Over recent years increasing numbers of medical professionals have sought to incorporate their private practices for perceived tax advantages. By incorporating their private practices the medics have, more often than not, moved from being a sole trader to a limited company, with the sole trade business sold to the limited company and a value for goodwill introduced.
HM Revenue & Customs (HMRC), via the Specialist Personal Tax team in the Shares and Valuation Division (SVD) based in Nottingham, has challenged the goodwill valuations in these circumstances and said the goodwill is based on the skills, experience and reputation of the medic. As a result, it is personal goodwill and cannot be sold to the limited company following incorporation.
In correspondence, HMRC has repeatedly expressed the view:
- that a company cannot carry on a profession; and
- that a company that employs professionals to exercise their profession as employees of the company has not succeeded to the practice previously carried on by the professionals in their own right.
Back in the late summer of 2012, HMRC told tax advisers that a ‘cross-directorate’ team was being set up within SVD to handle the high number of medical professionals incorporating and to ensure a consistent approach was adopted across all of the cases being challenged. A pause in correspondence followed and a ‘steer’ from the newly formed cross-directorate team was expected.
HMRC has begun writing to tax advisers again since the turn of the year. The letters tend to follow the same format:
‘As you are aware the goodwill disposed of/acquired by your client has been the subject of an ongoing valuation with my colleagues at Shares and Valuation Office. Sometime ago a letter was issued giving HMRC’s view of the matter and indicating a consistent approach would be taken through a dedicated team. I would now like to resume those discussions as part of a team co-ordinating similar enquiries. In order to progress the enquiry a fact finding process needs to be undertaken….’
The letters then generally ask for further Information and Documents:
Please provide the following:
- A full explanation to show the value attributed to goodwill.
- An explanation of the conduct of business as at the transfer date. This should explain the relationship between the doctor, his patients and the hospital/insurers involved. Was the business exclusively on a referral basis.
- The activity of the doctor, to include hours per week – on average – which were spent in the business, up to the transfer date.
- The hours per week spent where there was a NHS employment.
- Any changes to the business post the transfer date up to the current date.
- A detailed breakdown of fee income as shown on the requested pre-transfer accounts (see below under Documents).
- Did the doctor have an employment contract with the company? If not explain why one was not entered into.
Please provide copies of the following:
- Any calculation or Valuation Report relating to goodwill.
- The business accounts for the sole trader for the last three years prior to the transfer date.
- Practising Privilege agreement with the hospitals where the doctor practised prior to the transfer.
- Any new Practising Privilege agreement with the company, or a copy of any amendment to the original document.
- If income was received from medical insurers/private hospitals, provide a copy of any agreement, other than at 3 above, governing the relationship between the insurer/hospital and the doctor.
- In respect of 5 above, a copy of any new agreement with the company, or a copy of any amendment to the original document.
- The Sale agreement covering the transfer of goodwill to the company. This should include any other document created relating to the transfer.
- Employment Contract with the company, to include the terms and conditions agreed and show how fee income is to be allocated.
- Letters to relevant parties, referring doctors, patients, hospitals, insurers etc., informing them of the cessation of the sole practice and the commencement of employment and the offering of services through the company.
- Letters informing the Professional Indemnity Insurers of the change in the nature of activity.
- Any responses to the letters requested at 9 and 10 above.
- The Company Memorandum and Articles of Association (this is required to understand the arrangements entered into).
- The directors loan account(s) with the company, detailing all transactions and dates from the date of incorporation.
- Samples of any Letters of Referral to the doctor before the transfer date and sample copies of referrals post the transfer date.
- Correspondence which related to the reasons for setting up the company and transferring the business to it. This could include letters, memos, notes of discussions, telephone conversations, e mails or text messages.
- Correspondence (of any kind, including Meeting Notes, telephone calls, e mails etc.) with outside bodies, banks, Estate Agents, agents etc., regarding the setting up of the company to carry out the medical practice.
- In relation to any referrals made prior to the transfer date, provide copies of any correspondence from the doctor/the company notifying the referring doctor of the change.
- Documents supporting the contention that a singleton medical practice has been sold to an unconnected third party, with the purchase of goodwill (or any further information in this connection). If nothing is found. please say so.
- Any documentary evidence of the doctor’s future intentions as regards his practice. This may include any steps taken to bring in another doctor into the practice, or any steps taken to ready the practice for his eventual retirement or any medical work undertaken by another person for the company.
Whilst it is undoubtedly correct that each case should be judged on its own facts it is, nevertheless, dis-appointing that some 18 months on the cross-directorate team is seemingly no further forward in providing a clear direction of travel for tax advisers and is still talking in terms of a fact finding exercise.
As recipients of these letters have been saying, what is the point of undertaking all the exhaustive research to answer these questions if HMRC is still of the view that medical professionals cannot incorporate? What about the professional fees incurred by the medic for this work to be done?
With so many cases involved, it is surprising the cross directorate team has not published some form of guidance note to communicate its technical thinking and plan of action. Even if tax advisers and medical professionals did not like the message, at least it would enable decisions to be made, such as whether to respond fully to the request for information and documents or proceed down the formal path to Tribunal.
(Readers with a particular interest in this subject may wish to know of a workshop taking place on Wednesday 14 May 2014 at the Royal Society of Medicine in London. Due to start at 10am, the workshop is going to focus on medical practice goodwill and will feature two guest speakers. Further details are available from Mrs Maggie Stitt of Stanbridge Associates. Her email is firstname.lastname@example.org)
Author: Guy Smith, Senior Tax Consultant on the ReSource Tax and VAT Consultancy Team.