GP Practice incorporation – navigating the ICB approval process
If you are one of the increasing number of GP practices looking to incorporate, then you will probably have familiarised yourself with the pros and cons of incorporation and (hopefully) sought the advice of your accountant and solicitors. One of the next important steps is to gain the support and approval of your ICB. This can present its own challenges and in this blog, we look at how to navigate some of these to reach a successful outcome.
Starting out with GP Practice incorporation
ICBs have their own concerns with the use of companies as primary care businesses, but they seem to stem not so much from unfamiliarity as from them leading to the increased possibility of contract terminations. The concern isn’t totally unfounded – it is much easier for a GP practice to terminate its primary care contract if it is operating as a limited company because the business owners can avoid personal liability for staff redundancies, and may even avoid personal liability under their lease.
In order to ensure a commonality of approach amongst ICBs to requests for a GP practice incorporation, the NHS has adopted a framework, known as the Common Assessment Framework (CAF), for ICBs to use when assessing whether to allow a GP practice to incorporate. The ICB will ask a practice to complete a questionnaire, and then carry out a RAG (red, amber, green) analysis on various aspects of the post-incorporation practice. Aspects covered will include strategy & delivery, the company details, outcome for patients, care quality and finance.
In our experience, a RAG analysis of a company taking over a partnership that meets the following parameters, will generally lead to scores which are overwhelmingly green:
- the shareholders and/or directors of the company are the same as the current partners;
- the company has the right to operate from the current premises;
- there is no change to personnel or clinical procedures;
- the company is acquiring all of the material assets of the current partnership (this can be documented in a simple business transfer agreement);
- the current CQC rating is good.
The novation agreement
Assuming that the ICB approves the incorporation of the partnership, and the CQC grants a new registration in respect of the company (there is little reason for them not to do so if there is no change to personnel, location, operating procedures or business assets) then the ICB will prepare a novation agreement whereby the primary care contract is taken over from the current partners by the new company.
ICBs usually start with a template novation agreement as published by the NHS, and in our experience practice often just sign it on the assumption it is innocuous. However the template includes the possibility of a guarantee from the current partners in respect of the primary care contract, and in our experience that ICBs will often include this guarantee together with other restrictions. This has the effect of significantly reducing the limited liability benefits of incorporation.
It is important to understand that a template can always be varied, and in our opinion there is no reason why a guarantee needs to be provided in a novation agreement. We have successfully presented the arguments against including such a provision on behalf of clients, and have had the guarantees removed through an appeals process.
Conclusion
Practices decide to incorporate for many reasons, and limitation of liability is only one of them. It is worth bearing in mind that although the oft requested guarantee ‘only’ covers liabilities arising from the GMS/PMS contract, these can of course be significant. If they were not, why would the ICB bother asking for the guarantee in the first place?
It is important to remember that even when you are presented with a template document published by the NHS for use in a particular circumstance, it is still possible to negotiate its terms and you don’t just have to accept it as the ‘NHS standard’. Many of these documents have hidden ‘stings in the tail’ which you will at least want to know about, so you can decide whether or not you are prepared to accept them.
Our specialist team at DR Solicitors are here to advise you on your GP Practice incorporation journey. Whether you are just starting out or hitting the first hurdles to overcome, you are invited to call us for a free initial consultation about your incorporation plans. Please telephone 01483 511555 or contact us here.
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Incorporating a GP Practice – is it right for your practice?
If you are a primary care partnership looking into alternative ways to deliver your core services, then this article is for you. There are a number of legal and tax related implications to consider before incorporating, and in this blog we look into some of the pros and cons of incorporating a GP Practice.
What is incorporation?
‘Incorporation’ means to constitute (a company, firm or other organization) as a legal corporate entity separate from its owners.
You may already have set up a limited company, for example, to hold your premises, deliver consulting services or to subcontract some of your core services. This blog concentrates on transferring the whole of the practice – namely the core GMS or PMS contract – into a limited company.
Why incorporate?
Whilst there are clearly many positive attributes to the partnership model, there are also a few problems, including:
- unlimited joint and several liability
- lack of a legal entity to contract. In a partnership it is the partners who contract personally
Some of the benefits of delivering your core services from a limited company include:
- a limited company is a legal entity in its own right and may hold assets and liabilities and enter into contracts in its own name. The directors and shareholders may change, but ownership of the assets and liabilities by the limited company remains the same. This simplifies matters when dealing with changes in property ownership, as there will be no need to change the name of the registered owners at the Land Registry, deal with Bank refinancing, or change the names on any contracts.
