The incorporation of professional practices is currently a hot topic and in certain areas, namely medical, has brought a significant amount of scrutiny by the Revenue Commissioners on how the post incorporation structure and initial transfer were executed.
One should remember that historically most professionals were not able to incorporate their practice. Indeed there are a number of professional services which still cannot be incorporated. This article will concentrate on the obstacles to incorporating for Medical Professionals, Dentists, Veterinaries and Solicitors.
Medical Professionals have only been free to incorporate their private practice since the late noughties. The medical council then clarified that a doctor could incorporate once they did not seek to limit their professional liability to a patient. As such there still remains a question as to whether a doctor can operate from a Limited Company, however they are free to operate from an Unlimited Company. The tax treatment on the different types of companies is the same.
There are a number of stakeholders which a doctor must inform if they are intending to operate through a company such as, their professional indemnity providers, the health insurance companies, the medical council and any other relevant body of which the doctor is attached to.
Currently Revenue are running a nationwide compliance review of the Medical Profession and have focused primarily on those doctors who have incorporated. On an incorporation of a business there is a transfer of the assets of that business to the new company. Generally a medical practitioner will not have significant assets in their practice with the exception of Goodwill. To quote Lord Macnaghten, goodwill ‘is the benefit and the advantage of the good name, reputation, and connection of a business. It is the attractive force which brings in the custom…’. Revenue, however, have challenged the values and even the existence of Goodwill in the practices which have incorporated. Until this matter finds its way to the Appeal Commissioners, the transfer of Goodwill by a medical professional will be subject to a challenge by Revenue.
Currently dentists cannot practice dentistry through a company. It is specifically prohibited under Section 52 of the Dentists Act 1985. Interestingly enough however, two or more registered dentists who are practicing through a partnership, can incorporate the partnership. As such while a single practitioner cannot incorporate their practice a dental group can incorporate their practice.
Up until the end of 2017, the incorporation of Veterinary practices was not possible due to the Veterinary Act 2005 and the Veterinary council’s interpretation of the relevant pieces of the legislation which regulated who may carry on a Veterinary practice. The Veterinary council, under some pressure by its members reviewed its interpretation with the result that a Veterinary practice can now be carried on through a company, once all Veterinary medicine and services are provided by a registered person under the 2005 Veterinary Act.
This amendment has opened up the opportunity for Veterinary practices to enjoy the benefits, tax and legal, of incorporation. For any Vet out there considering incorporation they should remember that incorporation can be a tricky thing to do right and if they aren’t careful then the expected tax benefits may not arise. It’s also worth noting that incorporation will not suit all practices.
Solicitors are still restricted from carrying out legal work through a company. However, as many solicitor practices also offer a wide range of other services, for example company secretarial services, it may be possible to incorporate part of the practice. Once again this depends on the size and services offered by the practice.
Professional Service Close Company Surcharge
The corporation tax rate for most trades and services is 12.5%. However there is an additional tax payable on the provision of professional services were the company providing the service does not distribute all its profits. This is an additional 7.5% charge on the undistributed profits of company providing professional services. As such the use of a company may not provide the tax savings one ay expect and any potential incorporation should be reviewed carefully for potential tax pitfalls.
If you are interested in exploring the potential opportunity to incorporate your practice reach out to your local ifac office.