By Simon Vincent, Senior Tax Accountant at Hive Business
Incorporation for dental practice owners used to be a no-brainer because it saved you money. You could sell your practice to your company, pay tax at 10% and be left with a big chunk of cash to draw from tax free. Plus, dividends were lightly taxed.
Now you don’t get the 10% tax rate when you sell your goodwill to your company, and dividend tax has gone up. Being incorporated now comes with a tax rate that’s pretty much the same as if you weren’t.
Hence many practice owners aren’t keen, and NASDAL accountants correctly highlight the technical downsides, yet there remain some compelling reasons to get incorporated even without the immediate tax sweetener. The main one is that it’s a new start for your business, and it’s difficult to overstate how powerful this is. It’s a bit like taking your life and saying “tomorrow I am going to be a physically different person and do things the way I want to do them”.
We see that attitude as the single biggest determining factor in the success of a practice, but you won’t see it on any tip list — it’s not “tickable”. Yet it’s likely that incorporation is going to be the best opportunity you’ll ever have for tidying up your sales processes, your invoicing and everything else to do with your accounts.
Plus it gives you a cut off point where you can draw a line in the sand and say “from now on we’re going to do things properly”. Obviously, this requires effort. The biggest pain is the CQC, I gather the form is a bit of a killer. You’ll have to set up a new bank account, tell suppliers to bill your new company and make sure all accounts are brought up to date.
All of this is tempting to put off, but if your business is growing or you are planning to grow, it will only get more difficult down the line. And if you are thinking about expanding to a second site you should incorporate right away.
It’s not surprising that people who stand to benefit from incorporation don’t get round to it. It’s human nature. I know a guy who was aware of the tax advantages available a few years ago and still didn’t get around to incorporating. I suppose he just didn’t prioritise it and so he paid £120k in tax when he didn’t need to.
Anyway, here are the main benefits of incorporation as it stands.
- Limited liability protection. If something goes wrong, your liability is limited to the amount you have contributed to the shares. (For most of our clients this is a few pounds.)
- It forces you to take a mature approach to business. The structure of an incorporated company means you must focus on the different roles of shareholders (who own it), directors (who are strategically responsible for making a profit) and associates (responsible for delivering services). You may do all three but you will have to accept that they are defined, whereas a sole trader would not need to recognise the roles as being separate.
- More flexibility in terms of structure. This is useful if you have multiple sites or want to diversify into other investments. Alternatively, you may be generating profits that are above your monthly needs (living costs plus spending money), in which case you are paying tax unnecessarily as a sole trader. You wouldn’t need to pay this if you owned a company.
And the drawbacks.
- The transition is an admin headache (bank account, CQC etc)
- There will be set up fees
- There will be ongoing admin thanks to stricter compliance requirements for accounts, costing at least an extra £2k a year
- It forces you to behave in a new way that’s outside your comfort zone
I would suggest that all these drawbacks are negligible given the benefits. If the setup costs really are a problem then you have deeper financial issues that should be resolved first anyway. If you’re not incorporating because the tax advantage has disappeared, this is a good time to ask yourself: how else am I holding my business back?