New dental companies are finally being allowed to form following this summer’s removal of restrictions on practices wishing to incorporate.
There are one or two conditions in that the majority of the directors have to be GDC registrants, either dentists or dental care professionals, and the GDC will keep a list of all corporate bodies carrying out ‘the business of dentistry’.
Furthermore, each corporate will need to pay an annual fee to the GDC and file an annual return consisting of basic information about the company, its directors and staff. The GDC will impose financial penalties on a corporate for serious misconduct if necessary.
There are many advantages and disadvantages to incorporation, which are extremely complex, and any dentist considering the move should take advice from their accountant beforehand.
Clearly the main commercial advantage of running any business through a limited company is that the format provides protection to the owner for their personal assets against commercial risk. However, this advantage may be of no use where bank finance and other sources of credit can be obtained only on giving personal guarantees. Nonetheless, for many businesses limited liability is probably the single most important factor in deciding whether or not to incorporate.
Furthermore, the ability to incorporate will enable dentists to have shareholders (including their relations and staff), raise capital from outside to purchase new premises or dental equipment and keep ownership of the business separate from the management. It will also provide dentists with the option to bring other dental professionals into the practice management and enable future retirement planning to be easier, and hopefully allow practices to grow substantially.
One of the other main attractions to incorporation are the tax benefits. Dentists may be able to extract value from the business in a much more tax-efficient manner compared to their existing sole trader/partnership basis. For many a plus point will be the fact that they will no longer have to pay income tax at 40% on profits earned but not yet extracted from the business. By incorporating and introducing more efficient tax extraction policies, we estimate that dentists could save as much as £8,000 in tax per annum.
Another issue that has to be considered from a tax perspective is the status of associates. Both the Department of Health and Her Majesty’s Revenue & Customs have confirmed that they accept the self-employed status of the associate and therefore this becomes less of an issue for consideration of incorporation.
There are also potential downsides to incorporation from a tax perspective which include tax charges on company cars, a less favourable treatment of trading losses and the possibility of reducing Inheritance Tax relief for assets owned personally but not used by the company (e.g. offices). Clearly, these should all be considered in tandem with the benefits of adopting a reviser profit extraction methodology.
There are also other non-tax reasons why running the business through a limited company may not be considered appropriate. Limited companies require additional regulatory requirements, which include the production of accounts in statutory format and the filing of accounts and information at Companies House. Therefore staff, suppliers and members of the general public could extract and review the accounts of the business. This lack of privacy may result in certain dentists not wanting to incorporate.
The transfer in the business meanwhile will certainly result in additional professional fees and there will be an upheaval during the move from sole trader/sole partnership to the limited company. Banks, clients, suppliers and insurers (personal indemnity for example) need to be informed of the change in trading status. Furthermore, prior to a dental practice incorporating, there is a necessity for approval from the GDC, which could take anything up to six weeks.
I have set out a number of the factors that have to be considered when deciding whether or not to incorporate. This list is not exhaustive and professional advice should be taken in all cases prior to a decision being made. There is no one set answer for all dental practices and each one should be considered under its own merits.
For example, particular care is needed where there is a prospect that the dental practice could be sold within the next two or three years as this could taint Business Asset Taper relief by incorporating the business now. Therefore, while it is relatively easy to get a business into a company, it is not so easy to exit the company, therefore you have to be sure that this is the route you wish to take.
Peter Gallanagh is a partner at chartered accountants Campbell Dallas. He can be reached on 0141 887 4141 or [email protected].