Since the introduction of pension-related tax charges, trading as a limited company has become the preferred trading option for most consultants in private practice.
Alec James looks at the cycle of considering a company through to formation and cessation and highlights some key events where important decisions need to be made.
A limited company is primarily used as your trading structure for three main reasons:
To limit your personal financial exposure. A company has limited liability which is contained within the entity thereby protecting the shareholders and directors.
For financial flexibility. As the earnings from your private practice are moved from your personal tax return to a corporate tax return, you have flexibility to control your overall level of earnings, which can be beneficial to avoid or mitigate certain tax charges such as pension annual allowance charges.
For potential tax efficiencies. Depending on the share structure, you may be able to use the company to reduce your overall tax liabilities. The savings and opportunities will, however, depend on your individual circumstances and you will therefore need to take professional advice.
For most consultants, the driving force behind the decision to use a limited company is usually a combination of all three.
Trading via a limited company requires a different thought process, particularly for those that have historically been self-employed and have enjoyed a great deal of flexibility over access to the funds generated.
The key difference between self-employment and being a limited company is that the income generated within a limited company is no longer yours; it is the company’s income, as it trades in its own right and is separate from you legally.
Decisions you make throughout the life of the company can often have an impact on the overall tax efficiencies and it is important to seek the advice of a specialist medical accountant even at the very start.
Formation of the company
Once you have made the decision to trade via a limited company, you are presented with your first key decision – how will your company be structured?
A quick internet search will tell you that a company incorporation can cost as little as £10 if the forms are completed by yourself. This is sometimes referred to as an ‘Off- the-shelf company’.
It is not a good idea to form the company in this way, as key decisions around the share structure are made at this stage. Carrying out this stage yourself to save formation costs is usually a false economy, as almost inevitable changes to the structure will need to be made later on, which is usually considerably more than the initial savings.
At the formation stage, you will need to decide who will be directors and shareholders of the firm. In private practice companies, it is common to be both a director and shareholder, but they are not mutually exclusive, allowing flexibility on who is involved in the business.
A director is an officer position within the company and is responsible for the day-to-day management of the company and for ensuring the annual reporting and legal requirements of the company are met. To remunerate them for their role, a director may receive a salary or benefits from the company such as an electric car.
Shareholders, on the other hand, stake an investment in the company – for small companies, this is usually £100 or less – and are therefore investors of the business and may have no day-to-day role within the business.
Because they have taken a financial risk of investing in the company, albeit a nominal amount, they are eligible to receive dividends from the company as a reward.
Dividends are the distributions made out of the company profits after corporation tax. Dividends are classified as investment income and are subject to lower income tax rates than earned income and also do not attract National Insurance contributions, often making them more favourable than a salary.
Once the company is formed, you will receive a Certificate of Incorporation – effectively the birth certificate of the company. You will need this to open a company bank account and also at various points in the firm’s life; for example, applying for finance.
When creating the bank account, it is extremely important the account is registered in the company name. Receipts from patients, insurers and solicitors should then be paid in the company bank account to avoid you receiving money personally that belongs to the company, which can create tax pitfalls.
In addition to the company current account, it is worth also opening a company savings account or, as some banks are now offering, have a current account with the ability to segregate monies. This will prove invaluable when saving for corporation tax.
You will also need to design a letterhead and invoice templates in the company and inform both the insurance companies and your indemnity provider that you will be trading via a limited company.
Once your firm is up and running
Once trading, the four key documents which will need to be prepared annually for the company are:
Full accounts – for the directors and shareholders together with HM Revenue and Customs (HMRC);
Abridged accounts – a filleted version of the full accounts, which are filed on public record at Companies House;
Company corporation tax return;
Annual confirmation statement – a document detailing any changes in shareholdings during the year, again a public record.
The accounts are drawn up to the company year-end. The company year-end is usually set by Companies House based on the date the company was incorporated.
