Dentists - Are You a Labourer or Landowner?

In today's newsletter:

1. Capital Allowances - When should you buy capital equipment?

April heralds a new tax year, and also some significant changes to the capital allowance regime. For you, the dentist, it means what you can write off against taxable income (such as equipment and surgery refurbishments) will change. As in all changes there will be some dentists that will benefit and others that will not.

In simple terms the new rules will feature:

1. An annual allowance of £50k - on qualifying expenditure up to this limit which will receive a 100% first year allowance.

2. Additional expenditure over the £50k limit will fall in to the normal capital allowance regime, qualifying for tax relief at a writing down rate of 20%.

So what does this all mean if you are planning some major expenditure?

If you are planning some major capital expenditure, if it is over £50k in total value, you maybe better off trying to spread it over more than one tax year to benefit from the annual 100% allowance. An example may illustrate this much better:

If you need to spend £100k on equipment and refurbishment in the next few months, it would be beneficial to try and spend £50k before April 2008, and then the remaining £50k in the following tax year. This way, the first £50k spent would qualify for a 50% first year allowance, and then subsequent 25% writing down allowances. But the next £50k to be spent in the new tax year would qualify for a 100% deduction against profits.Such an approach to planning your expenditure would greatly aid your tax planning and cashflow.

If you need more help on this get in touch with us, our team will be able to help you on this.

2. Dentists - Are you a landowner or a labourer?

We have all seen goodwill values rise over the last 12-24 months nationally. With some practice goodwill being valued at over 150% of turnover.

Now many people I have been speaking to state that this now brings practice values in line with other professions such as accountants, lawyers, which it does. A typical small to medium size accountancy practice will sell at around 1.5 to 2.0 gross recurring fees. However, in my opinion I feel this is not comparing apples with apples.

To set up an accountancy firm, this can be done in a bedroom (that is how I set up the Samera firm) with a PC with some software not costing more than a few thousand pounds. Contrast that with setting up a dental practice with the right kit to the latest regulations etc, for just one room alone with all building work etc you are talking at the very least in excess of £100k.

So the first financial problem occurs in just setting up a practice - a lot of money needs to be found to open a practice in the first place. Although money is still available in the sector from the main banks, no doubt with the current economic woes they will be much more choosy about who they lend to.

Providers of dentistry

The next concern arises from the structure of dental practices. As someone who has feet in two professional service industries, dental and chartered accountants, I feel am qualified to compare and contrast the two sectors as I feel one can learn from the other.

A typical accountancy firm will have a hierarchy, whereby the person at the top of the hierarchy will get paid more, but also have greater responsibility and at the same time be able to charge out at higher fee rates to clients.

People lower down the hierarchy, although they maybe qualified accountants, will get paid a lower salary, but at the same time their charge out fees to clients will be lower. The responsibility may lie with the senior partner, but some or may be all of the work maybe carried out by some of the junior members in the team.

Accountants vs Dentists

Now contrast this with dentistry. The principal dentist will usually set the fees for the practice (or the NHS will) and then take on dental performers, such as associate dentists, hygienists or therapists. However, in a typical practice the fee charged by the dental associate may well be the same as the principal dentist, for the work done, but again in the typical practice, he will then take 50% of the net fees from the fees generated. Therefore there is no hierarchy in respect of fees charged to patients, or at the same time in terms of pay to dentists. Whether a dentist is 10+ years qualified, or is relatively newly qualified their pay calculation structure may well be the same.

Yet a younger dentist will in many cases not be able to generate the levels of fees a more experienced dentist maybe able to do. In such situations, which I see frequently, the principal dentist is then having to support the loss making associates.

No doubt there are occasions where I do see young associates generate profits for practices, but this also why I often see many principal dentists doing financially well, when they are working clinically, but when they reduce or even stop working clinically their profits (or even their losses) suffer considerably. That is perhaps why so many principals value getting a VT to join their practices, as they only have to pay a relatively low fixed salary, whilst getting a large fixed sum from the state.

Now contrast this with the accountancy model, whereby a structure of hierarchy is in place and much of the work is done by varying levels of team members. This enables the true business owner (perhaps the senior partner) to enjoy the rewards of business risk, whilst reducing his commitment. This enables the senior partner to manage his cost base and revenue mix accordingly.

Labourer vs. Landowner

Ok it is not that easy, but again from my perspective, I feel that dentists need to think about their futures. All too often dentists perceive themselves to be in business, but in fact the true reality for some is that they are employer and the employee, or as Adam Smith may have put it, the landowner and the labourer.

The fundamental question many principal dentists need to face over the next few years is whether they want to be the landowner and the labourer, or just the landowner. If they just want to be the labourer, then perhaps they are better off being an associate dentist somewhere, rather than facing the much higher risk of being the business owner.

By being the landowner, this gives you the real opportunity to seek new land to nurture and develop, rather than ploughing the fields in your existing field. My experience has shown that it is the landowner that usually wins, allowing the work life balance that so many business owners, including dentists AND accountants are after. This means understanding your business better and tweaking the running of your practices in just a few little ways. If you need help, we can help you make those necessary tweaks!

Not only will such an approach perhaps justify the value of your business goodwill, but also aid you to grow the goodwill beyond your wildest dreams and enjoy the quality of life you maybe seeking!

3. Setting Up In Practice - Want to become your own landowner?

If all of this makes sense and you are an associate and want to become your own landowner, then your best bet is to come along to our Setting Up In Practice course on Saturday 12th April. You won't be disappointed.

Our last event was a resounding success, so visit www.settingupinpractice.com for more details and to book your space.

Have a fantastic day!

Best regards

Arun Mehra ACA