The Autumn Statement was more significant than in previous years, reflecting the fact that George Osborne was aiming to make a big impression before the general election on May 7.
The big story for me was the changes to the rules around incorporation, which mean there will no longer be as many tax benefits to incorporating your practice. This is a major setback to practices that are sole traders or partnerships, and who have been considering incorporation for commercial reasons (such as limited liability and the continuity of business in the event of a fail). Practices already incorporated will not suffer as a result of these new changes.
So, what were the tax benefits prior to December 3, 2014? Well, the goodwill of a sole trader/partnership would have been valued and then sold on to a new limited company, with the profits of that sale taxed at the capital gains tax (CGT) rate of 10 per cent. This has been increased to 28 per cent, effectively making the process of valuing and selling goodwill non-viable, from a tax point of view. A second benefit was that, in certain circumstances, the goodwill acquired by the new limited company could have been written off for tax purposes. This concession has also been withdrawn.
For a number of years, NHS England has actually been standing in the way of many practices incorporating. In fact, it is only since the middle of 2014 that they have been cooperating. Even so, many local area teams (LATs) still haven’t got a proper policy in place, so we have ended up in a situation where we have practices queuing up to incorporate. These are the practices that will be affected by the new rules. It still might make sense for them to incorporate, based on the good commercial reasons outlined above, but there will far fewer tax benefits.
The circumstances in which incorporation would still make sense would be when the practice owner’s living expenses are less than the profitability of their business. Any profit that he/she has made which is extra, and not needed for consumption, stays in the company and is at least partially tax sheltered. Essentially, if you need all of your profit to maintain your standard of living, incorporation will probably not suit you, at least not from a tax point of view.
In these circumstances, one might incorporate without valuing the goodwill or selling it over – basically, set up your incorporation with no goodwill whatsoever. If your limited company makes a profit and you draw all or most of the after-tax profit out, your tax position will be broadly the same than if you had been a sole trader/partnership, particularly with the additional accounting fees associated with being a company. Or the company makes a profit, and you don’t draw it all out and enjoy some – reduced – tax benefits. This really is a massive change.
Moving on to other key points in the Autumn Statement, it was the long-awaited reforms to Stamp Duty Land Tax
(SDLT) that grabbed most of the headlines the day after the Chancellor’s speech. Most homebuyers will be better off and pay less SDLT under the new thresholds: only properties valued at more than £937,500, at the top end of the housing market, will pay more. For anyone in this price bracket, this is obviously not great news, but an estimated 98 per cent will pay less. Under the new rules, you will not start paying SDLT until the property goes over £125k and then it will not be the ‘slab’ approach, in which one rate of tax applied to the entire value either. Instead, tiered rates will apply to a portion of the purchase price, within a set of five bands.
With regards to personal finance, there was some welcome news. Previously, thousands of people were losing out on the tax advantages of their spouse’s ISA when he or she passed away – even if they had saved that money together. Now, spouses and civil partners will be able to pick up the tax-free status of any money left in ISAs after death. This follows on from the upcoming changes to the taxation of pension death benefits, which were announced in the spring 2014 budget.
Other positive notes were the promise of £2 billion in additional funding to frontline NHS services in England in 2015-6 and, generally, growth, with more people in work than ever before. But there is still work to do and with the general election looming, it is imperative that you start the new year with some solid financial resolutions. Get informed and get supported – specialist dental accountants will have a wealth of knowledge and can advise about how you can adapt to the changes ahead. With proper planning, you can steer both you and your practice through any choppy waters