Cut down your tax bill in 2011
Well, the day of reckoning has arrived. On January 4 2011, VAT went from 17.5% to a whopping 20%.
How could you combat the VAT rise by incorporating your dental practice?
Now, the dental and medical sectors generally fall outside the scope of VAT. However, the rise in VAT will mean that all purchases made by dental practices are going to cost more. This includes such expenses as materials, accounting fees, advertising, recruitment costs, telephone, Internet, stationery and printing. The profits of every dental practice in the UK are going to be negatively affected by this single change.
Why has VAT increased?
- What other tax changes have there been and how do these affect you?
- What should you be focusing on in 2011 to improve your overall financial position, and to compensate for this horrific VAT increase?
The cost of the emergency budgetThe current government has found its coffers are empty. On the one hand, there is a reduced amount of tax being collected due to the recession. Fewer people are working and paying tax. The profits of businesses and the consequent ‘tax take’ for the Treasury are down. On the other hand, demand on the national finances has never been higher.
Incorporate your practice
- The recession has reduced ‘tax-take’
- VAT has risen to 20%
- Individuals are picking up the bill
- Companies are being given tax relief
Choose an accountant that is highly experienced in forming dental companiesBrought about by increased interest payments on greater levels of borrowing, spiralling welfare costs on supporting larger numbers of the unemployed, the pension costs of a growing – and ageing – population, not to mention the price tag of propping up a shaky banking system.
The result is that swingeing cuts in public expenditure are being introduced over the next four years. Taxes are rising for individuals, but not for companies, which are instead having their tax rates reduced in an attempt to stimulate economic growth. We are now living in a time of the highest rates of personal taxation. However, we are seeing the lowest levels of company taxation in more than a generation.
The benefits of incorporation
In tough economic times western governments of all political persuasions generally see companies as generators of growth and employment; they are essential to national economic recovery. The UK government certainly subscribes to this blueprint. As a result, companies are usually rewarded with tax reductions. It is no surprise, then, that the Chancellor has reduced the rate of tax on small companies from 21% to 20% in his emergency budget. And larger companies stand to gain proportionately more as their rate drops from 28% to 24% with a four-year phase in at 1% per annum.
Individuals, however, have to make up the difference of tax lost in the interim. Most individuals are employees and are therefore taxed via the PAYE system, the bedrock of government tax receipts. They inevitably face tax rises at the same time as companies are enjoying tax reductions. Again, the UK is no different from other countries. Less than a year ago, the highest rate of combined tax and National Insurance for the self employed was 41%. By April 2011 the highest rate will be 62%, an outrageous increase that would certainly have promoted civil unrest in other parts of the world.
However, the greatest anomaly of all is that businesses that trade as sole traders and partnerships are taxed as individuals. They are paying higher rates of personal tax whilst those that trade as limited companies are taxed as businesses. Not only do businesses benefit directly; they are also paying lower rates of corporation tax. Thus, the current tax system does not offer sole traders or partnerships recognition for the contributions they may make in driving the economic recovery process. Nor is it able to provide appropriate mechanisms for rewarding such contributions – unless that business is trading as a limited company!
Corporation tax cuts
Thankfully, the GDC allowed dentists to trade as limited companies in July 2006. This process of conversion from a sole trader or partnership to a limited company is known as incorporation. This means that every dental practice in the UK can benefit from the June 2010 corporation tax cuts.
Everyone’s circumstances are unique and the amount of tax that an individual dental practice could save varies depending on a range of factors. These are so complex that only a dental accountant who specialises in incorporation can consider properly
A well thought-out and properly documented incorporation should reduce an average dentist’s tax bill by between 30% and 50%. However, there is a lot more to an incorporation than just forming a limited company. There are so many additional pieces of information that need to be considered in order to maximise your overall strategy. An accountant who is not exceptionally experienced in dental incorporation could easily miss a few key tricks.
So, my advice for 2011 is to focus carefully on how your trading structure could be rearranged to reduce your overall tax bill. The savings that you make could easily cover the additional VAT that you are going to have to pay and even make you a handsome profit!
The good news
You could use that money to take a family holiday to cheer yourself up after all the bad tax news. Alternatively, you could save a little more towards your retirement. With the government increasing the retirement age, you are going to need a bigger nest egg than before!
First published in PPDentistry Dec 2010.