- a shareholder’s liability is limited to the value of their shareholding, which is usually limited to a few hundred pounds. Incorporation separates business assets from personal assets and creditors cannot come after a shareholder’s personal assets for a debt owed by the limited company.
- the management and ownership roles are separated. This allows for a wider range of business models than the partnership model allows, such as bringing in business managers as directors without the requirement for them to contribute capital or incur risk. Similarly, shareholders may contribute capital and receive profits without having any day to day involvement in the running of the practice.
- all staff, including directors, are normally employees and therefore paid under PAYE and have full employment rights. The partners in a partnership are self-employed and have very limited employment law protection, but what they lose in employment protection they gain in tax relief and partnership status. With the current challenges in recruitment of new partners, the protection afforded by a directorship in a limited company may be more attractive to some.
But incorporation does present its own problems, including:
- you are bound by the strict regulations set out in the Companies Act 2006. These override all your own governance rules, and you are not at liberty to run your business in a way that suits you and your partners, without reference to the Act. Partnerships by contrast are governed by the Partnership Act 1890 which is a much simpler and more flexible set of regulations, most of which you are able to tailor to your own needs.
- whilst limited liability is a major benefit for the shareholders of a limited company, it is a significant disadvantage for creditors who may be unwilling to lend to a limited company unless it has sufficient assets (such as a surgery) over which they can take security. Banks may ask for personal guarantees from the shareholders, and landlords could ask for guarantees from the directors.
- there is no ‘expulsion’ mechanism to remove a partner in the event that you can no longer work together. Special rules need to be written into the company’s Articles but even then, it is likely to be complicated to expel as it will involve terminating a person’s status as an employee, director and shareholder.
- you will need to make annual filings, including accounts, at Companies House and such information is publicly available. You will need to hold regular board meetings, record the minutes and document certain decisions in a specific way.
- shareholders do not have individual capital accounts. When a company makes a profit (or loss) this is not divided up amongst shareholders, but is retained by the company for its own benefit. The directors may then recommend that a dividend is paid to the shareholders as a return on their capital invested in the company, but this is only made from a combined ‘pot’ of retained profits. It is illegal to make a dividend payment unless there are sufficient retained profits in the company as a whole.
Conclusion
Whilst limited liability is a hugely attractive benefit, limited companies are not panaceas to all the issues of running a primary care practice, and there are definitely both pros and cons. We have certainly seen a trend towards practices incorporating, but any decision to do so should only be taken after seeking expert advice from both tax accountants and specialist primary care solicitors so that you can be advised on your particular situation. Incorporating a GP Practice certainly works for some, but many others discover that it is not for them.
Our specialist team at DR Solicitors are happy to answer any queries you may have about incorporating a GP Practice, and can also put you in touch with some expert accountants. Please contact us here or telephone 01483 511555.
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Should GPs worry about Directors’ Liability?
When we incorporate PCNs or GP practices, one of the most common questions from concerned GPs relates to the liability they might pick up if they become a director of the incorporated company. In this blog, we look at how real the risks are to company directors, and whether or not you need be concerned.
Financial risk
At a very basic level, it is worth remembering that liability is limited in companies but is unlimited in partnerships. So, if a partnership has assets of £60,000 and £100,000 of creditors, then the partners have personal liability for the shortfall. If a company has assets of £60,000 and £100,000 of liabilities, then the directors can liquidate the company, whereupon the £60,000 of assets are sold and the proceeds distributed to the creditors, leaving the creditors short by £40,000. In other words, in a partnership structure the partners lose out if there are insufficient assets, whereas in a company structure the creditors lose out. This is the very essence of limited liability and is why limited companies come with more onerous rules than unlimited partnerships.
In the above scenario, the shareholders of the company will have no liability: if shareholders could be liable for a company’s debts then neither stock exchanges nor pension funds would exist. Directors could theoretically have liability for some or all of the shortfall, but in practice this is extremely unlikely. However, the likelihood of a partner being held liable for the shortfall in a partnership is 100%.
Directors can incur personal liability to creditors in certain circumstances if the company is insolvent, but such liability only arises in situations which go beyond negligence and into the realms of recklessness or crime. One of those circumstances is fraud, which speaks for itself. The other is wrongful trading, which occurs when a company continues to trade when it has “no reasonable prospect” (which wording sets quite a high bar) of avoiding going into insolvent liquidation or insolvent administration. An example of this in a normal trading company might be continuing to take customer orders and customer money when there is no realistic chance of the orders being met because the company is insolvent. Again, the liability which a director would have in such circumstances is no greater than a partner of a partnership would have in identical circumstances, whilst the hurdles which a creditor would have to overcome to enforce a claim against the director would be considerably higher than in enforcing them against a partner.
