Financial
corporate? Want to go
Tricia Halliday from Martin Aitken & Co Chartered Accountants explores the pros and cons of incorporating your practice
A
t the time of writing, the government was embroiled in the controversy over an attempted takeover of the UK’s drug behemoth,
AstraZeneca by its US rival Pfizer. The opposition railed against the alleged dubious takeover practices of the US company, demanding a public enquiry. Leaving aside the table thumping, alle-
gations and dispute which arose from the corporate bid, what do multi-million pound international mergers and acquisi- tions have to do with your practice? The answer lies in the UK’s relatively low rate of corporation tax (CT) – currently 2ı per cent (and drops to 20 per cent next April). The media cited this as one of the principal factors for the attempted takeover. The current CT rate in the US is a whopping 35 per cent. Some business sources suggested that Pfizer wanted to relocate its business to the UK to escape the US rate and Astra- Zeneca provided just that opportunity. This again brings into focus the lure of
incorporating your practice. The aim of this article seeks to explain some of the consequences of incorporation and iden- tify advantages and pitfalls. It is important to understand that
incorporation results in the creation of a new legal entity – a corporate body which possesses its own ‘legal personality’. In your unincorporated practice, you and/ or your fellow partners own the business and its assets. Once incorporated, you no longer own the assets – ownership is effec- tively transferred to the company. You (and your former partners) now own shares in the company and become employees or directors of the company. There are a number of advantages in
incorporation, other than the low CT rate. The ability to control profit extrac- tion by way of dividend payments allows shareholders to minimise their Income Tax and National Insurance Contributions (NIC) liabilities. Dividends are not liable to
NICs and are taxed a lower rate of Income Tax than the profits of an unincorporated practice. A traditional route is by way of a small salary, typically up to the threshold at which national insurance is payable and then taking the balance of post-tax profits as dividends. Transferring your practice to a company
offers tax efficient profit extraction. One of the assets which will have transferred from the unincorporated entity is the goodwill. Goodwill is an intangible business asset
“Incorporation is not suitable for every practice”
and reflects the reputation, good name and customer base of the practice. When transferred to the company, the
value of goodwill is liable to Capital Gains Tax, albeit at a rate of ı0 per cent. The company funds the purchase by way of a credit in the directors’ (being the former owner) loan account. Funds (when avail- able) can be drawn down tax free until the loan account is exhausted. Transferring ownership of the corpo-
rate entity is relatively straightforward. Company shares represent ‘indirect’ ownership in the business and the shares can be sold, such as to an individual who wishes to invest in the practice, or gifted to a sibling in the course of succession planning. The disposal of a shareholder’s holding also offers a simplified exit strategy, say, in the case of retirement. With detailed tax planning, these transactions can have minimal or no tax cost. All of the above looks very attrac-
tive. However, you should also seriously consider the less appealing side of practicing through a company. Your practice may benefit from NHS
grants – some may not permit a transfer to a corporate entity. This means that
the income will continue to be taxed in your name giving you an unwanted tax headache. Another potential concern is the impact of the salary/dividend/loan account payments on your pension enti- tlement. Structuring remuneration in this manner may lead to a reduced pension. These factors alone may be enough for some dental practices to decide against incorporation. The compliance requirements are
hardly straightforward for a company and it places onerous responsibilities on the directors. Among other things, they must ensure that the company prepares and files statutory annual accounts and the various returns required by the Companies Act. HM Revenues & Customs (HMRC) will also require a company tax return to be filed along with the accounts, all of which lead to higher professional fees. Finally, companies are subject to rigorous
HMRC Employer Compliance Regula- tions. Where company assets are made available to directors i.e. a company car or a loan, it must be notified to HMRC and the associated tax and NICs accounted for. This area of the tax law has been a lucrative source of additional revenue for HMRC Officers who conduct compliance reviews. Incorporation is not suitable for every
practice. We at Martin Aitken & Co advise a number of practices, both incorporated and unincorporated. We understand that the decision as to which entity you choose to practice from – whether incorporated or unincorporated – is based on a number of factors. We can work with you to decide the best route for your practice considering both your personal circumstances and your expectations for the future.
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Should you have any queries in respect of the information contained in this article, please contact Tricia Halliday at Martin Aitken & Co on 0141 272 0000.
Scottish Dental magazine 45
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