Keeping on top of financial affairs is a necessary part of any business and for dental practice owners, the same applies regardless of how much the market may be fluctuating.
Given the currently difficult recruitment market for dentistry and potentially far-reaching tax changes ahead, dentists are relying increasingly on expert financial advice. The BDA has issued various warnings over the state of recruitment following evidence that all is not well with the market.
Its own national survey of practice owners published in March 2019 showed three quarters of NHS practice owners in England struggled to fill vacancies last year, which rose from 50% of such practices that had the same problem in 2016 and 68% in 2017.
BDA Vice Chair Eddie Crouch said at the time: ‘Patients are losing out because ministers wrongly assume NHS dentistry's survival is a forgone conclusion. The facts are if NHS practices can't fill vacancies then we can't treat NHS patients. ‘Recruitment and retention are key, and a cash-strapped system that puts government targets ahead of patient care is now squeezing the workforce on both sides.’
Financial experts from accountancy firms agree these are challenging times. Nigel Utting is Director of the Dental Team at Hazlewoods LLP, an award winning, top 30 accountancy firm celebrating its centenary year.
Asked what are the big issues that dentists should be aware of at the moment from a financial point of view, he says: ‘Associate recruitment issues are more common, although this can vary depending on where the practice is located.
‘Associate costs are therefore increasing, as are practice costs as a whole. Fee income hasn’t kept pace with cost increases, resulting in lower practice profitability. Completing contracted UDAs [Units of Dental Activity] is also a challenge for some practices and Associate retention/recruitment can be a significant factor.
‘A related area for concern is the employment status of Associates. There is continued speculation that Associates could be classed as employees, resulting in increased National Insurance costs for practices.’
Tax changes in the future are another issue that dentists are worried about and are seeking clarity, according to Priya Kotecha, a Partner & Chartered Accountant with Mac Kotecha & Company.
Mac Kotecha & Company, established for more than 30 years, is a specialist dental accountancy firm, where Kotecha and the senior partner deal exclusively with dentists. They offer accountancy, taxation and payroll services in addition to advice on practice management, buying/setting up a practice and other dental issues.
‘At the moment, there is a lot of uncertainty about future tax and National Insurance rates and this could make certain decisions (like whether to incorporate) tricky and mean you want to put them on hold for a while,’ says Kotecha.
‘One of the other big issues is tax relief on pensions as well as the tax treatment of buy to let properties, which is causing many people to rethink how and whether they get involved in properties.’
Tax relief is available. There has been a temporary increase (for two years) in the annual investment allowance (AIA) meaning that from January 2019, the maximum AIA is increased to £1 million from the previous level of £200,000 which applies to companies, sole traders and partnerships.
Kotecha explains: ‘The AIA (tax relief on additions to equipment, fixtures etc) is separate to corporation tax meaning that it is available to sole traders, partnerships and limited companies.
‘You should ask your accountant to help with what the maximum relief available is, which will link into your accounting period and the timing of expenditure.
‘On qualifying expenditure, dentists can get full tax relief on expenditure up to the £1m mark. Examples would include loupes, dental chairs, cabinetry and even some refurb.
‘It is essential, if planning a large project involving an element of building work, to get your accountant’s view as some expenditure may not qualify for tax relief.’
Utting says this will only benefit some dentists, adding: ‘For the majority of smaller, owner-managed practices, the AIA increase will make no difference, as they are unlikely to spend more than £200,000 on qualifying plant and machinery in a year.
‘For large practices, small groups etc. this could make quite a difference to their tax liabilities. The exact benefit will depend on whether practices are limited companies or sole traders/partnerships as the tax rates differ considerably.’
Shift towards private practice
Another development which has caught the attention of financial advisers is the move from NHS to private dentistry for professionals and the possible reasons for that. NASDAL, the National Association of Specialist Dental Accountants and Lawyers, is an association of accountants and lawyers who specialise in acting for and looking after the accounting, tax and legal affairs of dentists.
In its most recent annual benchmarking statistics, published in March 2019 within its NASDAL Benchmarking Report for 2017-181, these showed there was a 3% decrease in net profits for a typical dental practice.