By moving trading activity from a partnership of which you are a partner to a company of which you are a director, you are invariably reducing your risk of personal liability very significantly.
Breach of fiduciary duties
So what other liabilities might a company director be opening themselves up to? In law, there are seven fiduciary duties set out in statute:
- to act within powers;
- to promote the success of the company;
- to exercise independent judgment;
- to exercise reasonable care, skill and diligence;
- to avoid conflicts of interest;
- not to accept benefits from third parties; and
- to declare any interest in a proposed transaction or arrangement with the company.
To a director who is familiar with these duties in the context of a partnership, these hardly seem onerous and, most significantly, the duties are owed to the company itself, rather than to third parties. It would be the company itself, either through a majority of directors or through minority shareholder action, that would have to sue a director for breach of fiduciary duties. Whilst this is conceivable in a large, listed company, in a small private company which is run and owned by the same people, and in which decisions are made by majority, it is hard to conceive of a situation whereby it might occur.
When it comes to clinical negligence, a company can be liable for the actions of a director, but it is rare for a director to be capable of being held liable for the actions of the company unless the director has themselves done something negligent, in which case the liability arises by virtue of the director’s action rather than by virtue of them being a director. Corporate manslaughter is an exception to this principle, but for a director to be liable in respect of corporate manslaughter it would have to be established that the way in which the activities of the company were managed or organised caused someone’s death and amounted to a gross breach of a relevant duty of care owed to that person. Again, it is hard, if not impossible, to conceive of circumstances where a director of a company had more liability in identical circumstances than a partner of a partnership.
What steps can be taken to reduce the risk to directors?
A question we are often asked related to directors’ liability concerns directors’ and officers’ liability insurance (D&O Insurance). D&O Insurance first started to feature in the public awareness as a result of the various government-commissioned reports into corporate governance in the 1990s: the Cadbury Report, the Greenbury Report and the Hempel Report. These reports led to an increase in the number of non-executive directors being appointed by listed companies. As these non-executive directors usually had very limited supervisory roles, usually concerned with audit and director remuneration, but could potentially incur the same personal liability as ‘ordinary’ directors, they invariably insisted on companies taking out D&O Insurance on their behalf before they would accept appointments – simply by virtue of the enormous numbers involved in such companies. D&O Insurance in respect of a small private company, such as a PCN company or an incorporated GP practice, would be unusual as the directors invariably have a much greater understanding of the operations of a much simpler business. If however you are concerned about this residual directors liability you should speak with a specialist insurance broker about the risks more generally in primary care.
Conclusion
In summary, when you move trading activity from a partnership to a company you invariably end up reducing your potential personal liability. It is no surprise that well over three quarters of all businesses in the UK trade as limited companies, and the majority of the remainder trade as very small sole practitioners. Partnerships have their advantages, but reducing personal liability is not one of them.
If you have any questions on the topics covered in this blog or on any other legal issues, please contact Nils Christiansen on 01483 511555 or email enquiries@drsolicitors.com.
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GP Partnerships: So who do you think you are? Are you a self-employed Partner or are you an Employee?
Most GP practices continue to be organised as partnerships: an ‘independent contractor’ status which has outlived innumerable changes in the NHS. The ‘golden hello’ new to partnership scheme has attracted over 1,300 applicants over the last year, demonstrating that there are still plenty of people who aspire to becoming a partner in a GP practice. However, in an effort to keep up with the fast changing environment and to appeal to a broader range of partner candidates, many GP partnerships are looking at ways of flexing the traditional partner role, to the benefit of all concerned.
In this blog, we look at the 3 main types of partner we regularly encounter in GP practices.
1. Equity Partner (self-employed)
This is the most traditional partner model. Equity Partners are self-employed and have full and equal rights to decision making and are part of a collective management team which is jointly responsible for all aspects of running the practice. Profits and losses are shared equally, although sometimes there is a ‘path to parity’ over a period of a few years. With the rise of part-time working, a common variant is to share the profits and losses on the basis of planned sessions. Equity Partners are expected to contribute capital to the business (as a minimum working capital, but sometimes also property or other capital) which is usually called ‘buying in’. An Equity Partner is jointly and severally responsible for any losses and liabilities that arise in the partnership. This means that creditors can choose to pursue one or all of the partners for the full amount of the partnership debts.
