As a general policy, NHS England expects all GPs on the England National Performers List who are insured to have minimum personal liability cover. One question that the healthcare team at VWV are being asked by GPs as the moment is whether GPs can avoid liability by putting their GP practice into a limited company.
Healthcare specialist Mark Jarvis, who recently joined VWV’s Healthcare team as a partner, and Oliver Pool, also a partner at VWV, give us their legal perspective on whether the answer to GPs’ concerns about having personal liability for the practice is to ‘incorporate’.
Unfortunately, the answer is almost always, ‘No’. This article sets out why not, in a bit more detail. It is true that a PMS or GMS contract can be held by a limited company and there is no bar to limited companies holding such contracts provided they are constituted and owned in the right way. There are companies that already hold PMS or GMS contracts, either those who were awarded to them under the transition provisions in 2004 or who have managed to incorporate their practice since then.
Novation; adding up your obligations
Several objections arise when a partnership or a ‘single-hander’ tries to move an existing PMS or GMS contract into a company. Like almost all NHS contracts, PMS and GMS contracts are non-assignable – they cannot be transferred to a third-party without the commissioner’s consent. Even if the company that is set up is owned entirely by the partners, it is still – for legal purposes – a third party, so the commissioner’s consent will be required.
When one contract holder is substituted wholesale for another, this is known as a ‘novation’ and technically involves the termination of the existing contract and award of a new contract. Commissioners will want to satisfy themselves of their procurement obligations in such a situation and whether any exemptions apply.
NHS England’s guidance sets out the procedure to follow for a request to incorporate and it emphasises the discretional nature of such a request, flagging that a new contract award does not necessarily mean the existing practice would win the contract in a competitive process. However, it also emphasises the need to gain assurance from the commissioner prior to terminating a contract.
A novation should be undertaken through a novation agreement, which involves an agreement to terminate and to sign up to a replacement contract. This agreement can make clear the terms of the contract, which presumably the partners will want to be substantially the same. However, the partners may be asked to guarantee the obligations of the company for a period of time.
Limited liability; a personal guarantee
One of the great attractions of operating through a company is that the members of a company have limited liability – so, if the practice were to collapse or wind up, the costs would fall to the company – not the doctors – and the company could go insolvent without the doctors being made bankrupt themselves.
However, the practice’s main creditors – the bank or the landlord (depending on whether you are in a freehold or leasehold building) – are generally aware of this. If the partners were to move the practice into a limited company, they would need the bank or landlord’s consent to move the bank loan/mortgage or the lease out of the partners’ names and into the name of the limited company.
The conversation might go like this:
Partners: We’re incorporating our practice and would like to put our mortgage into the name of our new company. Can we have your consent, please?
Bank manager: Is this so that you can have limited liability?
Bank manager: So, if the practice folds and the company doesn’t have sufficient funds to pay back the loan, you don’t have to pay the money back to the bank yourselves?
Partners: Yes, that’s the idea.
Bank manager: Hmm. I think we’d much rather carry on lending to you individually, thanks. We’ll only move the loan into the company’s name if you all give us personal guarantees for the loan.
Partners: But wouldn’t that give us much the same level of liability that we have now?
Bank manager: Yes, I suppose it would do.
And of course, for those in leasehold buildings one would expect a conversation with most landlords to work much the same way – quite often landlords will expect the partners to give personal guarantees of the rent.
Redundancy costs; thoughts for the future
Aside from the bank and the landlord, the other main ‘creditors’ if the practice were to collapse – the other main cost that partners might like to be protected from – is the cost of making the staff redundant. It is sometimes suggested that partnerships could set up separate limited companies to employ the staff rather than having them directly employed by the partners.
However, if the staff are not employed by the contract holder they may well fall outside the NHS pension scheme – i.e. there are pension issues if the partnership continues to hold the PMS or GMS contract, but the staff are employed by a different entity.
Other problems with limited companies
Practices should be aware of the increased compliance requirements, including the obligation to file accounts each year, which allows patients to see what the partners earn (with much more accuracy than the statements partners are required to put on their websites).
Ongoing legal and accountancy costs may be higher because of the additional administrative costs of rejigging shares each time partners come and go, which is a much more complicated process than with partnership shares.
It can also be more complicated to adjust profit shares if a partner takes a sabbatical or decreases his sessions or covers for another partner – instead of simply making an adjusted calculation in the accounts one has to deal with actual share transfers.
There is also the issue of whether there are any financial savings to be made by incorporating. We defer to the accountants on that point, although the view we usually see given is that it is not beneficial. In particular, for NHS pension reasons, the shares have to be held by those in the NHS family – which means the advantages of adding spouses as shareholders are generally not available here.
If a practice chooses to keep core primary medical services in their partnership or sole name, they may well be able to put non-core services into separate limited companies, and there may be good reasons for doing so. That is the subject of a different article. But this doesn’t help much with the concern of being jointly and severally liable for a GP practice and its lease or bank loan.
Incorporation may not be a ‘silver bullet’ in terms of protection from liability and certainly, it can only come about with co-operation and consent of the commissioners. However, practices seeking to incorporate should take advice from specialist medical accountants and solicitors in order to establish whether it is appropriate and feasible for the practice concerned. If incorporation entices sufficiently, we have experience of the process for primary medical contractors and can help you through the planning, application and corporate structuring.