How to form a company

Specialist medical accountant James Gransby explains why PCNs might want to consider switching to a limited company business model 

Most PCNs set up as either a lead or flat practice model. But many are now finding this problematic, particularly when sharing staff, and are considering a limited company (corporate) business model. And PCNs that operate as a super-partnership or in a federation are equipped to deal with a growing amount of legal and employment issues.

What key problems can a company model overcome?
The main issues relate to tax and staff liabilities.

1 VAT 
While healthcare services are classed as VAT exempt, the sharing of staff around the network (including medical staff) is usually subject to 20% VAT unless a practice is operating below the £85,000 registration threshold. HMRC indicates that this applies to the Clinical Director (CD) role too. This is a complex issue, but a PCN operating a limited company can be structured to benefit from a VAT relief called the cost-sharing exemption, by operating a cost-sharing group. 

2 Liability 
A network with a lead practice structure is not a separate legal entity. It is a group of practices that are jointly and severally liable for what happens in the network. So all the practices – and therefore all the partners – are trusting each other to share the network’s legal and financial responsibilities. The main concern is that if a PCN needs to make staff redundant, the cost will fall on individual member practices. But if a company is employing the workforce the costs come out of the assets of the company – so there is less risk of destabilising individual practices. Also, it’s possible that PCNs may not be a permanent fixture – an issue that should not be ignored.  

3 Legal framework 
A PCN operating without a formal framework relies only on the guidelines set out in the network agreement. A limited company is governed by the Companies Act 2006, which sets out the company’s obligations and makes the people involved accountable for their actions.

4 Tax on PCN surplus? 
If a PCN is not a legal entity it has no mechanism to report its taxes, except through its member practices, with each practice needing to report its share of the surplus through its own accounts. Creating a company offers options for the PCN to shelter some of the profits at corporation tax rate instead of partners’ marginal tax rates of 40-45%.

Why is TUPE important?
When moving the workforce into a limited company, companies must follow TUPE regulations, which ensure employees retain their terms and conditions and keep continuity of employment. Because of this, a number of PCNs have decided to form a company now, even if they operate below the VAT registration threshold, to avoid needing to transfer a larger number of staff at a future date. 

What about pensions?
PCNs using limited companies could not originally access the NHS pension scheme, but they can apply for this under a temporary direction/determination order, which currently lasts until 31 March 2023.  

Next steps
The next steps include: 

• Forming the company with the correct legal structure and paperwork.
• Transferring staff from the PCN (with TUPE and consultation).
• Arranging access to the NHS pension scheme.
• Other admin such as opening a bank account, arranging contracts of employment and exploring CQC registration.

Specialist advice is usually needed for these tasks. However, the long-term benefits outweigh the short-term effort.

James Gransby is vice-chair of the Association of Independent Specialist Medical Accountants and a partner at RSM UK Tax and Accounting Ltd. This is an update to his article published in PCN Spring 2021

For more guidance as well as practice business and financial advice, visit pulse-intelligence.co.uk