2. Fixed Share Partner (self-employed)
Fixed Share Partners are also self-employed. A Fixed Share Partner typically receives a fixed, guaranteed income for a defined period of time (sometimes during a mutual assessment period) and there should also be an element of variable income based on the profits or losses of the practice. The ‘golden hello’ scheme does not apply to Fixed Share Partners where the fixed share period extends beyond the expiry of any mutual assessment period. Fixed Share Partners still share full liability alongside the Equity Partners so they ought to be suitably indemnified by the Equity Partners in the partnership deed. Fixed Share Partnership arrangements need to be carefully documented to avoid HMRC viewing the tax status of the person as an employee.
3. Salaried Partner (employed)
Salaried Partner and Fixed Share Partner are often (incorrectly) used interchangeably. The key to this person’s status is in the word ‘salary’. Whereas partners take drawings on account of their profit share, Salaried Partners are employees who receive a salary. Salaried Partners should have an employment contract, they benefit from the protection of all relevant employment legislation and they receive a salary with tax and NI deducted at source under PAYE. Salaried Partners may have an element of ‘bonus’ depending on the profitability of the practice and this will be documented in their employment contract. Salaried Partners will not be a party to the partnership deed and they should have no share in the partnership profits and no voting rights. For a Salaried Partner, the word ‘partner’ is just a title and nothing more so they need to be suitably indemnified by the Equity Partners in their employment contract.
A word of warning…
Third parties can bring a claim against anyone who calls themselves a partner, be they an Equity, Fixed Share or Salaried Partner. So behind the scenes, Fixed Share and Salaried Partners are usually protected by way of an indemnity from the Equity Partners. An indemnity is a promise from the Equity Partners to financially compensate the Fixed Share or Salaried Partner in the event of a loss or liability arising. However, the indemnity will not be worth the paper it is written on unless the Equity Partners are good for the money.
Conclusion
If you are a GP practice or a partner or you are thinking about partnership and you want clarification on this blog or any other matter relating to primary care, then it’s time to contact us. Please call us on 01483 511555 or send an email to info@drsolicitors.com
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Due Diligence and Disclosure – A Guide for Healthcare Professionals
If you are thinking of acquiring, merging with or disposing of a primary care practice, then this blog is for you.
Firstly, let’s look at two scenarios. When a patient attends an appointment with his GP, the GP will probably ask a series of questions, conduct a physical examination and review the patient’s medical record. Likewise, when buying a house – you will engage a solicitor to make some pre-contract enquiries, to carry out some property searches at the Local Authority and Land Registry, and you will probably instruct a surveyor to check that the building is sound.
When acquiring a GP practice, there is no analogous method for carrying out a physical examination or survey. Similarly there are no publicly available records in relation to partnerships (and information is scant even for companies). Accordingly, the only effective option for investigating a GP practice which you may be interested in acquiring or joining, is by asking a series of questions of its owner. These questions come in the form of a comprehensive due diligence questionnaire – essentially a checklist – covering the commercial, financial, regulatory and legal aspects of the business. The answers to those questions are critical as they form the only x-rays of the target business that a buyer sees.
Just as x-rays are only as good as the ability of the people taking them and as useful as the knowledge of the people examining the results, due diligence is only as good as the questions asked and the understanding of the people reviewing the answers. Lawyers will have comprehensive due diligence questionnaires; those supplied by accountants tend to focus on finance and therefore may be less comprehensive. Prudent buyers will review the answers received themselves and also have their lawyer and accountant review them.
Just as the occasional patient might be less than honest with a doctor in an effort to obtain a particular prescription, business owners have been known to be economical with the truth when answering due diligence enquiries. A problem arises in this regard for buyers, because a peculiarity of the English law of misrepresentation means that a buyer probably cannot place legal reliance on the answers to due diligence enquiries. So why bother with it at all?
Fortunately, to overcome the problem, a buyer’s solicitor will ask the seller to give a series of warranties to the buyer concerning the state of the target business. Breach of those warranties is directly actionable in law and therefore avoids the legal problems related to misrepresentation claims. Warranties are a comprehensive series of statements about the business included in a business transfer agreement prepared by the buyer’s lawyer.
Why then do lawyers not proceed directly to warranties and cut out the due diligence enquiries altogether? Making due diligence enquiries and reviewing the answers is a relatively inexpensive process conducted at the outset of the transaction and therefore, with honest sellers at least, it flushes out any potential problems with a business cheaply and early on in the process.
Warranties differ slightly from guarantees and are essentially a checklist in the form of statements that could be made unqualified in relation to a (mythical) flawless business. To the extent that there are exceptions to the warranties the seller needs to reveal them to the buyer in a disclosure letter. This process is best illustrated by an example.
