1.    Historic arrangements

1.1       Whilst the PCTs were managing GDS Contracts, it was very rare that they would agree to incorporating a GDS Contract.

1.2       For this reason, it was difficult for NHS Practices and mixed Practices to take the tax benefits arising from incorporation of the Practice.  When it was not possible formally to incorporate the NHS Contract, it meant either leaving the NHS Practice outside the incorporation or, alternatively, subcontracting the NHS Contract to the company. 

1.3       Subcontracting created significant potential difficulties, including an arguably unlawful act under the NHS Contract itself and questions over whether a capital disposal was achieved by subcontracting the NHS Contract to the company.

1.4       The PCTs were abolished in March 2013 and management of NHS contracts fell to NHS England, under the management of LATs.

1.5       Management, arguably, was something of a euphemism, because the management of NHS Contracts pretty much ground to a halt from April to December 2013.

1.6       NHS England published a paper in June 2013 relating to the incorporation of NHS Contracts, which is at: http://www.england.nhs.uk/wp-content/uploads/2014/05/incor-pc-con-pol-may.pdf.  The paper supported incorporation.  The LATs refused to incorporate, claiming that the paper was unclear and that clarification had been sought from NHS England, which was not expected to be given before December 2013.

2.    The here and now

2.1       It seems that whatever clarification was required has now been given, because a number of LATs are adhering to the June 2013 incorporation policy and a trickle of incorporations are now going through. 

2.2       Clients should seize the opportunity to incorporate, during this window of opportunity.  It may continue indefinitely, but it may close up again, on a whim!

2.3       As can be seen from the paper, the LAT is first directed to look for excessive UDA rates and then directed to novate the Contract from the individual contractor to his company.

2.4       Novation is a big word for what is in fact simply the substitution of one contracting party for another.  In other words, the GDS Contract is entered into between Dentist and the NHS and the Novation Agreement simply says that Dentist is replaced as a party to the GDS Contract with Dentist Limited, as if Dentist Limited had been a party to the GDS Contract from the beginning.

2.5       There is one tricky aspect to the standard form Novation Agreement.  The document requires Dentist to guarantee the obligations of Dentist Limited under the Contract.  This is quite understandable, in that it would be quite wrong for the NHS to release Dentist, a contracting party of substance and worth, and replace him with Dentist Limited.  Dentist Limited could, in substance terms, be a worthless entity, incapable of meeting its legal obligations to the NHS, such as clawback liabilities.

2.6       The problem is that Dentist ends up guaranteeing those obligations forever, even after he has ceased to be the owner of Dentist Limited (i.e following a sale of his shares in that company).  Obviously, this is wrong, because once Dentist Limited is sold by Dentist to Dentist 2, it should be Dentist 2, who takes over as the guarantor of Dentist Limited.

2.7       Unfortunately, there is at present no means of communicating this fairly simple proposition to NHS England.  Their stance is that the standard form Novation Agreement is handed down by God himself and can't be varied for any reason, however reasonable.

3.    Sale of Orthodontic Practices           

3.1       There is another very sinister aspect to incorporation.  Orthodontic contracts are almost exclusively PDS Contracts.  One of the two key differences between GDS and PDS is that PDS Contracts do not incorporate the provisions enabling transfer of Contract via the partnership route. 

3.2       PCTs permitted the transfer of PDS Contracts via the partnership route, as if the Contracts included the relevant transfer provisions.  The LATs realised that PDS Contracts should not be transferred in this way, banged the drum and lo, Orthodontic Practices became unsaleable, overnight.

3.3       Curiously, this did not stop the Practice owners approaching the Practice brokers, the Practice brokers marketing Orthodontic Practices, the prospective buyers bidding for them, the bankers offering finance for them (albeit very slowly) and then ….  nothing, as the realisation dawned, 4 months into the prospective sale, that actually nothing was going to happen.  AD had to literally refuse to act, on several prospective purchases, because there was no progress that could meaningfully be made.

3.4       There was or rather, there is, a couple of significant problems with NHS orthodontic practices, which creates something of a perfect storm. 

3.4.1    NHS Contract holders are realising that they don't need expensive Associate orthodontists.  They can manage perfectly well with cheap therapists and they can grind improved profits from the Practice.  This means that Associate orthodontists are, at best, having their Associate fees squeezed and, at worst, being sacked to make way for therapists.

3.4.2    In turn, Associate orthodontists realise that they must buy a Practice at any cost, because it is the only way to stay in the game.

