Limited Companies For Dentists
Bob Cummings of specialist dental accountants Morris & Co has recently written some articles on the advantages and disadvantages for dentists if they incorporate (or set up as a limited company). He has very kindly given us permission to reproduce the article here - and we've attached a couple of other useful documents as well. if you want to read more about them please click here Morris & Co Accountants
Advantages
TAXATION
• Dentists can “cash in” on goodwill by transferring the business to a company. This can create a tax free fund to draw from the company with a personal tax bill of only 10% of the capital gain made on goodwill.
• The limited company may be able to claim tax relief on goodwill purchased, subject to certain conditions.
• Profits can be withdrawn from the company as dividends thus producing a lower rate of tax and avoiding NIC. Savings for the average Dentist could be in the region of £4,000 to £5,000 per annum.
• It may be possible to increase the tax savings mentioned above by allotting company shares to and paying dividends to the Dentist’s spouse.
• Enhanced NI benefits are available to employees and directors e.g. state sick pay and maternity pay, provided a salary in excess of £5,044 per annum is paid
• Personal tax bills can be deferred by leaving profits in the company rather than drawing the money out.
• Savings can be made on mobile phone bills and private medical insurance if the company contracts with the service provider.
• It is easier for the company to obtain tax relief on course fees than it is for self employed dentists.
COMMERCIAL
• PCT contracts will be made with the company. The contract will therefore continue even if the directors and shareholders change on the sale of the practice. This also provides some protection on death or incapacity of the dentist.
• The company is a legal entity distinct from its members and is liable for all its own debts. Liability of its members is restricted to the level of their shareholding.
• Greater borrowing capacity, therefore increased potential for investment to fund expansion and increased ability to raise finance through the issue of share capital.
• Employees can own a share of the business, increasing staff motivation and retention.
• Risk can be segregated – that is, if you are running more than one practice, a separate company can be set up for each one.
Disadvantages
TAXATION
• Drawing money from the company as a dividend rather than as salary may have an adverse impact on raising a mortgage, Permanent Health Insurance cover, critical illness policies and tax relief on personal pension contributions.
• Prospective changes in UK tax legislation may erode tax savings currently available
• Potential tax savings may be reduced, or disappear altogether, if company profits exceed £300,000. It should be noted that if separate companies are set up for individual practices the £300,000 profit limit is shared.
• NHS dentists may be forced to take high dividends to support NHS Superannuation Contributions (which could negate many of the tax savings) or restrict their NHS pension funding.
• Additional tax charges may arise on sale of the business.
COMMERCIAL
• The contract with the PCT may have to be re-negotiated, providing the PCT with the opportunity to reduce contract values and/or UDA rates, they may refuse to issue a contract to the Limited Company or stipulate the need for pre-emption rights over the sales of shares to 3rd parties.
• Lenders may require personal guarantees from the directors and/or shareholders thus diminishing the benefits of “Limited Liability”.
• The rates of interest on borrowing tend to be higher for a limited company
• Potential loss of control. As a director, you are not necessarily the only person with control over the business’s direction; other members and shareholders can influence decision making.
• Loss of privacy. Accounts must be filed at Companies House where they are available for public scrutiny.
• Additional Indemnity Insurance cover may be required for the company.
• It may be harder to sell a limited company than a non corporate business.
ADMINISTRATION
• Running a company involves greatly increased administration and bureaucratic requirements involving Companies House and HM Revenue & Customs..
• New bank accounts will have to be opened and existing business standing orders, direct debits changed. In addition the bank details with the NHS and any private capitation scheme companies will need to be changed
• Funds can no longer be taken as needed and treated as personal drawings. Any funds withdrawn from a company must be accounted for.
• For the majority of practices significantly better accounting records will need to be maintained and periodic management accounts prepared.
• Set up costs and increased annual accountancy fees due to greater bureaucratic requirements and more detailed accounts as required by the Companies Act.
• New contracts of employment will need to be issued to employees as they will become employed by the company and not the Principal. The Transfer of Undertakings (Protection of Employment) (TUPE) regulations will apply.
• If the practice premises are leased then the lease may have to be transferred to the limited company
• Existing arrangements and contracts with suppliers will need to be renegotiated and suppliers may look for different terms.
• Companies are more likely to be investigated by HM Revenue & Customs than other businesses.
• Divorce! If shares are given to a spouse he or she will still own part of the business following divorce.
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