intricate negotiations involved in transferring these to the new Limited Company, require the expertise of specialist dental accountants, lawyers and valuers.
Since 21 April 2002, Goodwill transferred into a Limited Company is exempt from Stamp Duty. But along with incorporation incentives additional administration and compliance considerations must also be factored in. PAYE Schemes and Superannuation pension contracts must be transferred to the new Limited Company which may have implications for a dentist whose income is non NHS based.
Tax laws introduced on 3rd December 2014 have made incorporation a less attractive tax saving prospect, however the pre-budget report highlights certain hurdles that still need to be overcome, which is why seeking specialist Tax advice makes fiscal sense.
Incorporation is still an attractive option, not least to shelter future profits from 40% income tax to 20% corporation tax.
So yes, incorporation involves complex and multi-faceted negotiations. But there are also clear benefits:
- Tax savings
- Corporate Intangibles Regime
- Tax Free Motor Allowance
- Increased audit thresholds therefore reduced compliance costs
- Separate ownership from management
- Ability to grant floating charges or company assets to a bank
- Protection offered through limited liability
- Enhanced status
- Creating a corporate ethos
- Non-dentist family members can be shareholders in the company
There is a great deal of online guidance and advice for any dentists considering incorporation of their dental practice. Whilst there are many benefits to doing so, there are also serious repercussions if all the issues are not carefully examined with experts to guide you through the intricate complexities involved.
It is vital that the legal, accounting and dental valuation teams work closely together to achieve a fully integrated and legal framework for the new Limited Company structure. So seeking expert specialist services at the outset is paramount.
Riz Akhtar, Partner of RA Accountants LLP,
ACCA accredited firm of Chartered Certified Accountants, Auditors and Tax Advisors
T: 0208 429 7474