Graham Hutton, Specialist Financial Planner at Wesleyan Financial Services, shares a key business management area that poses a significant financial risk to your practice…
Owning and running a dental practice can be a rewarding and potentially lucrative career path, but it’s not without its potential pitfalls.
After years of study and financial input to become a dentist, many then find themselves as business owners but do so without the same level of rigorous training in running a business and managing finances, contracts and people as the training required to become a dentist.
One area that is therefore often overlooked is truly understanding the various contractual agreements that are held between different parties within the practice - and it’s a widespread issue across dentistry.
You only need to look at the recent court case of the GDC versus Williams over the top-up of NHS treatment to see how fine print can come under debate if various parties have different interpretations.
This also holds true for your associate and partnership agreements:
Changes in guidance on determining associate employment status
HMRC’s new guidance for setting out how associates need to demonstrate self-employed status for tax purposes has been implemented since 6 April 2023.
Previously, this could be determined by case law and the provision that there was a contract in place in line with that provided by the BDA (so long as key conditions of the contract were followed).
Now, HMRC has stated that tax status needs to be considered using the Check Employment Status for Tax (CEST) tool and greater emphasis has been placed on ensuring that the contractual arrangements are being followed in the practice.
One particular clause within associate contracts that is a cause for concern in terms of risks to self-employed status is around substitution and the provision of a locum by the associate who is unable to perform or is otherwise absent.
It’s common practice for the wider practice team to cover this absence and absorb the workload, which is understandable in one sense to ensure that cover meets the level of care that the practice wants to deliver to patients. However, this is one of the key indicators of employment that may be challenged by HMRC when they come to visit.
Principals and associates will be interviewed separately by HMRC and if inconsistencies are found in the understanding of practice arrangements, there is a possibility that the associate could be considered employed.
There are two sets of implications of this, firstly the associate could potentially lose what is often considered a favourable tax position as well as some of the freedom and flexibility of being self-employed. Secondly, practice owners will be required to pay a standard basket of employee benefits, including National Insurance contributions, and the impact on practice profitability could be significant.
An additional risk to the practice owner is the potential for HMRC to backdate employers’ Tax and National Insurance Contributions for each impacted associate in the practice for between one and six years.
Obtaining locum cover could help in this scenario, providing a financial safety net for associate dentists in the event they are unable to practise without having to take the hit solely through their hard-earned money. It can also serve as evidence in the event of a challenge from HMRC that the processes detailed in the associate contract around substitution could actually be met.
It may also be worth considering discussing with a dental accountant who understands the implications and can provide further guidance.
Ensure your partnership is truly a partnership
Whether you’re a partnership or a limited company, there is a clause within the partnership agreement or shareholder’s agreement to determine the procedure for when one of the partners or directors is absent.
In some cases, in as little as 26 weeks of absence, there could be a compulsion where the other partners are able to buy an absent partner out. You need to fully understand when this kicks in and if this is viable for your situation and business. If not, it’s imperative that this is discussed and ironed out.
Then, you need to flip the coin and consider the business continuity of your practice should your partner be unable to continue to lead the practice alongside you. This could be due to illness or injury or, even though it’s difficult to think about, your partner’s death.
Without a solid business continuity plan, underpinned by a robust legal agreement, you could be in a situation where you have a sleeping partner in the form of the deceased’s family, with no dental experience, expecting a profit draw.
You need to think about how you will make provisions for that scenario from a financial sense. Is your practice able to get extra borrowing at that point to buy them out and fairly compensate them for the share in the business?
Define these scenarios with your practice partner – the peace of mind is worth it.
Speak to a specialist
If you are unsure whether these risks apply to you, you can speak to a Specialist Financial Planner at Wesleyan Financial Services as part of a no-obligation financial review by visiting wesleyan.co.uk/dental or calling 0800 316 3784.
Please note: Tax treatment depends on individual circumstances and may be subject to change in the future. This article cannot be considered financial advice, which should be undertaken on an individual basis.
About Graham Hutton
Graham is one of a small team of Specialist Financial Planners at Wesleyan Financial Services offering bespoke business planning for dental businesses. As part of his specialised role, he helps dental businesses identify and resolve risks found in their legal documents, their business processes and their accounts.
‘WESLEYAN’ is a trading name of the Wesleyan Group of companies.
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