Your company year-end does not need to follow the usual 5 April personal tax year-end. In fact, it is often advantageous to have a company with a year-end which does not follow the usual tax year, as this can be useful for tax planning.
The year-end can be changed and you may wish to consider this if, for example, your company is working in a group through another business structure such as a limited liability partnership (LLP) so that your company year-end moves in line with that of the LLP to aid accounting.
A company has nine months from the year-end to prepare the accounts and deliver a copy of the abridged accounts to Companies House. The accounts must follow a prescribed format, so you should seek the advice of a medical accountant to ensure you are not only in line with the requirements but are minimising the corporation tax payable.
The full accounts contain details of the income and expenditure of the company together with a balance sheet of the company. The balance sheet is a snapshot of the company worth as at the year-end date.
Abridged accounts exclude the income and expenditure pages and any management information, leaving only the balance sheet and a few statutory disclosures being available to the public.
As limited companies are separate legal entities, the profits of the company are subject to corporation tax. This is currently 19% irrespective of profits, but this is increasing for companies earning more than £50,000 from 1 April 2023.
Following the new tax rates, the first £50,000 is taxed at 19%, with profits over £250,000 taxed at 25%, the earnings in between being taxed at an effective rate of tax of 26.5%.
Corporation tax is due to be paid nine months and one day after the company year end, irrespective of the year-end adopted. The corporation tax is calculated based on the profits in the full accounts. These profits are subject to adjustment for any non-allowable expenditure, but also provide tax relief on capital expenditure incurred during year, such as IT equipment, office furniture or electric vehicles.
Electric vehicles are currently extremely tax-efficient, with tax relief being available to the company whether purchased or leased.
As a director, you will pay very minimal tax personally for having use of the car. Therefore, if you are considering a new electric vehicle, having it as a company car in your own business is likely to be the cheapest option.
Some companies may have additional reporting requirements if they have paid employees benefits in kind, such as electric cars, or are VAT-registered.
Most medical companies will not need to register for VAT, as the income generated is covered by the healthcare exemption. Those companies which provide procedures which are considered purely cosmetic or in relation to medico-legal work may need to consider VAT registration if income exceeds £85,000.
Winding your company up
At some point in your career, you will find you no longer require your limited company; this is usually when you come to retire.
Few medics are able to sell their private practice at the end of their career and therefore the majority cease trading when they retire.
At this point, it is likely that there will be reserves left in the company.
Reserves are the post-corporation tax profits which have not been paid to the shareholders as dividends. The level of reserves at the end of the company’s life often dictates the winding-up procedure.
If the reserves of the company are below £25,000, the company can be wound up and removed from the Companies House register fairly simply by your accountant applying for the company to be struck off and corresponding with HMRC.
Before the strike-off, all the liabilities of the company must be settled. This includes any payments the company owes to HMRC, the directors and any other creditors such as your accountant. The remaining funds should then be paid to the shareholders.
For many medics, the reserves will be well in excess of £25,000, particularly if you have carried out any tax planning with your accountant. In these cases, the company will need to be liquidated.
Liquidations are often reported in the press in a negative way, as we usually hear this word when a company is unable to meet its liabilities. However, the same terminology refers to a company that is solvent and being liquidated.
In fact, a liquidation is simply the company realising its assets and paying the funds to the shareholders. This could involve selling or transferring any assets the company has as well as collecting the final monies owed to the company.
A liquidation above £25,000 of reserves will need to involve a liquidator, which is a special type of accountant. Liquidations are often more tax-efficient than dividends because, providing certain key criteria are met, the final distributions from the company will be subject to capital gains tax rather than income tax.
This presents a tax-planning opportunity to work with a specialist medical accountant, as capital gains tax rates are lower than income tax rates.
Whatever stage you are at with you company, specialist medical accountancy advice is always invaluable to ensure that you are maximising your tax efficiencies both in the short and long term.
Alec James (right) is a partner at Sandison Easson & Co, specialist medical accountants