A warranty that is typically included in a business acquisition is one to the effect that the business is not currently a party to any litigation. If the business is, in fact, in the middle of a court case then the seller needs to disclose that information to the buyer in a disclosure letter, setting out the full facts of the case (dates, parties, nature of claims, nature of defences etc) and attaching copies of the relevant documentation. If the seller fails to make this disclosure then she will be giving an unqualified warranty to the buyer that the business is not involved in any litigation. Because that warranty will be untrue, it will be actionable in law by the buyer. There is therefore a considerable onus on sellers to make full and proper disclosure for fear of otherwise leaving themselves open to legal action. Warranties therefore force sellers to reveal in disclosure letters matters that they might have preferred to leave hidden and which they may not have revealed in response to due diligence enquiries.
In a well-managed transaction nothing will emerge in the disclosure letter that wasn’t already revealed in the answers to due diligence enquiries. There is therefore considerable overlap between due diligence and disclosure, leading many people to conflate the two. This is a mistake, as they are entirely different processes. Due diligence enquiries and answers are essentially an information-gathering process from which few adverse consequences can befall a seller. Warranties and disclosures, on the other hand, form the main protection available to a buyer so that she knows what she is buying ‘warts and all’ and forces the seller, on pain of legal action, to reveal all instances of human papillomavirus infecting her business. As with all documents which you may one day need to rely on in court, you would be well advised to speak to a specialist solicitor before signing any warranties and indemnities!
If you are thinking of acquiring, joining or merging with a practice and would like a free consultation with one of our experienced healthcare solicitors, then please contact Daphne Robertson on 01483 511555 or email info@drsolicitors.com
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Opportunities and Challenges of using limited companies for NHS primary care
Practices have, in principle, always been able to use a limited company as a business vehicle, but few have done so because it requires the consent of NHSE to migrate the core contract into the company. We’ve noticed a recent increase in the number of practices successfully persuading NHSE to provide consent, so we have set out in this blog some of the opportunities and challenges associated with running the practice through a limited company.
Why convert?
Most obviously, running the practice through a limited company limits your potential liability to the capital which you have invested in the company, plus any undistributed retained profits. This can be attractive to partners concerned about the unlimited liability in an ordinary partnership.
Because a limited company separates out ownership and management (shareholders and directors), senior staff can have a management role without needing to contribute any equity or take any ownership risk. Company directors do not need to be shareholders, so are free to manage the business without putting any personal capital at risk. Likewise, the shareholders can put in capital, but do not need to have any day to day involvement in the practice.
There can also be tax and pension advantages with limited companies. These depend on individual circumstances and advice should always be sought, but they include the ability to target a particular income number to manage your tax liabilities and ensure that you do not exceed the annual pensions allowance. Other tax reasons include the different tax structure for ltd companies and certain tax allowances which are only available to limited companies.
Differences between a company and a partnership
In a company, all staff including the directors are employees and therefore have employment rights. The partners in a partnership are self employed and have very limited employment law protection.
Companies have to make certain information publicly available, such as their accounts, the company constitution, the directors and people with a significant interest in the business; whereas in a partnership, everything is confidential.
Limited companies have no concept of capital accounts for each shareholder. As a consequence, there is no obvious way to ring-fence an individual’s capital or ensure that they are able to withdraw it upon leaving the practice. This needs to be thought about carefully from the outset if that is what you are seeking to do.
There is no automatic mechanism for expelling a shareholder from a company. In a partnership you can expel a partner, but you cannot normally take away a person’s shareholding.
Partnerships dissolve automatically on the retirement of any individual unless the partners agree otherwise, which is one of the main purposes of a partnership agreement. A limited company, by contrast, continues indefinitely until somebody decides to wind it up. This means that once a GMS/PMS contract and a surgery building are held by a limited company, they do not need to be varied as partners/shareholders come and go.
Conclusion
Now that NHSE are becoming more open to limited companies, we expect to see their use in primary care increase significantly. However, GPs should be aware that there are major differences between partnerships and companies, and they should take advice from specialist accountants, solicitors, and their bank and IFA before attempting to make the change.
For further information about the use of limited companies, please contact Daphne Robertson, d.robertson@drsolicitors.com or Nils Christiansen n.christiansen@drsolicitors.com
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The NHS Long Term Plan: How will GP practices be impacted?
There is a tendency when new plans come out of the NHS for people to say they have seen it all before. Would this be a wise response to the Long Term Plan?
Pleasingly, there is an acknowledgement of the many issues in primary care and a commitment that investment in primary medical and community services will grow faster than the overall NHS budget. Spend should be at least £4.5bn higher in 2024, but the extra money will come with strings attached. If applied consistently, this will mean further change is coming for many GPs in England.