Whilst income for NHS and private practices had increased (although there was a slight reduction for mixed practices), there was an increase in most expenses – notably Associates’ costs and wages.
NHS practices fared worst having seen average total fee income per dentist drop from £181,804 in 2017 to £169,615 in this 2018 report.
Ian Simpson, Chartered Accountant and a Partner in Humphrey and Co, which carries out the statistical exercise, says: ‘Although profits are down across all types of practices, it is clear that there is a big divide between private practices and those that are NHS and mixed.
‘Private practices saw a reduction in profit of just 0.5% whereas both NHS and mixed practices saw reductions of around 10%. Interestingly, mixed practices typically have the highest level of fee income, but they also have the highest cost ratios.’
Kotecha has noticed a change, saying: ‘We are certainly seeing more dentists, particularly younger dentists, want to focus on private dentistry. This has meant that demand for NHS Associates has crept up.
‘For fast working NHS dental Associates, they can actually have very good capacity to earn well. For private dentists, this depends on geographical area, practice and the type of patients and treatments but there is also good capacity to earn well (though this does fluctuate more than the NHS side of things).
‘Interestingly for dentists wishing to buy practices, many seem to be more comfortable buying mixed or NHS practices rather than fully private.’
Utting adds: ‘We often see articles in the press about NHS dentists leaving and converting to private and it is becoming more common for the NHS patient charge to exceed the UDA rate dentists are paid, which isn’t good from the dentist’s perspective.
‘Other factors are the UDA treadmill, NHS administration and uncertainty over the new NHS contract, so yes, some dentists do get fed up with the NHS system, particularly if struggling to deliver target UDAs and dealing with the resulting impact on cashflow.
‘Converting to private can be a viable option, but it is important to consider the potential ramifications. It is common for entrepreneurial dentists to use the NHS contract as a backbone whilst broadening the specialist services offered and these additional/high-end treatments help grow their practices.’
Changes to pension arrangements a few years ago for dentists are likely to have been noticed by the profession.
Andy Hogarth, Financial Planning Manager for Hazlewoods Financial Planning LLP, says: ‘It appears likely that there will be some changes to pensions that may affect dentists in the near future, but the exact details are unknown at this stage. The changes are going to centre around the ‘tapered annual allowance’, which restricts the tax free amount high earners can pay into pensions.
‘The tapered annual allowance was first introduced in April 2016 and reduces the amount an individual can pay into pensions each year by £1 for every £2 of ‘adjusted income’ over £150,000.
‘This has seen a sharp rise in individuals overfunding their pensions, particularly from those in defined benefit arrangements like the NHS Pension Scheme, where it can be difficult for individuals to control the contribution position.
‘The government is currently in consultation on whether to amend the rules. It is not yet known whether any changes will be purely for the NHS Pension Scheme or applied more broadly.’
Kotecha says: ‘When assessing your contributions you must look, not only at your gross personal pension contributions, but also the deemed contribution into your superannuation scheme (which is not just what you pay in but also what the government is deemed to pay in on your behalf).’
Benefits of advice
Some dentists appear to be struggling to manage their finances currently and seeking the support of professional experts in finance is becoming increasingly important, say the accountancy firms.
Utting argues: ‘We find there is a huge variation in terms of managing finances, from those who do very little to those who prepare detailed budgets and forecasts for the year ahead.
‘Of particular note are those dealing with NHS financial clawback coupled with a contract reduction – a double whammy on cashflow.
‘Advice from a specialist dental accountant is essential – we can help with budgets, benchmark practice performance, help implement accounting systems to monitor performance, prepare accounts in a timely manner, advise on future tax payments, remuneration strategies, tax planning etc.’
Kotecha agrees, adding: ‘As with any profession and any time period, there will always be some who struggle and some who do not.
‘The biggest key is ensuring that you live within your means and a big part of that is ensuring that you set aside enough money to cover your tax liabilities as they fall due. We can help with estimating how much you need to set aside for tax as well as how much you could be setting aside for savings – and of course making sure you are structured tax efficiently and are saving as much tax as possible!’