2019 sees the continued theme of two topical areas in the dental sector being incorporation and the consolidation of dental practices.
In both situations goodwill is a key focal point. This is whether ensuring that goodwill is appropriately valued on an arm’s length basis for incorporation or on the sale of the practice, where particularly in the latter, owners will want to ensure the goodwill value obtains a maximum return.
At the time of writing NASDAL are still to issue the results of their quarterly goodwill survey for the quarter ended 30 April 2019, based on goodwill values achieved on practices sold in the quarter.
However the report issued for the quarter ended 31 January 2019 reported an average value of goodwill obtained for practices of – 118% of gross fee income for NHS practices, 127% of gross fee income for private practices and 108% of gross fee income for mixed practices. In the main it was reported that the average values obtained for goodwill had fallen compared to those reported 12 months ago.
The above statistics are clearly averages and only captures those practices disposed in the reporting period which are members of NASDAL. However these statistics give a flavour on the basis of goodwill valuations being obtainable when valuing a dental practice for a potential sale.
In terms of incorporation, the same principles apply when valuing goodwill similar to where the practice was being sold on an arm’s length basis. It needs to be kept in mind when an existing sole trade or partnership practice is incorporated, the new company is a separate legal entity from its owners. So in essence the new company is acquiring the practice from the existing owners and goodwill cannot be ignored within an incorporation scenario.
The sale of goodwill is a chargeable event subject to capital gains tax which may be significant. The capital gains tax result is also different to that when goodwill is transferred on incorporation to a new company compared to a sole principal or partnership selling goodwill as part of their practice to a third party.
Where the existing practice is incorporated and goodwill is sold to the company for cash or debt on or after 3 December 2014, individuals (subject to some exemptions) are prevented from claiming Entrepreneurs’ Relief and capital gains tax arises on the net gain at 20% for higher rate tax payers or 10% where any element of the gain falls within unused basic rate tax bands. There is a mechanism for deferring the gain until any later sale of the company if the business is transferred in exchange for shares in the company.
In a situation where a sole principle or partnership is disposed to a third party then any chargeable capital gains for goodwill may be entitled to Entrepreneur’s Relief (subject to meeting the strict conditions of eligibility to this relief) resulting in the net capital gain being taxed at 10%.
Incorporation is certainly not something that should be taken lightly as there can be a number of factors for a dental practice to consider in making this decision and they should not focus purely on the tax aspects.
In valuing the goodwill of a dental practice it will very much depend on individual circumstances and should be viewed on a case by case basis with assistance provided by specialists in the sector.
At PKF Francis Clark we have a team of specialists that can assist in valuing dental practices and are experienced in guiding businesses through incorporation together with the various aspects of taxation for consideration. If you would like to discuss these or any other areas relevant to your dental practice please get in touch.