The Network Contract
A new ‘Network Contract’ will route the additional monies and will also incorporate local enhanced services currently commissioned by CCGs. This Network Contract will be in addition to existing GMS, PMS and APMS contracts. ‘Primary Care Networks’ (PCNs) will be responsible for these contracts and will typically cover 30-50,000 patients. Each network will be responsible for expanded community multidisciplinary teams along the lines of the Integrated Care Vanguards. The obvious question is, who will actually hold (and deliver) these contracts? In some parts of the country GP Federations are sufficiently developed to do so, and could then subcontract services to member practices or to other service providers as appropriate. In other areas super-partnerships are sufficiently large and geographically contiguous to do so, though they may be concerned about using their unlimited liability partnerships to do so. Elsewhere again, it is possible that existing community health providers may look to lead.
What is clear is that the Network Contract is supposed to facilitate ‘integrated community-based health care’ and all new money in primary care will flow that way. We are told that practice participation will be voluntary, but it is hard to see how practices will remain financially viable in the medium term if they do not participate.
Online GP consultations
Digital-first primary care will become a new option for every patient. Over the next five years every patient in England will have a new right to choose telephone or online consultations instead of face to face consultations. The plan states this will be ‘usually with their own practice or, if patients prefer, with one of the new digital GP providers’.
The plan goes on to say that a new framework will be created for digital suppliers to offer their platforms to primary care networks on standard NHS terms. It is therefore unclear whether the digital providers enabling online consultations are supposed to be suppliers of services to networks of GPs, or will be able to hold patient lists themselves.
Our recommendations
It has been clear for some time that any increases in funding will go to practices working at scale. Scale working has now been formalised into PCNs . In those areas of the country where there is already an obvious PCN in existence, the immediate focus should be on working out which approach to use for online consultations. Where there is not currently any single obvious PCN, practices would be well advised to reconsider their local joint working arrangements: be that though through federations, mergers, primary care homes or the like.
Remember that the new Network Contract will need to be held by an appropriate business vehicle (there is no indication yet of any restrictions on who could hold them) so you will need to consider who will be the local prime contractor.
We would be delighted to discuss how we can help practices and PCNs prepare for the imminent changes. Please contact Nils Christiansen in the first instance for a no obligation conversation about how we can assist.
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The advantages and disadvantages of LLPs and Mutuals in Primary Care
There are currently only four types of business vehicle permitted to hold GMS contracts. These are:
- Individual GPs (who have unlimited liability)
- Unlimited liability partnerships including at least one GP (the most common structure)
- Limited partnerships including at least one GP
- Companies limited by shares including at least one GP shareholder
There are statutory mechanisms enabling a GMS contract to be transferred between types 1, 2 and 3, but no statutory mechanism enabling a transfer to or from type 4. The rules for PMS are slightly different, but given the right of PMS contractors to return to GMS the difference is not material for the purposes of this note.
The current options for practices to limit their liability are restricted. They could transfer a GMS contract into a limited partnership, but these entities require at least one partner to have unlimited liability for all the risks of the business. Since only a subset of the partners have limited liability, this would create obvious difficulties in a GP partnership. Using a Company limited by shares would limit the exposure of all the shareholders to the value of their capital, but this is not normally available to practices as there is no mechanism to transfer the GMS contract into the company.
Limited Liability Partnerships (LLPs)
LLPs retain the central feature of partnerships, being that partners both own and manage the business. In a company, by contrast, ownership and management are split between the shareholders and directors. Partnerships are often the preferred business vehicle in the professions because the alignment of ownership and management encourages close collaborative working. This in turn facilitates the transfer of tacit skills and good risk management on which the reputation of the profession relies.
LLPs bring several advantages over other kinds of partnership:
- LLPs are registered legal entities and are therefore capable of contracting in their own name. This means that important assets such as the surgery freehold or lease can be held in the name of the LLP rather than individual LLP member’s names. When a member joins or leaves an LLP, there is no need to change the lease or the land registry title, because the member is not named on it. Discussions amongst members would then change from being whether or not to ‘buy-in’ to the surgery, to whether or not to contribute capital to the LLP.
- The liability of LLP members is limited to their capital contribution. There are ways this can be circumvented such as by a mortgagor requiring personal guarantees, but members know that their liability is limited except where they have agreed otherwise. By contrast in traditional partnerships all partners have unlimited liability except where they have agreed to limit it. The most common ways of doing so are to take out insurance (such as professional indemnity cover) or to have contractual limits to liability in service contracts. In this way it is possible to create structures which arrive at similar levels of risk, but they start from opposite extremes
- In an LLP a member is not responsible or liable for another member’s misconduct or negligence. This is an inevitable consequence of the limited liability status since this removes the joint and several liability inherent in an unlimited liability partnership. Some argue that this can reduce the level of collaboration between LLP members, but this has not generally been the experience of other professions.
