If you require any further information on the items featured in this newsletter or indeed advice on any other dental legal matter, please contact one of our Professional Services solicitors.
Business Structures for Dental Practices
The choice of business structure for a dental professional can have a significant impact both on the taxation of profits and the business risks owners of dental practices are exposed to. In our experience, as your practice grows and taxation rules change, the existing business structure selected should be regularly reviewed to ensure it is still the best and most efficient business structure.
The various structures available are as follows:
- Sole trader;
- Limited Liability Partnership (“LLP”);
- Company; or
- a hybrid structure including a combination of the above.
Prior to July 2005, the Dentist Act 1984 (“Act”) effectively prohibited the formation of newly incorporated dental practices and only those practices incorporated and carrying on the business of dentistry on or prior to 21 July 1955 were permitted to trade as limited liability companies.
The Act was amended in July 2005 so that an incorporated body (be it a company or an LLP) may operate as a dental practice as long as a majority of its directors are individuals who are either registered dentists or registered dental care professionals.
Differences between the structures
The primary differences in relation to the various structures relate to taxation and liability of owners:
- Profits and capital gains of sole traders, partnerships and LLPs are all taxed against the individual owners irrespective of whether profits are drawn or retained in a practice. This means that retained profits can be
subjected to effective rates of tax as high as 60% if these structures are used.
- A company pays corporation tax on the profit that it makes. At present the first £300,000 of profits made by a company are normally taxed at 20%. Therefore, such retained profits will usually only be taxed at this rate rather than higher marginal rates of income tax. A company structure may also give you the opportunity to pay dividends to other family shareholder members to use any unused lower income tax allowances they may have.
- Sole traders and partners are personally liable for all debts and liabilities of their business. In addition, partners are jointly and severally liable for their business debts and liabilities. However, all of their affairs are private as there is no need to file any accounts or other information with any register open to the public.
- Although an LLP is treated differently to a company for taxation purposes, it shares the limited liability characteristic of a company in that they are a separate legal entity that can shield its member(s) from its liabilities. Members of an LLP and company are only liable to contribute the amount of capital they agree to commit to an LLP or have committed to a company. There is no minimum amount of capital that must be contributed to either a company or LLP.
- LLPs and companies must file accounts and other material information with Companies House which are then open to public inspection. However, unless a dental LLP or company is very large, it is unlikely that it will have to file a profit and loss account at Companies House.
- The amount of national insurance payable by a self employed sole trader, partner or member of an LLP is lower than the national insurance payable as an employee or director of a company. These differences should be taken into account when considering the best structure.
Tax planning/Saving on incorporation
At present, given the prospect of paying 50% income tax on higher amounts of income, many incorporations of professional businesses are now taking a hybrid form where a business is traded through an LLP with one or more corporate members, sometimes with or without individual members of the LLP.
When considering incorporation as either a company or an LLP, you should consider whether or not it might be tax efficient to “sell” all or part of your practice to your own limited company and/or a corporate member of your LLP. If you are eligible to claim Entrepreneur’s Relief, it may be possible to sell some or all of the goodwill of your practice for its market value on deferred payment terms against which you may only pay 10% Capital Gains Tax. Such an arrangement can be used to extract some or all of the goodwill value of your practice in a tax efficient way utilising future profits of your company/corporate member of an LLP. Effectively, structured right, the deferred consideration can sometimes be drawn-down over a number of years “in lieu of salary”.
Hybrid LLP structures may also make it easier to fund capital retention more effectively and allow profits to be taxed at lower corporation tax rates. We are seeing these structures being used more and more and this may be something that you wish to consider, subject to obtaining detailed taxation and accounting advice.
NHS and PCT considerations on change of structure
Before any change to your business structure, you should give serious consideration to any effect it may have on your eligibility to the NHS pension scheme (superannuation) and other NHS benefits, as these may be lost on incorporation (or in providing your services via a company or LLP).
If a decision is made to transfer from a dental practice to a new business structure, the General Dental Services Regulations do not permit General Dental Services contracts to be transferred to a newly-incorporated vehicle simply by giving notice to the PCT. Accordingly, the consent of a PCT to the issue of a new contract to the new business structure is required. The PCT may decide that this amounts to a new contract opportunity and, therefore, tender that opportunity before issuing a new contract to the new company/LLP. This is not necessarily fatal in relation to transferring your practice as the contract in question may continue to be held by the relevant individual with the remainder of the business and assets of the practice being transferred to the new medium. However, this may result in a lower value for the goodwill.
Acquiring Property for a Dental Practice
Buy or lease?
Sometimes dental practitioners have no choice but to continue an existing lease when they acquire or buy into an existing dental practice. However, all commercial leases come to an end at some point and therefore most dental practices will at some stage be in a position to decide whether to acquire or lease premises. Whilst leasing reduces owners’ initial capital outlay, acquiring the freehold occupied by a dental practice can often prove to be a sensible investment as dental practices are normally very difficult to relocate given the geographical locality of patients.
Freehold/long leasehold purchases
When acquiring the freehold/long leasehold for your dental practice, you should consider the following:
Property can be owned by the practice itself or held in a separate investment vehicle such as a company, LLP or pension scheme. Whilst a small self-administered pension scheme (a pension arrangement often used by dentists) can only borrow 50% of its assets, it is often very tax efficient to acquire suitable premises through a pension scheme and then lease them back to the dental practice. The rents payable to the pension scheme will be tax deductible and rents received by the pension scheme will not be subject to
income tax/national insurance. As a result of pension changes that came into force on 6 April 2011, it is now easier to make larger contributions to pension schemes to facilitate property acquisitions.
