What GP partnerships should consider before opting to incorporate

Medical accountant Andrew Leal outlines the pros and cons of forming a company and what to consider when deciding whether it is the right move for your partnership

NHS England recently issued new guidance for commissioners to follow when considering requests from GP partnerships to operate through a limited liability company.

This followed an increase in the number of requests to transfer GMS or PMS contracts or to sub-contract some services to limited companies, driven mainly by the development of Primary Care Networks (PCNs) and the scaling up of services.

The guidance strengthens the process for managing incorporation requests. The aim is to ensure a more rigorous and consistent risk-based process is adopted by commissioners.

As a result, any practices looking to incorporate should consider this guidance carefully as it sets out the criteria against which their request will be assessed.

Examples of requests to move to a limited company can include several practices, each with a GMS or PMS contract, seeking to novate their contracts to the same jointly owned limited company. They can also be from a cluster of practices who merge these contracts into a single geographically extensive and high value contract, which is then novated to a limited company.

For commissioners, such ‘at scale’ providers present a risk to the continuity of service should the company run into financial difficulty. The new guidance doesn’t resolve the potential procurement issues that can arise from incorporation. When a contract is novated the old contract is terminated, and a new contract is awarded. This process is discretionary and the commissioners will need to satisfy themselves that they have met their procurement obligations which might include considering alternative providers. Therefore, practices need to obtain assurances from the commissioners before terminating a contract.

However, it provides a process for commissioners to follow, suggests what requirements partnerships should be expected to meet and recommends variations that should be incorporated into the contract to mitigate the risks.

What restrictions could the commissioners require?

The guidance outlines the following general recommendations:

• Prohibit changes in company control and ownership that could pose a threat to sustainability.
• Prohibit the company from entering into significant financial arrangements (ie, high value loans).
• Place conditions on the company that must be met before dividends can be distributed.
• Commissioners could:
  • Impose additional obligations on the contract holder where the contract is terminated
  • Prescribe minimum working capital requirements  
• Require the company to report on matters such as the annual company business plan, financial accounts, management information, staff pay and dividend payments.

What are the advantages and disadvantages of incorporation for partners?

While the above provides valuable guidance for GP partners, there are many factors that practices should carefully consider before incorporating.

There are several potential benefits of forming a company that are often promoted to GP practices – in particular reduced liability if the business fails, greater tax efficiency and the avoidance of premises liabilities.

However, the benefits very much depend on individual circumstances of the practice and there are also some drawbacks.

The key considerations are outlined below.

Limited liability

Up until now GP partners have been able to manage and mitigate business risks as their own practices have increased in size. With the development of PCNs this dynamic has changed. Operating at scale and across different practices presents new threats that partners are less keen to embrace. A corporate vehicle that limits the financial risks to the shareholders may therefore appeal.

There is also an increasing concern about GPs becoming the ‘last man standing’ in a partnership. Some practices face the prospect of partners retiring without replacement. As the number of partners reduces, the risks are concentrated upon a smaller number of individuals, so the possibility of limited liability can be more attractive.

Taxation

There is a widely held belief that using a limited company will be tax efficient. However, the tax burden from incorporation may end up higher than for a partnership.

If a practice incorporates, the company will pay corporation tax at a rate of 19%. GPs usually take a modest salary on which they will pay income tax and national insurance, and the company will pay employers national insurance contributions. Remaining profits will be paid as a dividend and will typically be taxed at 32.5%.

It is this combined liability to corporation tax and income tax that can result in higher tax liabilities. If all the profits are extracted from the company in full it is unlikely that there would be any tax saving. Tax advantages are only likely to be obtained if profits are retained in the company or the shareholdings of the company are widened to include individuals who are subject to lower rates of tax.

Some practices have sought to include other family members with lower marginal rates of tax as shareholders, but this may jeopardise the company’s ability to hold NHS contracts or access the NHS Pension Scheme.

Where the corporate tax structure may provide a benefit is if a practice has plans to scale up delivery over a number of years and plans to fund this expansion from retained earnings.

The NHS Pension Scheme

If the contract is to be novated to a limited company, it is essential that the company is structured to be eligible to access the NHS Pension Scheme. Just as importantly, the company’s ownership and control will always need to meet the requirements to have access to this scheme.  

Crucially, becoming part of a limited company will reduce the GP partners’ pensionable income. Partners in a limited liability company will typically take the majority of their remuneration as dividends, which are paid from the profits of the company after the payment of corporation tax. As such, their pensionable remuneration will be lower than for a partner.

Surgery premises

If the practice premises are leased, then it will be necessary to negotiate the transfer of the lease to the limited company. Typically, the practice will need to cover the landlord’s legal costs and the directors may well be required to provide personal guarantees, so that in the event of the company defaulting on the payments under the lease the directors would be personally liable. This would ensure that the security of the landlord is not reduced.

If a practice owns the freehold of its premises, a transfer could make the partnership liable to Capital Gains Tax and Stamp Duty Land Tax and advice should be sought to mitigate these liabilities.

Flexibility

The traditional partnership model is extremely flexible. Partners can take for granted how easy it is for them to change sessions and profit shares, and to take certain personal income streams. It also enables them to bear certain costs personally and leave and join the practice easily. This flexibility doesn’t exist within the corporate structure and changes will require greater planning and attention to detail with significantly higher costs.

Regulation and privacy

Traditional partnerships are subject to very few regulations and are not required to publish their accounts. By comparison, limited companies need to submit accounts in a proscribed format to Companies House. As a result, compliance costs will typically be higher for a limited company than a partnership.

NHS contracts requirements

NHS contracting regulations impose restrictions on the ownership and control of entities holding certain NHS contracts. Typically, GP partnerships have no difficulty complying with these requirements. However, it is possible for a limited company to inadvertently breach these rules. As with access to the NHS Pension Scheme, it is essential that advice is taken to ensure that this doesn’t become a problem.

Other considerations

Following incorporation, the practice staff will need to be transferred to the company under the Transfer of Undertakings (Protection of Employment), known as TUPE, regulations. All other contracts, including insurance will also need to be transferred and the company will need to apply for CQC registration.

Importantly, the ‘New to Partnership’ payment in the current GMS contract is not available to GPs or other eligible staff in a practice operating via a limited company.

So, is it worth it?

GP partners will need to take numerous elements into account when considering incorporation.

For many, forming a limited company currently doesn’t offer enough advantages over the traditional partnership model.

The exception to this will be where the requirement for limited liability overrides the costs and complications arising from the limited company model. This will be particularly relevant where practices are delivering services at scale. For example, where a PCN or federation are looking to take over the GMS/PMS contracts of practices in their area or a company has been formed to take over multiple contracts or a single, but very large, contract.

Andrew Leal is Head of Healthcare at MHA MacIntyre Hudson