Specialist medical accountant James Gransby explains why Primary Care Networks might want to consider switching to a limited company business model and what could be the deciding factors
This article first appeared on Pulse Intelligence.
When Primary Care Networks (PCNs) were first established they were free to choose their own business models, depending on how the members of the network intended to operate.
The BMA’s PCN Handbook, which was widely consulted by fledgling PCNs two years ago, made an interesting reference to business models on page 11 and the potential for practices to change to a ‘limited liability’ model in future:
‘… it may be that practices decide to develop the network initially under a different model, with an expectation that they will change to a limited liability model once this [access to the NHS pension fund] and other potential issues are resolved.’1
In line with this, NHS England recently updated guidance to commissioners with additional advice on handling applications to incorporate, in anticipation of an increase in the popularity of the corporate model.2
As the function of networks develops, and as the third year of the PCN DES approaches, now may be the time for PCNs to consider whether the legal form adopted at their inception in July 2019 needs to be adapted.
Why might PCNs consider a company business model now?
Most PCNs adopted either a lead or flat practice model to set up their network. However, these models can be problematic for member practices, particularly in terms of sharing staff.
At the outset, the PCN workforce was small, with many networks employing a single social prescriber and one or two clinical pharmacists. The workforce is now increasing, alongside the expanding remit for networks, with more funding available from the Additional Roles Reimbursement Scheme (ARRS).
This growth in workforce is a key reason such PCNs are considering a possible move to a limited company (corporate) business model. In addition, a recent change in legislation means that limited companies can now access the NHS pension.
Those PCNs that are operating as a super-partnership or under the auspices of a federation were equipped from the outset to deal with all these legal and employment issues, and generally appear to be robust and fit for purpose.
What key problems can a company model overcome?
The main challenges that flat or lead practice PCNs face, and which they could potential overcome by adopting a limited company model, relate to tax and staff liabilities.
While healthcare services are often classed as VAT exempt, the sharing of staff around the network (including medical staff) is usually subject to 20% VAT (unless a practice is operating below the £85,000 registration threshold). This is a very complex issue, but essentially a PCN operating a limited company can be structured to benefit from a separate VAT relief, called the cost sharing exemption, by operating a cost sharing group.
A network operating under a lead practice or with a flat practice structure is not a separate legal entity in its own right. It is a group of practices that are jointly and severally liable for what happens within the network. This means all practices – and therefore all the partners – are trusting each other to share the network’s legal and financial responsibilities.
The main concern here is that if a PCN needs to make staff redundant in future, the cost will fall on individual member practices. By contrast, if a company is employing the workforce the costs will come out of the assets of the company – lessening the risk of destabilising individual practices.
A PCN operating without a formal framework relies only on the guidelines set out in the network agreement. A limited company is governed by the Companies Act 2006, which sets out strict regulations concerning the company’s obligations. Having this formal framework in place makes the people involved accountable for their actions.
Tax on PCN surplus
If a PCN is not a legal entity it has no mechanism to report its taxes, except through its member practices, with each practice needing to report its share of the surplus through their own accounts.
With a company the profits can be sheltered at lower tax rates, and in some circumstances without tax being applicable until it is distributed out to practices. This is far more attractive than the exposed route that lead and flat practice models need to adopt.
What are the main pros and cons of a corporate model?
The advantages of the corporate route include:
- Limits the liability for the practices, and therefore GP (and other) partners, involved in the network.
- Mitigation of the VAT issue relating to shared staff, but only if the very strict VAT cost sharing group rules are adhered to correctly.
- Staff can be employed on consistent employment terms.
- Surpluses due to any unspent PCN funds at year-end will be subject to lower tax rate (corporation tax rate of 19% instead of partners’ marginal tax rates of 40-45%) or even no tax if the company is structured correctly.
- A company would be the only way that a network could hold an APMS contract.
The disadvantages would include:
- There is a cost to setting up and running the PCN company, as an extra entity for which to prepare and submit accounts and run a payroll. This would eat into the £1.50 (current) per patient PCN funding.
- The company may need separate CQC registration as a service provider.
- Transferring staff, following TUPE procedure (see below), can be onerous.
- Access to the NHS pension is not automatic (see below).
Why is TUPE important to consider?
When moving the workforce into a corporate vehicle, such as a limited company, companies must follow the Transfer of Undertakings (Protection of Employment) – or TUPE – Regulations. The aim of the regulations is to ensure employees retain the same terms and conditions and keep continuity of employment in the event of a change of employer.
As a consequence of the TUPE regulations, a number of PCNs, despite currently operating below the VAT registration threshold, have decided to form a company now to avoid needing to transfer a larger number of staff (requiring extra time and resources to consult with each) if the decision is left too long.
What about pensions?
At the outset, a huge stumbling block for PCNs using limited companies was that they could not access the NHS pension scheme. However, under revised NHS Pension Scheme access regulations, PCNs operating as limited companies can now apply for staff to access the NHS pension under a temporary Direction/Determination order. This is currently available until March 2023 by which time it is expected to be written into legislation, so that staff will continue to be able to have access in future.
How can PCNs weigh up their options?
A quick way to assess if something needs to be done, particularly those using the lead practice model, would be a VAT review. This could highlight if the mandatory £85,000 VAT threshold is at risk of being breached.
Looking at the likely scale of the PCN in coming years might tip the balance towards a limited liability route. Can the practices within the PCN accept circa £1m of income flowing through an unincorporated entity with only the network agreement to fall back on?
Once a PCN decides to form a corporate entity the practicalities, for which specialist advice will usually be needed, to consider are:
- Forming the company, ensure the underlying legal structure and paperwork is correct.
- Transferring over any staff from the PCN (in accordance with TUPE regulations and after necessary consultation).
- Obtaining access to the NHS pension scheme.
- Other steps such as opening a bank account, arranging contracts of employment, exploring CQC registration and many other aspects before it becomes operational.
While this means getting past a certain ‘pain barrier’, for many PCNs the long-term benefits of operating in the correct structure may outweigh the short-term effort.
James Gransby is vice-chairman of the Association of Independent Specialist Medical Accountants and a partner at RSM UK Tax and Accounting Limited
For more advice and analysis on practice finance and business management topics, visit Pulse Intelligence.
1. BMA. Primary Care Network Handbook. March 2020
2. NHS England. Primary Medical Care Policy and Guidance Manual: Version 3. Published January 2016; updated February 2021
3. NHS Business Services Authority. Primary Care Networks and NHS Pension Scheme Access. [Accessed 3 March 2021]