Geoff Long, leading Dental Accountant, explains how Dentists can obtain tax relief when buying a practice.
If you are an ambitious Dentist wanting to hit the big time, one good way of
getting there can be by a programme of Practice acquisitions rather than waiting for a start-up squat to grow organically. Practice acquisitions are usually a good idea where some or more of the following factors are present:
- The target Practice is likely to fit in well with your other current activities, so as to give you “economies of scale”.
- You can see ways in which you can make the Practice more profitable than the current Dentist.
- You have surplus funds that are currently returning an inadequate income where they are.
- You want to become the dominant player in a town or PCT area and the best way to do this is by acquiring your competition.
Tax Relief When Buying A Practice
On the other hand, there are a lot of bad reasons for acquiring a business, one very common such reason being the vanity of presiding over a high turnover organisation. Some may argue that this is what some corporates have done. It is surprising how often this is the true underlying motive behind someone buying a big Practice. When it is acquired, it can be run at a loss for a long time for the same reason – definitely bad for your business’s health.
It is surprising how often a Dentist lands himself in a tax charge before he has even bought the new Practice. The way this usually comes about is this. In order to provide the funds to buy the Practice, a mixture of bank borrowing and existing funds is used. Sometimes those funds cannot be taken out of where they are (e.g. in a Limited Company Bank Account) without triggering a tax charge. If say you have a Dental Practice run through a company at present and you want to tap into some of the value to provide the “equity” in your new Practice purchase, a thoughtless person would simply take the money out of that company by way of dividend.
The problem is, to provide you with your £100k deposit (say) you need to take out a net dividend of £135k from your Company, paying £35k higher-rate tax to the Chancellor (assuming you are already a higher-rate taxpayer) and then using the £100k you have left to put into the new business.
This is just one example of how you can finance your purchase in a tax efficient way.
What are the alternatives? Well a straight forward alternative would be simply to buy the new business within your current company structure. Unfortunately though, there are a number of reasons why this might be a bad idea.
A reason why you may not want to buy the new Practice through the vehicle of your existing Company is if you are concerned to ring fence the different Practice, perhaps because one or more of them are risky. You don’t want one Practice going bust to bring all the others down.
While the above problem may be soluble by setting up a group structure, where the different Practices are run in different subsidiaries of a holding company, this in turn has disadvantage and so on and so on.
Finally, using a Limited Company as your business vehicle going forward is very unlikely to be the most tax efficient way of doing so. A Sole Trader structure gives you in many cases a much cheaper ongoing National Insurance cost on your own remuneration from the business. Also, the punitive “company car” regime doesn’t apply to Sole Traders.
Tapping into your Pension Fund
What a lot of Dentists don’t realise is that there is a potentially huge untapped source of business finance or the acquisition of new freehold Practices in the form of personal pension schemes.
What I have been talking about in the above is just a selection of the tax planning points that tend to be important in a lot of Practice purchases. Every case is different and you should at the very least have a Dental Accountant on board at a very early stage in the negotiations.
Geoff Long Dental Accountant is a specialist based in Hertfordshire. He advises on a wide range of dental tax issues and regularly writes for the dental press. Geoff has over 20 years’ experience with dentists accounts and is recognised for his proactive approach to dental taxation and business problems.
You can contact Geoff on 01438 722224 or email email@example.com