This is a potentially worrying issue for some dentists because if HMRC is successful in its challenge, any reduction in the valuation could be taxed by up to 59 per cent.
Alan Suggett, a partner in accountants UNW LLP and a member of NASDAL’s technical committee, explained: “The goodwill transferred to the limited company can be treated as taxable remuneration. This creates a liability for income tax at 45 per cent and National Insurance of 13.8 per cent.
Alan commented: “In the case of an NHS incorporation, where the contract remains in the name of the dentist, this could apply to the whole goodwill value. How many practice owners could afford to write out a cheque to HMRC for 59 per cent of their goodwill?”
“Suppose the goodwill valuation was £1m and this is successfully challenged by HMRC, the dentist’s company will have to find £588k to hand over as tax.”
The issue was discussed at the biannual meeting of NASDAL at which members share their technical knowledge of dental practice matters for the benefit of their dentist clients.
This issue is of particular concern to NASDAL lawyers who sell practices which were incorporated without the benefit of specialist advice. In many instances NHS practices have been “incorporated” leaving the contract in the name of the dentist, which throws up significant problems when the practice-owner wants to sell the company. In addition to tax and NIC, other problems that result from flawed incorporations can include breaching the NHS contract and exclusion from the NHS pension scheme.
The meeting agreed that, provided the incorporation had been carried out by dental specialist accountants and lawyers, unexpected problems should not arise. Unfortunately many incorporated practice owners have not been advised properly.
According to Nick Ledingham, NASDAL’s chairman, roughly 20 per cent of dentists have incorporated compared to 61 per cent who are sole traders and 19 per cent in partnerships. He urges dentists who are concerned about possible implications of their incorporation to contact a solicitor or accountant.