New and redeveloped premises and VAT legislation
Some practices may consider the possibility of buying a new build or redeveloped property as opposed to buying an old property. In such circumstances, you need to consider very carefully whether or not the purchase price will be subject to VAT (currently at 20%). Generally speaking, “old” commercial buildings (buildings that are not new or completed less than three years before sale) are not subject to VAT on
purchase. However, even some old properties will be subject to VAT where such exemption to charge VAT has been waived by a developer seeking to recover the VAT on redevelopment costs.
If you have a property built for you on a design and build basis, then you need to ensure that collateral warranties are provided by those involved in the construction process (such as architects, building contractors and subcontractors). When taking such warranties, care should be taken to check that professional indemnity insurance is in place should work undertaken by professional contractors prove to be defective.
Whilst there is much press about banks not wishing to lend, in our experience many banks are still prepared to lend to dental professionals on the right terms. Whilst banks will no longer offer 100% of the funding costs to acquire a freehold, most will seriously consider any “traditional” requests for property finance for a dental practice.
When taking on a new or existing lease of premises, consideration should be given to the following:
The length of the lease and break rights
As the costs of fitting out dental premises are very considerable a dental practice will want to have the certainty of being able to occupy premises for a sensible minimum period of time (perhaps five to ten years). When taking a new lease you should consider requesting an option to renew the lease when the initial agreed term comes to an end or, if acquiring an existing lease, you should consider negotiating an extension of the existing lease to give you the minimum term of occupation you will require. Given the uncertainty at present in the economy, it may also be prudent to negotiate a right to break the lease. At present, many landlords are willing to give tenants the right to break leases after an initial period of, say, three or five years as a means of inducing them to take on new leasehold premises.
Security of tenure
It is absolutely vital to ascertain whether your lease will have the security of tenure rights under the Landlord & Tenant Act 1954 or whether such rights are excluded in the lease. Where the rights are not excluded, dental practices will have the right to request a new lease of their business premises when the lease comes to an end, which the landlord must agree to unless he has a statutory ground for opposing the grant of a new lease (such as the landlord wants the premises for his own occupation, for redevelopment or if a tenant has breached its obligations under the lease). Given the costs of fitting out dental premises, almost all dental practices will normally want to ensure that the Act applies to give them such security of tenure rights.
Rent-free period/rent reviews
Given the difficulty many landlords currently have leasing premises, it is not uncommon for landlords to agree considerable rent-free periods at the start of a lease (typically between three months to two years, depending on the length of the lease). Rent review provisions are normally included providing for rent review regularly throughout the term of a lease (most commonly every three or five years). It is absolutely vital that the rent review assumptions are considered and that rent is assessed by reference to the “shell” of the building and disregarding any tenant improvements and value of the dental business that is in occupation.
Insurance/Service charge contributions
Where you lease part of a building, it is common for the landlord to insure the building and maintain the common parts and then to apportion the insurance/service charges amongst the tenants. You should therefore check the proportion applicable to your premises. You should review previous service charge accounts to see what charges have been levied in the past and also check future anticipated expenditure and, if at all possible, negotiate a cap on your service charge liability.
Factors to consider whether you buy or rent
Planning – Under planning legislation, provision of medical health services needs to be separately authorised. This can be overlooked when acquiring premises for a dental practice (particularly in high
street retail units where a change of use may be required).
Capital allowances/business premises renovation allowance – One of the largest costs incurred by any dental practice setting up or being modernised will be the upfront acquisition of dental plant and machinery. In certain situations, these costs may be offset against profits. The term “plant and machinery” covers a large proportion of infrastructure items and does not merely include industrial items; in the context of the acquisition of a freehold, it may also include such things as central heating, air conditioning, electric wiring,
movable office partitions, special lighting or decorations. Items that do not perform functions relating to the business will not be considered as qualifying (for example, background lighting).
Equality Act 2010 compliance issues
In April 2010, the Equality Act 2010 was passed to consolidate existing discrimination law. This Act repeals the previous disability discrimination legislation and introduces new duties that affect property owners and occupiers. The legislation provides important guidance on the provision of services such as dental services and sets out the requirements in terms of adjustments that may need to be made to properly assist disabled people.
At Neil Myerson LLP we have many years’ experience of helping dental professionals navigate their way through the day-to-day aspects of operating a successful practice and also the major milestones such as practice sales or mergers. Our professional services team is ready to advise and assist you on all aspects of your practice requirements, including:
- advising on your business structure: sole trader, company, partnership, limited liability partnership (LLP) or a hybrid LLP/corporate structure;
- drafting shareholders’ agreements, articles of association, partnership agreements and LLP agreements, together with appropriate income/capital distribution arrangements;
- incorporation of sole traders and partnerships to companies, LLPs or a hybrid LLP/corporate structure;
- dental practice sales, purchases and mergers;
- funding and financing your practice;
- admission or appointment of a new shareholder, partner or member;
- retirement or removal of an existing shareholder, partner or member;
- all issues in relation to the property needs of your practice and you personally;
- dispute resolution between shareholders, partners or members;
- issues concerning PCT contracts;
- expense-sharing agreements;
- protecting your practice using restrictive covenants and injunctions;
- drafting employment contracts, handbooks, policies and procedures, including associate, hygienist and therapist contracts.
For a no obligation and confidential discussion about how we may be able to assist you in relation to your requirements, please contact us. We know you are busy professionals and our professional services team will always make time to talk and/or meet with you outside of your core practising hours.