3.5       One possible solution to the absolute bar to purchase requires the target Practice to become incorporated, meaning that there would indeed be no need for the partnership route.  However, there is another huge hurdle.  The length of the NHS Contract.

3.5.1    A GDS Contract lasts indefinitely and is therefore, bar disaster, guaranteed income in perpetuity.  It is for this reason that NHS practices command higher prices than private practices.

3.5.2    PDS Orthodontic Contracts are all on the verge of expiry, mainly due to expire either in March 2015 or March 2016. 

4.    The Value of Orthodontic Practices

4.1       As can be seen above, there is huge demand for NHS orthodontic practices.  It is not unusual for NHS general practices to sell for 120% of gross fees.  It is not unusual for NHS orthodontic practices to go to sealed bids, with successful bids running out at 150% of gross fees.

4.2       The sole reason why NHS Practices command higher prices than private Practices is because the income is guaranteed.  The income of private practices, particularly in recession, can trend downwards by a few percent each year, which makes them less valuable.

4.3       So why would the NHS premium apparently apply to a business whose income could terminate within say 12 months through absolutely no fault of the buyer? 

4.4       So let's put a bit of flesh on this proposition.  NHS Orthodontic Practice in, say, Pinner, with gross fees, including a tiny bit of private, of £475,000, in leasehold premises. 

4.4.1    The Practice is incorporated and has a brand-new 12 month PDS Contract, commencing in April 2015.  If all goes well, the Contract will be renewed for successive 12 month periods.

4.4.2    The Practice is very professionally marketed by one of the leading dental Practice brokers and, to their credit, they receive offers from countless desperate soon-to-be unemployed Associate orthodontists.  Again, doing the right thing for their client seller, the broker puts the deal out to best bids and hands are shaken at £700,000.  Finance is (eventually) raised and the deal marches towards exchange of contracts.

4.4.3    Following discussions with his/her client about the issues set out above, the dental lawyer acting for the buyer suggests to the Practice broker, upon his/her client’s instructions, that perhaps there should be some kind of price rebate in the unlikely event that the NHS Contract comes to an end through no fault of the buyer a year or two after the purchase.

4.4.4    The Practice broker carefully weighs up the options and discreetly sounds out the under bidders.  The under bidders remain desperate to purchase an NHS orthodontic Practice and plead for the opportunity to pay the full asking price and then some.  After consultation with the seller, the Practice broker politely responded to the proposition and said that the seller would not consider any form of rebate of the purchase price in any circumstances and that if the buyer did not want to proceed on an unconditional basis, there were plenty of people who would do so.  The buyer, understandably, declared full commitment to the purchase at the full asking price with no rebate in any circumstances.

4.4.5    Does the buyer have a crisis of confidence and pull out before exchange?  Does the buyer go blindly ahead in the (probably safe but hopelessly naive) belief that the Contract will be renewed indefinitely?  Does the buyer refuse to commit unless the seller agrees to return a sliding scale percentage of the purchase price if the Contract comes to an end through no fault of the buyer after one year or two years or three years?  Watch this space for the answer!

4.5       What is the prospect of the PDS Contract coming to an end after, say 12 months?  Almost certainly very slim, but would you risk it?

4.6       And if the Practice is purchased, and the PDS Contract comes to an end after, say 12 months, what happens then?

4.6.1    The revenue of the Practice will have dropped from £475,000 to £25,000, with very limited prospects of converting NHS children's orthodontics to private revenue, but the overheads of the Practice, including rent, fuel, salaries etc will not have reduced.  The Practice will be insolvent and there will be no alternative but to make the entire staff redundant, at a quite significant cost.

4.6.2    The Lease over the Practice has another 13 years to run, it is limited to use as a dental or orthodontic Practice.  The appetite for the setting up of a private squat is marginally less than nil, so the property is completely useless. 

4.6.3    So our hapless (desperate) orthodontic Associate has now paid out £700,000 for the Practice, made a healthy profit during year 1 and has then paid out £100,000 in termination and redundancy costs.  On top of that, there is a liability for rent and rates for 13 years at £47,000 per year and a dilapidations liability at the end of the Lease of approximately £45,000.  Total costs, admittedly not having to be paid out all in one go, of just under £1.5 million, less the profit for year 1!

Russell Abrahams, Solicitor, Abrahams Dresden LLP


Abrahams Dresden articles and guidance notes are for general information purposes only and generally state the law as at the date of publication.  The information may not be relied upon as legal advice.  We are of course always happy to advise directly on specific issues arising.