- There is considerably more formality around LLPs. Unlimited liability partnerships can be created and dissolved with no documentation, whereas LLPs cannot exist unless they are registered at Companies House. This increased formality eliminates some of the uncertainty around whether a partnership has been created or dissolved, which is at the heart of many GP partnership disputes. However, Companies House requires LLPs to file and disclose information about their membership and accounts which is normally kept private in an unlimited liability partnership.
Mutuals and Social Enterprises
There are a variety of legal structures which enable employee and community ownership of, and involvement in, a business. These are usually known collectively as social enterprises. The only form of social enterprise which is currently open to primary care is a Community Interest Company Limited by Shares (“CIC-CLS”). Since the same ownership rules apply to a CIC-CLS as to an ordinary company limited by shares, it is not possible to use it to broaden employee and community involvement in the practice.
If other social enterprises were to be permitted to hold GMS and PMS contracts, they would most likely include Companies limited by Guarantee (“CLG”), Community Benefit Societies (“BenComs”) and Industrial Provident Societies (IPS).
The primary difference between the various different types of enterprise comes down to who they ultimately seek to benefit:
- Partnerships and LLPs look to provide financial benefit (profit) for the partners/members
- Companies limited by shares look to provide financial benefit (profit) for the shareholders
- CLGs look to provide financial and non-financial benefit to a defined purpose and are often charities
- BenComs look to benefit the community
- IPS’s seek to benefit their members
If social enterprises were able to hold GMS and PMS contracts, they would have similar advantages to LLPs. They all generally have legal personality and so can hold assets and contracts, they have limited liability by default, and they are regulated and must be registered. Social enterprises come with the additional disclosure requirement beyond those of LLPs, to ensure that their social purpose is being complied with.
A further possible advantage with social enterprise is that it might make it easier to integrate across other elements of healthcare, since it would be easier to involve the care and voluntary sectors in a social enterprise such as a BenCom.
Transitioning issues
If LLPs and mutuals were permitted to hold GMS and PMS contracts, this would not resolve the question of how to move existing GMS and PMS contracts into them. As LLPs and mutuals are distinct legal entities, they would suffer from the same procurement problem as Companies limited by shares currently do. This is that procurement law states that public bodies must tender all contracts above a certain value. Because GMS and PMS contracts do not generally have a fixed term, their cumulative value normally exceeds this threshold. Since moving a contract from one legal entity to another is technically a termination and re-grant, the re-grant would by default have to occur through a tender process. There are exceptions to the public tender rule, but it is a matter of some debate whether these exemptions can be applied to GMS and PMS contracts.
If you have any questions or for more information, please contact Nils Christiansen on 01483 511555 or email n.christiansen@drsolicitors.com
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Can a GP practice have limited liability?
As Primary Care changes, we are frequently asked about different business vehicles and in particular whether a GP practice can have limited liability. Choosing the right type of business vehicle for your GP practice is not always straightforward, and managing risk is likely to factor highly in the decision making process.In this article we look at the issue in more detail, explaining the different business vehicles and their potential implications.
Unlimited liability partnership
Most GP practices currently operate as unlimited liability partnerships. This means partners are “jointly and severally” liable in the case of any financial problems. Creditors and other litigants are free to sue all the partners in the partnership to recover their losses, regardless of who caused the problem. What is more, each partner is liable up to the value of the whole of the debt. This means that creditors are able to look to the personal assets of all of the partners until the debt is settled in full or there are no personal assets left. Although your partnership deed will specify how you share profits and losses between you, your creditors will have no regard to this and will typically simply look to find ‘the deepest pockets’.
Although unlimited joint and several liability can be a frightening concept, it has historically not been a major concern for GP Practices since the clinical negligence risks are mostly insured against. However, as practices have become larger and more complex, other risks have become important and need managing or protecting against.
Limited Liability Company (Ltd)
A limited company is the vehicle of choice for most businesses in the UK. A limited company is managed by directors and owned by shareholders. If a limited liability company is unable to pay it’s debts, it becomes insolvent. Creditors are not normally able to ask the shareholders or directors to contribute to losses, so liability is limited to the capital which the shareholders have introduced to the company, plus any other assets (such as retained profits) the company might hold. Importantly, the personal assets of shareholders and directors and generally protected from creditors.
GP practices are, in principle, able to operate as limited companies. However, the consent of NHS England is required to move the GMS or PMS contract to a limited company and they have historically been reluctant to agree. There are also regulatory restrictions about who can own a company delivering GMS or PMS services, which will need to be secured in the Company Constitution. Moving a practice from an unlimited liability partnership to a limited company is not a straightforward process, so anyone thinking of going down this route should always seek specialist legal advice first.
