Dental Write - Winter 2011
Clear,
pragmatic advice for you and your practice.
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 to the right.
You can also download a copy of this newsletter in PDF format
here.
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;
- Partnership;
- Limited Liability Partnership (“LLP”);
- Company; or
- a hybrid structure including a combination of the above.
Historical prohibitions
Prior to July 2005, the Dentist Act 1984 (“Act”) effectively
prohibited the formation of newlyincorporated 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.
Back to top
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:
Structure
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.
Construction issues
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.
Funding
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.
Leasing premises
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.
Back to top
Want to see something specific in future editions of our
newsletters?
Please leave your feedback here.
The articles in this newsletter are for guidance
only and do not constitute legal advice.
The firm is regulated
by the Solicitors Regulation Authority |
