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- Advice on most tax efficient structure LLP, company, partnership, sole trader or MDPs
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- VAT management
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Latest news & blogs…
SHIPLEYS TAX – Tax Bites
A RECENT study on Inheritance Tax paid suggests that many hundreds of taxpayers are being caught out by avoidable Inheritance Tax (IHT). The reports states that millions in unnecessary IHT have been paid through gifts gone wrong.
The study found that the most common issue involves parents giving the family home to their children but continuing to live there thereby making the property a gift with reservation. Such assets are caught by the Gift With Reservation Of Benefit rules and are treated as remaining part of the donor’s estate for IHT purposes.
For Inheritance tax purposes, a gift that is not fully given away because the person making the gift (the donor) keeps retains some benefit for himself will attract an anti avoidance tax charge.
However, it is quite possible to easily avoid this tax trap through some careful planning. Many people are unaware of this and are being unnecessarily caught out each year when passing assets along to the next generation. Unfortunately, this can lead to beneficiaries of the donor facing hefty tax bills.
Please note that Shipleys Tax do not give free advice by email or telephone.
GP PRACTICES in England are able to incorporate and trade as limited companies holding a GMS, PMS or APMS contracts and such GP incorporations have become increasingly popular over the past few years. Those that do are stepping into a largely untested minefield of tax, legal and accounting issues. Should GPs abandon their traditional partnership model in favour of the perceived benefits offered by a limited company? Should you believe the hype?
In today’s tax brief, Shipleys Tax looks at the some of the tax and accounting pitfalls facing GPs considering this route. It looks at why the current trend of the limited company model as being right for general practice is one that should be properly examined and tested, the perceived tax benefits having numerous side effects which many fail to consider when looking for an alternative trading model for NHS practices.
Many advisers are increasingly advocating a limited company structure for traditionally partnership run GP surgeries. There are quite a few attractions that are bandied about:
- You will pay less tax – the company tax rate is 19%, the partnership is paying 40% and above
- You can get your spouse involved and use their tax bands too
- You don’t have to worry about VAT as medical services are exempt
In theory this may well be true, but in very limited circumstances and, as the saying goes, there is more to it than meets the eye. So, let’s look at some key headline issues.
You will pay less tax
This is the number one determining factor. It certainly is correct that it is easier to save tax and manage income by using a limited company, but this only works under certain circumstances and is more difficult than people realise. Under a company, the partners become employees and shareholders, and would typically extract profits either as salaries or through dividends. Dividends are taxed at lower rates than partnership profits (at certain income bands), however, once you factor in corporation tax of 19% (which is set to rise to 25%), the amount of income distributable to the shareholders tax efficiently becomes a much more complicated scenario. Whilst tax savings might be achievable, the problem is that partners in a practice may not have equal ambitions, so where one partner might wish to minimise tax and another might want to maximise take home income. Even then, at some point the profits earned in the limited company will need to be distributed, so you may end up creating a tax time bomb for the future where tax will be payable possibly at a higher rate.
This is potentially compounded by putting any owned property (i.e. surgery) into a less favourable tax environment and triggering Stamp Duty and/or Capital Gains Tax, crystallising tax at an earlier point in time giving rise to major cashflow problems.
Most GP practices have their own profit-sharing arrangement based on essentially the time spent and seniority of the partner.
The kind of complex profit-sharing arrangements in partnerships is not easily replicable in a limited company structure. Convoluted shareholder agreements and various alphabet share classes are employed to overcome this. The result tends to be an unwieldy instrument which neither does justice to the partnership agreement it replaces nor is it an improvement to it. Further complications arise where partners regularly change their sessions, or when a partner joins or leaves, the document is not always sufficiently flexible to accommodate this.
Under the partnership model it is generally possible to exclude a partner from the practice and withhold their entitlement to share of the practice’s profits. With a limited 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 a legal agreement for such a scenario, but this would need to be agreed by all parties beforehand and not easily implemented.
Although using a limited company can help solve annual and lifetime allowance limit problems (by moderating income), it is likely that the final NHS pension will be lower. This is because when taking income from a limited company the reported superannuable income would be based on the dividend policy. If the aim of using a company is to optimise your tax bill then it is obvious that there will be a reduction in reported income for superannuation purposes and as a result the final pension may be lower than it would have otherwise been.
Contractual position & VAT
Currently, GP practices wishing to incorporate need follow a set process which includes making a formal request to their CCG (Clinical Commissioning Group) to novate the primary care contract into a company vehicle. The process is lengthy and drawn out, requiring the applicant to provide a huge amount of personal and business information to mitigate perceived risks. Even then, the CCG has discretionary powers and is not obliged to grant the request. Historically, the process involved effectively handing over the contract and then having it granted again to the new entity, leaving the risk that the NHS contract could be put out to tender rather than automatically being granted to the limited company. In some cases, the CCG may want the contract to be an APMS one, or they ask for personal guarantees or bank bonds from the shareholders to cover certain income that is being received.
Additionally, in some cases, badly drawn contractual positions and skewed trading structures mean VAT will potentially be chargeable on the supply of “medical services”. This is a common mistake made by practitioners but is beyond the scope of this article.
These are only some of the issues, not to mention the many legal and accounting hurdles that will need to be surmounted before a trading model akin to a partnership can be achieved.
However, in the right circumstances, a company can be a very useful tool for GPs. In the wrong circumstances, it can mean walking straight into a tax and contract nightmare. Questions about incorporation usually arise because of a desire to limit liability or to save tax. Both are attractive aims, but it is important to understand that there are many other considerations and there are many fatal pitfalls to navigate. Depending on what you want to do with the limited company, it may require a significant amount of due diligence, or it may not be the right fit at all.
At Shipleys Tax, we have a dedicated team of specialists who have developed GP practice incorporation options which gives you the best of both worlds. Talk to us about the following:
- GP incorporations
- Partnership with 20% tax rates
Using the right setup, the move to an incorporated trading model can bring benefits both from a taxation and succession planning point of view. There is no substitute for specialist advice as getting it wrong can be expensive and extremely stressful.
Please note that Shipleys Tax do not give free advice by email or telephone.
The Chancellor Rishi Sunak delivered his second Budget of 2021 on 26 Oct 2021 with a focus on increasing spending pledges. Here we summarise the key tax announcements.
As the major tax increases have already been announced earlier this year (increases to rates of corporation tax, NI and dividends) the Budget was extremely light on taxation measures. But the highlights are as follows:
- An overall increase in the national living and national minimum wage rates
- A further extension to the annual investment allowance, which will remain at £1 million until 31 March 2023
- Confirmation that generally unpopular basis period reform will go ahead, with the transitional year in 2023/24, and an automatic spreading mechanism
- A cut in the Universal Credit taper rate from 63% to 55%
- A 50% cut to business rates in 2022/23 for businesses in the hospitality, retail and leisure sectors
- An increase in the rate of relief for three cultural activities, including museums and galleries
- A welcome extension of the UK Property CGT reporting deadlines, from 30 days to 60 days
- The announcement that alcohol duty will be heavily simplified.