Another way limited companies can be used is to manage the largest risks in the partnership. For example, the surgery could be held in a limited company, while the practice is kept as an unlimited liability partnership. This is a reasonably common model for practices to adopt.
Limited Liability Partnership (LLP)
An LLP is an alternative legal structure that is commonly used by professional services firms, such as accountants and solicitors. It enables a business to operate with a partnership structure (where ownership and management are one and the same), whilst limiting the liability of the partners and protecting their personal assets. As with a limited company, it is a matter of public record how much capital each of the partners have put at risk.
We are often asked about LLPs since they superficially appear to be an obvious solution for GP practices, but they are unfortunately not permitted business vehicles for GMS or PMS contractors. If a practice were to be set up as an LLP, it would put these contracts, staff pensions, and much more at serious risk.
Other options for managing liability:
Insurance
One route partners may take to gain greater protection for their personal assets, is the purchase of specialist insurance. All NHS GPs are obliged to take out professional indemnity insurance against one of their biggest risks – professional negligence claims. The same approach can be taken to other risks to the financial wellbeing of the practice as well. Possible examples include life insurance, key man insurance, or mortgage repayment insurance.
Indemnities
As discussed above, to the outside world all partners are jointly and severally liable for the losses of the partnership. This can, of course , seem quite unfair so it is reasonably common for Partnership Deeds to provide that partners are responsible for the consequences of their own negligent or unapproved actions. These clauses are called ‘indemnities’.
Whilst fine in theory, the obvious problem with this approach is that if the individual concerned runs out of money, the other partners will still be exposed to the remaining debt. Also, it is often difficult to link a loss directly to the negligent actions of a single individual. More commonly, a problem is a result of a series of unfortunate events, where several people could have intervened, but failed to do so.
Our recommendations
Sadly, there isn’t a single, simple solution when it comes to managing liability in a GP practice. All the options we have detailed come with their own difficulties, and we are conscious that as healthcare becomes more ‘commercial’ it is also becoming more risky commercially.
We would always recommend seeking professional accounting and legal advice before making any decisions, to ensure you understand the full implications of the options which are available to you. The ‘right’ answer for your practice will depend on your individual circumstances and your appetite for risk.
For more information, please contact Daphne Robertson on 01483 511555 or email d.robertson@drsolicitors.com
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Thinking of setting up a private GP practice?
There has been much discussion in recent years about the rise of private GP practices within primary care and it is a subject we are increasingly being asked about by our clients.
Setting up a private GP practice is a complex area and for anyone thinking of taking such a step, there are many issues that need consideration. The priority must always be to ensure compliance with the many regulatory barriers.
Here, we share the first of a series of blogs on this topic.
What are the rules?
The NHS regulations are very clear. A practice providing GMS, PMS or APMS list based services must not charge any of its patients for treatments – regardless of whether these treatments are available on the NHS or not. (There are a few limited exceptions to this rule, which most practices will be aware of).
Setting up a separate business vehicle (eg a limited company) to provide the services may appear a potential solution to this, but it is a risky strategy, as it is highly likely to breach the regulations.
So, what can you do to ensure you comply?
Set up a distance away from your NHS practice
It’s critical you have robust processes in place to ensure that none of your private patients are registered on a list where you are the contractor.
The easiest way to do this is to set up your private practice well away from your NHS practice area. You will still need to undertake checks, but the risk of being in breach will be greatly reduced.
Conduct thorough employee checks
You also need to undergo checks to ensure any GPs you employ or otherwise engage in the private practice, do not have an interest in an NHS list based contract. If they do, then you will need to extend your checks to cover these patient groups too.
One slightly grey area is where a locum GP is providing services for both an NHS practice and a private GP practice with overlapping patient lists. It’s certainly arguable that this breaks the rules, but as the regulations aren’t entirely clear it will depend upon the individual circumstances of each case.
Make sure patient records are kept up to date
Data Protection rules will prevent you from using your NHS practice list to run your checks. You will, therefore, need to ask each private patient to confirm where they are registered and then have steps in place to ensure these records are kept up to date.
Our recommendations
If you’re considering setting up in private practice, then bear in mind that the rules associated with this are complex and the consequences of getting it wrong are serious. That said, while the rules are strict, it is possible to put controls in place to ensure compliance. To help you navigate the process, we would always advise you seek the advice of specialist, professional advisers.
For more information, please contact Daphne Robertson on 01483 511555 or email d.robertson@drsolicitors.com