Shoaib Khan discusses the tax issues involved with the process of buying a dental practice.
In the previous two articles of the series, we discussed tax issues relating to dentists whilst they are either employed or self-employed. In this article, we will consider the tax issues when a dentist decides to buy their own practice.
Whilst there are a number ways of buying a practice, going through each scenario is outside the scope of this article. The tax issues discussed in this article will be with reference to buying a practice via a share purchase.
A share purchase is where you buy the shares in a company which holds the practice you wish to buy.
So you’ve found the practice you want to buy
Generally, when a practice is advertised for sale, often references are made to the practice’s earnings potential. For example, the practice’s annual turnover will usually be quoted. However, in a share purchase, the buyer will not just acquire the practice’s earnings potential but also inherit the pre-acquisition tax history.
A seller company’s future tax liabilities will generally be for items already disclosed in the company’s accounts. However, if seller company’s tax records aren’t up to date – or worse, incorrect – then future fines or penalties become the buyer’s responsibility after the share purchase.
As an example, take a company that has five or fewer shareholders. The shareholders may take cash advances by way of loans from the company. The loans are disclosed in the company’s accounts under ‘directors’ loan account’.
These loans may have a tax impact on the company. However, it is not possible to confirm from the company’s accounts alone if these loans have been reported correctly from a tax perspective. Therefore, unprovided tax liabilities may come with the company in a share purchase.
To identify any unprovided tax liabilities and tax risks that come with a share purchase, a tax due diligence is required.
What is tax due diligence?
Tax due diligence is a process where a tax adviser will review the seller company’s corporation tax and employment tax records. The review of other tax records such as VAT and stamp taxes may also be included, if applicable.
The findings are presented in a report. Key areas of risk are identified and steps to mitigate those risks are highlighted. The tax risks are often quantified and can be factored into the purchase price. Furthermore, your solicitor will ensure that the purchase agreement you sign provides you protection from unexpected tax liabilities.
Due diligence is not just limited to tax risks. As part of a share purchase, detailed checks will be made concerning the legal, commercial, and financial history of the seller company (or group).
In addition to tax advisers, the buyer will usually work with many different advisers. For example, corporate solicitors, corporate financiers, and valuations specialists, depending on your requirements.
The acquisition process may take between two to three months and in some cases longer. Once all the matters have been agreed, a purchase agreement is signed between the seller and the buyer. This concludes the purchase.
What happens if a tax issue is identified?
Continuing with the example of directors’ loan account, if a loan is taken from the company, this should be reported in the company’s tax return. Any tax liability should be paid together with the company’s corporation tax.
If these directors’ loans are not reported correctly to HMRC or the tax in relation to these loans is not paid by the due date, interest and penalties may apply. If this is identified during the tax due diligence, the seller will be asked to correct this. It has to happen prior to concluding the purchase and make payments in relation to tax, interest or penalties, as applicable.
In addition to this, your tax adviser will quantify the risks and your solicitor will ensure that appropriate protection is included in the purchase agreement.
Other tax matters to think about
Tax due diligence aims to identify risks; it does not focus on tax planning opportunities available to the buyer. In my opinion, separate tax advice should be taken prior to the purchase. This helps you to understand the tax impact on you (the buyer). It also helps you to understand the tax impact on the company you are buying – before and after the purchase.
This becomes even more important if the purchase involves a number of buyers who are investing together. Each individual buyer will need to understand how the commercial agreements affects their personal tax position.
For example, how each buyer wants to take income from the practice may vary, depending on their personal circumstances. We discussed the tax impact of taking a salary and dividends in the previous articles.
Finally, it is highly likely that once the purchase has concluded, there will be a number of ongoing tax issues to address. For example, you may wish to operate differently to the seller.
Any change in the operational structure may impact the acquired company’s tax position and/or your personal tax position. Therefore, with appropriate tax advice, you will be able to operate tax efficiently.
Running the practice
Once the share purchase is complete, there will be a number of tax related administrative matters. As the practice owner, you will be responsible for submission of the company’s accounts, tax returns and running the payroll for your staff (including NHS pensions for NHS practices).
In addition to the reporting requirements, you will be responsible for paying the corporation tax and employment taxes by their respective deadlines.
Some concluding thoughts
In my experience, there is no such thing as a standard tax due diligence. Each purchase will have different risks. They depend on the nature of the underlying business and attitude of the seller company’s shareholders to risk.
Therefore, once you’ve acquired one practice and you want to acquire further practices, a tax due diligence should be carried out in each case.
Next in the series, we look at tax issues when selling your dental practice.
You can read part one and part two here:
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