Are limited companies a realistic aim for today's GP?
John Roberts talks to accountant Richard Vickery, a specialist in medical matters, about GPs doing business via limited companies
There has been a lot of talk about saving tax by channelling private income through a limited company. What are your thoughts?
We have all seen the headlines and on the face of it there seems no reason why GPs should not set up a limited company to handle private practice income. But let's weigh up the pros and cons. Let's look at a GP with private income profits of £10,000 a year which up until now had been included in the partnership accounts and prior share allocation to that partner. We should also assume the partner with these private income profits would have other profits assessed in the partnership from NHS sources of over £40,000 a year.
All other things being equal, the GP would pay £4,000 tax on the profit share. If the GP has a spouse paying basic-rate tax and those profits are put through a limited company and paid out as dividends to the GP and spouse equally, the headline tax-saving figure would be £2,750. This could increase if the share holdings were tilted towards the spouse.
But what about the bad news?
There are significant costs involved in running a limited company the trick is not to incur costs that exceed the tax savings! For starers there will be a one-off cost of setting up the company in the first place. It is best not to go for the readymade company off the shelf but to go to your accountant to arrange for a brand-new company to be set up. The costs of correcting the readymade company to reflect the GP's needs are likely to exceed the costs of the new company around £450 plus VAT.
Then there are the ongoing costs: accounts preparation, corporation tax returns, Companies Act compliance and payroll expenses. This could add up to £1,800 plus VAT or more. Of course the more adventurous GP could probably deal with the Company House compliance and the GP practice could deal with any payroll matters. This would still leave likely costs of more than £1,000 plus VAT on an annual basis.
Are there any other tax or NIC effects?
Oh yes. If a salary is paid for whatever reason to either the GP or spouse it could mean both employer's and employee's national insurance contributions becoming due. It is best to steer clear of running a car through the company because of complicated benefit-in-kind rules and high tax charges to the director. It is probably best to steer clear of all benefits in kind because of compliance risks. If the company makes over £10,000 in profits it will have to start paying corporation tax, which is payable nine months after the year-end so will become due much sooner than under self-employment rules.
Any other effects?
Company accounts are available for anyone to have a look at, so if the thought of your patients pouring over your accounts is too much then incorporation may not be right for you.
Limited liability seldom means you can just walk away if it all goes horribly wrong. For example, any loans the company takes out will probably be guaranteed by the directors personally.
So are limited companies a good idea?What is clear is that each decision to incorporate a business should only be made in light of the full facts involving that particular GP and not just looking at a typical circumstance as each individual GP's circumstances will differ.Much depends on whether a GP needs to draw out all the profits from the business, and whether these profits are drawn out as salary or dividends.If the GP is claiming tax relief on superannuation payments and has a private pension then, if pension payments are to be maintained, there must be a certain amount of profit drawn out in the form of a salary or bonus.Where company profits don't need to be paid out as salary they may be paid out by way of a dividend to shareholders. This may be attractive if the GP and spouse are equal shareholders and the spouse is not a higher-rate taxpayer. In these particular circumstances the tax savings can be substantial and be far more than the professional compliance fees, giving a real saving to the GP.Company accounts are available to anyone what would you think of patients pouring over them?~