UK Dentists - Should You Set Up as a Limited Company?

We've asked Malcolm Winston of specialist medical and dental accountants UHY Hacker Young for his insight.

The long awaited changes to the Dentists Act 1984 finally came into force on 31 July 2006 and have significant implications for dentists and their practices. 

After years lobbying and government debate, section 42 of the Dentists Act, which prohibited bodies corporate from carrying on the business of dentistry, has been repealed.  This allows 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.

The main benefits of incorporating a dental practice are:

• Tax benefits

• Limited liability protection

• Structural and management issues

• Ease of attracting loan finance and external investors

• Ease of selling shares in the company to existing
  staff and outside investors.

The impact of incorporation on your tax liabilities will very much depend upon your personal circumstances and the following example should only be taken as illustrative, however the conversion of your sole trader or partnership can create considerable tax savings by:

• Reducing the annual tax payable on the practices profits

• Freeing up capital locked in the practice at a minimal capital gains tax cost.

For Example

The annual tax saving is best demonstrated by a worked example. 

The example assumes a 2 partner practice with annual profits of £400,000 (although a similar example could be produced for a sole trader).  The partners transfer the business and assets to the new company at a valuation to be agreed but which is equivalent to several years’ income for the partnership. 

In subsequent years the partners receive income from the repayment of their loans rather than by taking salary or dividends.  An annual tax saving of £61,610 will be shared between the partners each year until the loan is repaid.

For the existing Partnership structure, the tax liablity for each Partner is £64,666 after taking account of all allowances. There is also National Insurance to pay which amounts to £3,946 each. The total tax liablity is £151,360 combined.

When operating as a limited company the tax rate is 30%. After allowing for marginal relief the tax liablity would be £89,750.

In this example the incorporated practice achieves an annual saving of £61,610 (£151,360 - £89,750) a year until the partner’s loan has been repaid in full.

The difference in the Revenue’s treatment of partnership and corporate tax also creates a cash flow benefit of a further tax saving of £75,680 (£151,360 x 50%), arising out of the situation that companies are not required to make an advance payment of 50% of the following year’s profits, which applies to sole traders and partnerships.  So the total tax cash benefit of being a limited company rather than a partnership in this example is £137,290 (£61,610 + £75,680).

Limited Liability Partnership

The transfer of your business to a limited liability partnership, although having the benefit of limited liability protection, will not result in any savings in tax.  This structure may be more suitable for practices that wish to remain owners of the business and do not wish to sell their business to a limited company.

Capital Gains Tax

In addition to the income tax savings outlined above for a limited company there are also capital gains tax savings which can be made by the use of various capital gains tax reliefs that are available.

Legal Issues

The legal steps required to incorporate successfully include:

• Incorporating a company or limited liability partnership;

• Preparing a legally robust business transfer agreement in order to transfer the assets and the business of the practice to the new corporate entity. This agreement will need to properly implement any tax planning and deal with matters such as contracts with third parties, debtors and creditors of the practice and any freehold or leasehold property;

• Carrying out a formal TUPE (Transfer of Undertakings (Protection of Employment Regulations]) consultation with the employees of the practice so as to ensure there are no potentially expensive breaches of employment legislation;

• Drafting articles of association, and if necessary a shareholders agreement, so as to regulate the management on the new company and, if required, mirror any existing partnership agreement;

• Dealing with any property issues, for example drafting a suitable lease or freehold transfer.

Actions to take

Unfortunately there are numerous potential tax pitfalls which can occur as a result of incorporation. 

It is therefore essential to:

• Obtain professional legal, accounting and tax advice;

• Obtain tax clearance from Her Majesty’s Revenue & Customs prior to undertaking any schemes involving the transfer of your practice to a limited company;

• Have all valuations in relation to property and goodwill agreed with HMRC.

Failure to take correct professional advice may result in an unintentional triggering of an income or capital gains tax charge with potentially disastrous consequences for the practice. 

If properly managed however, incorporation can result in substantial tax and cash flow savings.

About The Author

Malcolm Winston is a partner in the Birmingham office of UHY Hacker Young.  The UHY Hacker Young Group is ranked amongst the top 20 UK accounting practices with over 18 offices providing accounting and tax advice to dental and medical practices. 

If you would like to speak to Martin about the possibility of incorporating your practice then please call:

0121 233 4799
malcolm.winston@uhybirmingham.co.uk 

The Key Considerations

Thanks Malcolm.