10 tips for GPs seeking a limited company status for their practice
There has been a surge in inquiries about the limited company option for GP practices. Specialist Healthcare Manager, David Lockitt considers some key issues.
“Can I put my medical practice into a limited company?” I have been asked this on numerous occasions over the last 18 months - and have also been asked to act for ‘Ltds’ that have already made the change.
The simple answer is yes. But should you? To help you and your partners decide, consider the 10 issues outlined below:
1. Is it easy to move our contract and employing authority status into a limited company?
With prior consultation with your CCG there is no reason why you cannot make this change, however it is not obliged to give prior consent and the process involves you effectively handing your contract back and then having it granted again to the new entity. Although I have not seen this happen it does leave the risk that your contract could be put out to tender rather than automatically being granted to the Ltd. The CCG may want the contract to be an APMS one. I have recently seen CCGs asking for personal guarantees or bank bonds from the shareholders to cover certain income that is being received. Transferring your employer’s authority status should not be an issue once the contract has been dealt with. But you must ensure this happens before your staff are transferred into the company because otherwise any contributions made to the NHS pension could be returned.
2. I have been told I can save tax by using a limited company
Correct, it is easier to save tax and manage income by using a Ltd, but this only works under certain circumstances and is more difficult than people realise. Once you start using a Ltd the partners become employees and shareholders and the mechanisms for extracting profits are either as salaries, or through dividends. Paying salaries to partners above the lower earnings limit of £118 per week would attract employers’ national insurance of 13.8% which is counterproductive to saving tax, so dividends it is. However, once you consider corporation tax of 19%, the amount of income distributable to the shareholders is much reduced. While a tax saving may be available, the main issue is that very few partners in a practice would not want to draw all they can out of the business. The dividend policy would also have to be agreed by all the shareholders so where one partner might wish to minimise tax and another might want to maximise take home income, this would simply not be possible. At some point the profits earned in the Ltd need to be distributed so you may just create a tax time bomb for the future where tax will eventually become payable anyway, possibly at a higher rate.
3. We have a complex profit-sharing arrangement - how does this work in a limited company?
On transferring into a Ltd each partner (shareholder) will be allocated shares based on their profit-sharing ratio as it was in the partnership. This then determines how much income they receive on each dividend declaration. To keep it simple let us say that for each 1% you had in the partnership you would receive 100 shares in the new company. These could be A shares with voting rights. Where prior shares exist you can issue B, C, and D shares on which further declarations can be made to accommodate specific shares. However these would have to be varied each year as prior shares would be in a partnership. There is also the added complication that you cannot have negative dividends so where a practice has historically prior shared expenditure this would no longer be possible and another mechanism would have to be thought of.
4. What happens when a partner changes their number of sessions?
In this instance the A shares would have to be changed to reflect future dividends. However this means that the Ltd would have to review unpaid income (reserves) and declare these as dividends prior to the change in shares. At this point any profits held in the Ltd and hence untaxed would become taxable. This could result in a large dividend being declared as a result of changes in a single partner’s circumstance. Other scenarios like this would be unpaid leave, maternity leave or sabbaticals. This is manageable if there are not too many changes, but in a partnership with more than four or five partners this is unlikely to be the case.
5. What about if we have a new partner join us, or one leaves?
When the Ltd is initially set up each A share issued to a partner can be valued at a nominal figure, say 1p each. However, at the point a major change occurs the company will need to be valued so that the new or exiting shareholder is given a valuation which is then payable/ receivable through the Ltd. This is effectively the same as how capital and current accounts are dealt with in a partnership, but an agreed valuation method needs to be set up at the outset which all shareholders agree to, and which will not put off incoming GPs.
6. Can we remove a shareholder due to internal disputes?
Under the partnership model it is possible to exclude a partner from the practice and withhold their entitlement to shares of the practice’s profits. With a Ltd this is not as easy; a shareholder is entitled to a share of all dividends paid while they hold their shares. This includes if they are for any reason excluded from the surgery. It is possible to put in place an agreement for such a scenario, but this would need to be agreed by all parties and a specialist solicitor used to put it in place.
7. Can we move our surgery into the limited company?
The simple answer is yes. But again, there are considerations that need to be looked at before making this decision, both for leased and owned property. Where the premises used are leased you would need to have agreement from your landlord and the lease transferred into the Ltd’s name. This is a good way of solving the last man standing issue that many practices now face. But a landlord may still ask for a personal guarantee from directors to ensure that the lease cannot just be broken if the Ltd ceases. Where the premises are owned by the partners prior to transfer there may be upfront costs before moving it into the Ltd. Capital Gains Tax could be realised on the sale of the property by individuals, Stamp Duty Land Tax is potentially payable by the Ltd on the purchase and this is further complicated if a loan/mortgage is currently secured on the property. All these issues could possibly be mitigated but there will be additional legal and accountancy fees to pay in order to make sure the transfer is done correctly.
8. I have been told that using a limited company will help solve my current annual allowance and lifetime allowance problems
As with the idea of saving tax this is possibly the answer, but only if you can manage what you wish to take out of the Ltd each year and do not need to take everything you earn. As I have also mentioned, you need to have an agreed dividend policy with all shareholders, with everyone looking for the same outcome for this to work as a strategy. So for a current single-hander or two-partner practice this may be possible, but for a six or seven partner practice this is unlikely to be the case.
9. Will using a limited company affect my final pension?
When taking income from a Ltd instead of completing a Type 1 Annual Pensions Certificate you would complete a Ltd Certificate, or both if you have other superannuable income. Therefore, your reported superannuable income would be based on your dividend policy. If the aim of using a company is to manage your tax bill then it is likely that there will be a reduction in reported income for superannuation purposes and as a result your final pension may be lower than it would have otherwise been.
10. Can I just make the decision to transfer my contract into a limited company?
There are complex issues here so consult your AISMA accountant, solicitor and financial adviser specialists first. Yes there are some advantages to using a Ltd but do look at your reasons for doing so and weigh up the advantages against the potential issues you may create. You lose a lot of the partnership model flexibility, such as profit sharing and structure, and this may mean any advantages initially identified are no longer possible. The NHSE would have to approve the change so you should assess how it, and the CCG, might react. Might they wish to put the contract out to tender or change its type? Companies House format accounts - useless for managing the business and open to inspection - would be needed at extra cost as well as management accounts.
Contact us to find out more
For further information on this subject or to discuss how we can help with your practice and its future plans. Please contact our Specialist Healthcare Manager, David Lockitt or send us an online enquiry.