A number of dentists incorporating their practices are being challenged by HMRC to defend the valuation and the processes the assets were transferred.
This is a potentially worrying issue for some dentists because if HMRC (HM Revenue and Customs) is successful in its challenge, any reduction in the valuation could be taxed by up to 59%.
Alan Suggett (pictured), a partner in accountants UNW LLP and a member of NASDAL’s (National Association of Specialist Dental Accountants & Lawyers) technical committee, explained: 'The goodwill transferred to the limited company can be treated as taxable remuneration.
'This creates a liability for income tax at 45% and national insurance of 13.8%.
'In the case of an NHS incorporation, where the contract remains in the name of the dentist, this could apply to the whole goodwill value.
'How many practice owners could afford to write out a cheque to HMRC for 59% of their goodwill?
'Suppose the goodwill valuation was £1m and this is successfully challenged by HMRC, the dentist’s company will have to find £588,000 to hand over as tax.'
This issue is of particular concern to lawyers who sell practices that were incorporated without the benefit of specialist advice.
In many instances NHS practices have been 'incorporated' leaving the contract in the name of the dentist, which throws up significant problems when the practice-owner wants to sell the company.
In addition to tax and national insurance contributions, other problems that result from flawed incorporations can include breaching the NHS contract and exclusion from the NHS pension scheme.
According to Nick Ledingham, NASDAL’s chairman, roughly 20% of dentists have incorporated compared to 61% who are sole traders and 19% in partnerships.
He urges dentists who are concerned about possible implications of their incorporation to contact a NASDAL solicitor or accountant: www.nasdal.org.uk.