What is a limited company?
A self-employed person such as a locum or a single-handed GP is just that person. No-one else. A partnership is more than one self-employed person – no one else involved but them. They are all taxed on their profits, and not what they take out of the business.
A limited company exists in its own right. It has directors who are paid a salary to run the company, and shareholders who are the investors who own the company and who may be paid a dividend for their ownership.
The single-handed GP or partner will most likely pay tax at 40% on most of their earnings. The company pays corporation tax at 19% on its profits after expenses, but importantly, before the payment of dividends.
Are limited companies tax efficient?
Many locum GPs believe it is more tax efficient to work as a limited company because, as mentioned above, the company only pays tax at 19%.
However, in addition to this, the GP receiving the money from their company – which they will need to draw to live on – has to be charged to some tax.
In most companies operated by GPs, the GP or GPs will be both the directors and shareholders. If the GP takes a salary out of the company, the GP will have to pay income tax on the salary and, if the salary is more than £8,164, the company will have to pay employer’s National Insurance contributions (NIC) at 13.8%.
In recent years many small companies operated by paying the directors a salary up to the NIC limit and the balance in dividends. Up to 5 April 2016 if you paid yourself dividends from your company and you were a higher rate taxpayer (ie paying 40%) then you effectively paid tax at 40% by paying 20% tax on the dividends, which together with the corporation tax meant you paid the same 40% tax as if you were taxed as self employed.
Since 2016 the taxation of dividends has changed and if you are a higher rate taxpayer now, you are paying tax on dividends at 32.5%, or 38.1% if you pay income tax at the 45% rate.
So, a 40% taxpayer using a company will pay corporation tax at 19% and dividend tax at 32.5% - a total of 51.5% - which is why limited companies are not always a good idea.
Non-partnership income and limited companies
One issue that we hear a lot is partners who want to put their non-partnership income into a limited company rather than having it taxed in their own name.
As mentioned earlier, the company exists in its own right, so the question that must be asked is whose income is this?
If this is employment income, then it cannot be argued that it belongs to the company. If it is other gross income, it must belong to the company. This means that the person paying for the service provided by the GP must know they are contracting with the company.
There is no objection to the director providing the service on behalf of the company, but it must be transparent. Otherwise, the argument that the income belongs to the company and not to the individual performing the service will not hold.
VAT and companies
We also often find GPs have questions about VAT. Most people assume that VAT is not applicable if you are supplying clinical services.
However, in 2013 a case was brought by HMRC against Rapid Sequence Limited. Rapid Sequence Limited provided anaesthetists to the NHS and claimed that the supply was exempt from VAT as it was health-related. HMRC argued that the company was providing staff rather than clinical services and that the supply was subject to 20% standard rate VAT.
HMRC won, so be aware that you will need to consider the VAT implications of using a company.
Can I transfer my GMS/PMS practice to a limited company?
There are circumstances in which it might be useful to consider using a company instead of the partnership model. Partners pay tax on all their profits, so investing for the future can be difficult because this has to come from profits that are subject to income tax.
GPs acting as directors in their own company can set a salary for their work and the reinvested profits are just taxed at 19%. The company has split directors and shareholders and, in addition, it is possible to have different classes of shareholders, so there is greater scope to widen the investment base and perhaps allow a greater range of individuals to feel part of the practice.
The good news is that if this is appropriate for a practice, there is a procedure that can make this happen. This is not a variation of the GMS or PMS contract, it is effectively the termination and re-issue of the contract – a process called novation.
The rules to novate a contract are strict, the commissioners will need to follow procurement law and protocols and, if the application is not handled properly, the practice could find their contract re-tendered.
However, it should be possible to get assurance that the contact will not be retendered before starting the novation process. In simple terms, the commissioner will send the practice an assessment template and, on receipt of the completed template, will decide whether to agree. The decision will be based on many factors including eligibility, procurement law, potential for innovation, continuity of care, extent of actual changes in services and many other factors.
Many people wrongly assume that because HMRC accepts their tax returns it is happy with the arrangements you have in place for paying tax.
We live in the tax world of self-assessment, which means that whatever goes on your tax return will be processed by HMRC.
You may never hear anything, but, HMRC has powers to investigate - and will do so. They may just pick on one aspect of your tax return and provided you can give a proper explanation the investigation will be closed, but if you cannot, then the investigation could proceed to a full enquiry. And then they go back four years for a normal enquiry, six years for careless behaviour and twenty years for deliberate behaviour.
So you should not take any comfort from silence that follows the submission of your tax return, and you should imagine yourself sitting in a room with a tax inspector having to explain why you are using a limited company.
To conclude, companies have a role in the world of general practice, but they are not a panacea. Each case has to be decided on its own merits, from whether it makes commercial sense, whether it could be considered tax avoidance and whether the company structure suits a particular practice – regardless of any general reviews of the partnership model.
If you are using or considering using a company:
- Have you checked it is still the best vehicle since the dividend tax changes?
- Is the use of your company likely to be considered tax avoidance by HMRC?
- Is it certain that the income declared by the company belongs to the company?
- Is there a risk of VAT being charged on the provision of ‘staff’?
This article was written by Laurence Slavin and Katie Collin of Ramsay Brown and Partners Chartered Accountants, who specialise in the finances of GPs and their practices. Laurence can be contacted at firstname.lastname@example.org and 020 8370 7710 and Katie at email@example.com and 020 8370 7706