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Different structures for commercial and tax efficiency

Most professions structure their business using corporate structures such as limited companies and LLPs, both to limit liability of the business owners but also for tax reasons, utilising the lower tax rates available in companies and giving much greater scope to plan taxable income. NHS GP partners are one of the only professions left taxed at high rates on their earnings. This article from Moore Scarrott Healthcare, nationwide specialist medical accountants looks at the issues.

The medical practice tax trap

For some years now, most professions have structured their business using corporate structures such as limited companies and LLPs, both to limit liability of the business owners but also for tax reasons, utilising the lower tax rates available in companies and giving much greater scope to plan taxable income.

NHS GP partners are one of the only professions left taxed at rates as high as 47% on their earnings, with some at effective rates of 62% on taxable earnings between £100,000 and £125,000, due to the loss of the tax-free personal allowance.

In addition, partners in a traditional partnership are taxed on their profits, regardless of how much they physically draw out; high earning partners can sometimes receive as little as 10% of earnings after tax and superannuation contributions are taken account of, and there are extreme cases (if a partner is subject to an annual allowance charge) where effective tax rates are in excess of 100%!

When combined with the payment on account regime, a partner can see a tax cash outflow of 120% of the increase in their profit share.

Understandably, this leads partners to question whether that additional session is worth it.

Increasingly, practices are looking at ways of mitigating the penal tax rates. Tax rates could increase further as a result of the Covid pandemic, with the resultant pressure on the public purse. With GPs traditionally a profession bearing the brunt of these increases, this is an increasingly important area to explore.

So, what are the options?

Most advisers will glibly say that the tax position of operating under a company as compared to a partnership is (very roughly) the same, so there is no point in changing. At a simplistic overview, tax neutrality can be the case, but it does not have to be.

Further, we should not be solely focused on the tax angle as this fails to consider the multitude of commercial benefits and limitation of liability that are available to corporate structures.

The key point here is that if corporate structures are used more innovatively, it is possible to generate significant savings and cash flow benefits.

There are many myths out there which we hear fairly regularly. Sometimes these can be perpetuated by advisers and clients not wanting to explore the options that are available. There is nothing wrong with being different to the crowd if it is for beneficial reasons, but it does take some effort!

There is no one size fits all

Understanding the business and the individuals is of paramount importance in considering any changes.

It is important to remember that every practice is different, every partner is different, and advice has to be framed in the context of the individual circumstances. What may work for one practice or individual will not for another.

As a result, it is necessary to carry out a detailed process to ensure that the advice works for the practice and gives enduring commercial and tax benefits going forward.

We are working with a number of practices on how to best structure their operations and would be delighted to speak with any partners or business managers about these concepts and discuss how they could be applied to your specific practice.

Author: Chris Clark FCA, associate director of Moore Scarrott Healthcare, nationwide specialist medical accountants.
www.mshealth.co.uk chris@mshealth.co.uk