Incorporation – why it is vital to get it right
The vast majority of the dental and medical clients at Figurit trade under a limited company structure. This is predominately to maximise the tax breaks associated with operating as a limited company; the lower rates of corporation tax compared to income tax as well as the benefits of being able to draw money from your business in a tax effective way, via dividends.
It makes sense for most. Getting the structure right from the start though is absolutely vital as Incorporation is a long-term tax planning strategy and all factors need to be considered. Also, larger tax breaks can be missed without proper, professional advice.
Tax planning means “planning”
In the many years of assisting UK doctors and dentists with accountancy and tax planning it is still incredible to see the number of new clients who come with badly executed Incorporations. Typically, this occurs when clients have either proceeded to set up their own limited company in the belief that it is just a case of registering a name and choosing a date to start trading, or, it is the sad situation of bad advice.
Restructuring your business is not an overnight task. It takes careful forward planning taking into account both short and long-term benefits and consequences.
One size doesn’t fit all
Whilst there are similarities in how a doctor or dentist might go about setting up as a limited company, everyone’s circumstances are different because of varying business and personal goals. One size really doesn’t fit all.
For example, one careful consideration is relating to the future of your practice. Do you intend to continue trading a while? Or do you want to sell in the next few years? The answer to this question could have an impact on your tax position.
Also, as a dentist, which NHS area team are you with? They have an involvement in the process too and, despite NHS England’s recent “standardisation” attempt, some are more flexible than others with their terms. Some choose to renegotiate things like the UDA/UOA rate and usually not to your favour.
Your company is different to “you”
Many business owners fail to recognise their proposed new Limited Company as a separate legal entity to them as a Sole Trader or Partnership. Even in the common event that you are to be the sole director and shareholder it is important from the begining to change your mindset around this point.
Treating the transition to limited company as an “arms length” transaction is the best method to keep everything fair and square and above board.
Correctly transferring assets and liabilities
One of the classic errors in a badly executed incorporation is not correctly transferring the assets and liabilities into the limited company, often missing tax saving opportunities or failing to meet important compliance regulations.
Assets that are typically transferred include practice equipment, IT equipment and furniture and fittings. Tread carefully though. Those assets purchased on finance where existing agreements are still in place need the authorisation from the finance company to formally switch the contract to the responsibility of the company. However, many financers don’t encourage this, as personal liability by an individual trader is a safer option for them in case of default.
Typically, motor vehicles are not transferred to a limited company, but again, one size doesn’t fit all and it is something up for discussion.
Correctly dealing with property
If you own a freehold property where your practice trades from, often the best option is to leave the property as a personal asset and a legally binding lease agreement is drawn between you as the freehold owner and the limited company to cover a commercial rent value.
Again, this doesn’t suit everyone as there can be Capital Gains tax implications, so specific calculations and advice are required around your own circumstances.
If the practice operates from a leasehold property then there is likely to be a requirement to assign the lease to the company, with you, as the director, acting as a guarantor. As with transferring assets, this can sometimes take time to fulfill obligations .
Your largest asset: Goodwill
Goodwill is generally considered the greatest asset to a doctor or dentist and it is frequently the area that can be misunderstood when incorporating a business.
Two key parts of the process are one, the valuation and two, the transfer.
The valuation needs to be provided by a respectable, qualified specialist accountant or a professional valuer in the medical or dental sector. HMRC often challenge the valuation this so be prepared to defend yourself, or have to settle the tax difference if they are not in agreement.
Figurit work with a firm of Chartered Tax Advisors who uses HMRC’s own method to value goodwill, therefore taking all possible measures to ensure that any investigation will not result in significant amendments.
The goodwill must be legally transferred to the new limited company.
For NHS dentists this includes a change in contract with the NHS and here further considerations arise around superannuation. It is a complex area that requires bespoke attention and sometimes the NHS can make the process extremely difficult.
Re-structuring your existing company
This information applies to all those doctors and dentists considering becoming a limited company to pre-warn of some of the common pitfalls.
However, it also applies for anyone trading as a company already who did not take professional guidance upon set up – it’s common. And there may still be time to make amends; it is just easier to get it right from the start.
Figurit are dental and medical specialists who offer incorporation advice as part of robust and long-term tax planning, Call today to arrange a free appointment with Michael or Mark, tax and incorporation specialists, who can help ensure you are getting the best advice. T: 020 7376 9333