Top 10 tips for GPs seeking limited company status for their practice
Healthcare specialists across our national association MHA have seen an increasing surge of inquiries about limited company usage for GP practices. From whether it is a viable option and if they should proceed, to being asked to act for those who have already made the change.
To help you and your partners decide if a limited company status is right for your practice, here are 10 important issues to consider:
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. It does leave the risk that your contract could be put out to tender rather than automatically being granted to the Ltd company.
The CCG may want the contract to be an Alternative Provider Medical Services one. 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
It is easier to save tax and manage income by using a Ltd company, 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 this has to be done through dividends.
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.
3. We have a complex profit-sharing arrangement – how does this work in a limited company?
On transferring into a Ltd company, 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. 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 about.
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 company 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. 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 company 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.
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 company, 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 there are considerations, 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 company’s name. 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.
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 company each year and do not need to take everything you earn. As mentioned above, you need to have an agreed dividend policy with all shareholders. 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 company, 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. 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 the best advice is to consult your accountant, solicitor and financial adviser first. There are some advantages to using a Ltd but consider your reasons for doing so and weigh up the advantages against the potential issues.