Tax issues unpicked: part four – selling a dental practice
Shoaib Khan explores the tax questions and considerations when one is selling a dental practice.
Not many dentists would have set up a practice with the intention of selling it at the outset. In most cases, when it comes to selling their practice, many will have built the value organically or by accident, focusing on delivering quality dental care in their practice, which may now be a high-value asset.
Whether you are looking to retire, sell to your associate or a corporate, or even passing the business on to the family’s younger generation, structuring the sale of your dental practice will have many tax implications.
Each sale will be different, and there will be much to consider from a legal and regulatory perspective. For example, the transfer of contracts and agreements for NHS practices, dealing with treatments that are yet to be concluded, preserving practice goodwill, property and employment matters and the timely transfer of CQC registration.
However, to maximise value, most practice owners will need to consider personal tax and business tax issues.
Ideally, the preparation should start at least three years before the intended sale. With dental practice owned by a company, one of the key considerations is whether to structure the sale as an asset sale, or a share sale.
Whilst the pros and cons of each option are outside the scope of this article, we will focus on tax issues with reference to selling the shares in your company.
Maximising personal tax reliefs
Companies that have not been operated with a view to sell may have acquired investment assets over time, such as investment properties. At the time, the shareholders may have preferred to acquire the investment through the company (e.g. rental properties) to avoid having to make a distribution, incur an income tax liability and then invest in their personal names.
This common occurrence can result in the shares not qualifying for business asset disposal relief (BADR) for capital gains tax or business property relief for inheritance tax.
There are specific rules around the types of shares that qualify for BADR. One essential requirement is that the shares must be of a trading company. Having too many investment assets could result in the seller company not qualifying for BADR.
Another common occurrence is for owners to give a different class of shares to family members. It is possible that not each class of shares would qualify for BADR.
BADR is a generous capital gains tax relief, which replaced entrepreneurs’ relief. Although the provisions are largely the same, the lifetime allowance was restricted to £1m. This means that the first £1m of the gain you make when you sell a qualifying asset would be taxed at 10%. The remainder being taxed at the standard rate of 20%.
For larger transactions, the relief may not be a concern. However, I’m not aware of anyone who would want to pay an additional £100,000 in tax if they can avoid it.
It would be advisable to review the company’s position in relation to BADR, before selling the practice. If required, the owners can reorganise the corporate structure. They can also separate the investment assets from the trading assets and reorganise the company’s share capital accordingly.
As is often the case with owner-managed businesses, a company can often be ‘untidy’ because of the lack of separation of the shareholders’ personal affairs and the company affairs.
Generally, market practice is for the buyer to review the seller’s company tax returns. This applies to all tax periods that are still open to HMRC enquiry.
They need to make sure that they do not inherit any unexpected tax liabilities. As discussed in our previous article, the buyer will be carrying out tax due diligence prior to the acquisition.
Common tax problems
Although this is not an exhaustive list, common tax problems found during the due diligence process are:
- Lifestyle: the company has been run as a lifestyle business, meeting the personal expenditures of the shareholder/director. There are specific reporting requirements in this respect
- Corporation Tax compliance: allowance deductions against profits have been overstated
- Payroll compliance: whether PAYE has been operated correctly, benefits in kind declared, expense reimbursements made correctly, and PAYE settlement agreements entered for staff benefits
- Profit extraction: the shareholders have implemented methods to extract funds tax-efficiently, which may constitute tax avoidance
- Overclaims: capital allowances or research and development costs are over claimed, or the basis of the claim is flawed.
For all of the above, it is possible that the transactions have not been recorded or reported correctly or both. If that is the case, additional tax, penalties and interest might be due.
If a buyer identifies these risks, it is likely that they will quantify the risks and seek to mitigate any future tax liabilities. Naturally, this could have an impact on how the buyer views the commercial viability of the company. The buyer may seek to revisit the commercial terms, propose to reduce, retain or defer part of the purchase price, or request additional contractual protection in the form of indemnities.
In extreme cases, where the risks are too large and difficult to mitigate, they may withdraw from the transaction entirely.
Seller due diligence
As the seller, you may consider engaging a specialist tax adviser to review your practice’s tax affairs. Identify potential risks and address these prior to bringing the practice on the market. For independence, your practice accountant will not be able to carry this out (essentially, they will be reviewing their work).
Depending on the size of your business, tax due diligence doesn’t have to be comprehensive or expensive. Rather, it should be focused on the specific tax matters. More specifically those affecting the value which the transaction in question is expected to generate.
Seller due diligence should be defined so as to provide potential buyers with sufficient information to make reasonable bids without having to carry out extensive due diligence of their own. Furthermore, the seller due diligence report can form part of the marketing package your broker prepares for prospective buyers.
Enjoy your retirement…. tax free?
After successfully selling your dental practice and having enjoyed a great career as a dentist, it’s time to relax and enjoy the much-earned time off.
We touched on it briefly above, but I’m afraid tax issues do not end in retirement. It’s important to take inheritance tax advice and passing on your wealth to your family tax efficiently.
This series covered taxes across various stages of a Dentist’s career. However, we have only scratched the surface. Whether you are an associate, looking to buy or sell a practice, working in the NHS, Privately or a mix of both, taking specialist tax advice cannot be over-emphasised.
Taking timely tax advice from a tax specialist will help ensure you are taking the right approach, paying the right amount of tax at the right time and operating tax efficiently.
You can read part one, two and three here:
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