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Illegal Sales of Goodwill

Readers will be aware that it is illegal to sell the goodwill of an NHS GP practice, but what does this really mean in the context of the recent changes in the NHS?

It is illegal to sell practice goodwill because it was all bought by the Government when the NHS was founded in 1946 and therefore belongs to the State. The offence is criminal so would need to be reported to the police for them to investigate, and both the seller and the buyer could be prosecuted. Anyone found guilty could be punished with a fine and up to 3 months in prison.

The rules are set out in the NHS Act 2006. Since there is very little case law to provide guidance these are somewhat open to interpretation but they make an important defence available. Anyone proposing a transaction which they believe may contravene the goodwill regulations can ask the Secretary of State for a certificate confirming compliance, and a Court will accept this certificate as a valid defence.

Goodwill is the amount that a purchaser is willing to pay for a business in excess of the value of the physical assets. A good way to ensure compliance is therefore to revalue all the physical assets whenever a partner joins or leaves and ensure that all payments can be attributed to either a revalued asset or a share of past partnership profits. Importantly, the building must always be valued as a medical practice whilst it continues to be used as a surgery, and this will normally require the services of a specialist surveyor.

In addition to payments on entry/exit from the partnership, the rules contemplate that goodwill could be paid for through the allocation of ongoing partnership profits. They therefore state that a deemed sale of goodwill can occur where a partner accepts a lower share of partnership profits than their ‘services might reasonably have been expected to be worth’.

When partners all have different types of experience, responsibility and working patterns this can be very difficult to ascertain, but certainly partners should be ready to explain why there is any divergence from profit sharing parity.

Whilst the theory is clear, the practical application can be very difficult. If a surgery has considerable development value, a retiring partner may understandably want to share in the imminent windfall. Similarly a departing partner will be reluctant to pay for their share of negative equity when it is clear that the mortgage will be financed by the notional rent for the foreseeable future.

As practices evolve and generate different sources of income, the scope of the term ‘medical practice’ also becomes relevant. The prohibition relates to the ‘medical practice of a person’ who has held a GMS, PMS or APMS contract. Once practices starts to generate significant income from non essential services (for example through a GP Federation), can the newly generated goodwill be separated and then sold? Similarly, if a limited company holds the GMS or APMS contract, can the shares be traded at market value (ie including goodwill) given that the prohibition only relates to ‘persons’?

It is apparent that the changes in primary care are beginning to put pressure on the goodwill prohibition. The rules were designed in an era before it was possible to opt out of Out-of-Hours, before limited companies could provide primary care, before contracts were tendered, and before GP Federations started to provide non-essential services. In this more complex and more competitive world we expect that it won’t be long before someone has their transaction investigated for goodwill compliance. If you don’t want to risk it being yours, the best advice may be to seek a certificate from the Secretary of State.

Posted on November 18th 2014 in News and Publications, Newsletters

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