Introduction
Running a dental practice often means handling complicated financial processes, from accounting and payroll management to tax planning and return preparation. As a result, it can be tricky for practitioners focused on patient care to balance their dental work with their financial responsibilities. However, as experienced accountants for dentists, we know that staying on top of your accounting tasks goes beyond compliance alone – they’re also vital to the long-term profitability of your dental practice. In this guide, we dive into the essential accounting tools and knowledge every dental practice needs, outlining how to claim business expenses, navigate audits, make the most of your financial management software, and more. With our expertise on your side, you’ll have the tools, knowledge and support you need to enhance your finances, unlock competitive advantages and move your practice forward
Setting up a dental practice accounting system
The first step to setting up a dental practice accounting system is choosing the right software.
Cloud accounting software has replaced paper filing and spreadsheet systems and is now the gold standard across the board, whether you’re managing your personal expenses or performing complex accounting tasks for your business.
Choosing the right accounting software
The software you choose sits at the heart of an effective accounting system. This is the tool that will streamline your financial management, making tasks like recording transactions, generating reports, and managing payroll a breeze.
While there are countless cloud accounting platforms available, the most popular options are:
• Xero: If you’re after something that feels modern and is easy to use, Xero could be your match. As Xero Silver Partners, we find that this platform shines when it comes to customisation, with over 800 third-party apps available in the Xero App Store. Adding extra users is also simple, making it useful for working on data with your accountant or business partners.
• QuickBooks: Ideal for small and large practices alike, QuickBooks has a knack for breaking down complex financial tasks into manageable processes. As well as keeping track of all the money coming in and going out, it can handle payroll admin and other more advanced processes.
• Sage: Sage offers a wide range of affordable subscription packages for micro businesses and large enterprises. It’s also especially convenient if you want to scale your practice, offering a comprehensive list of robust features that handle everything from automatic invoicing to sophisticated forecasting.
The right cloud accounting platform for your practice will depend on various factors, including your existing processes, budget, and personal preferences. If you need help making a decision, our experts can help you find a software solution that ticks all the boxes
Implementing your accounting system
With the right software in hand, the next step is implementation. This phase is about setting up your system to reflect the unique aspects of your practice.
Chart of accounts
Set up a chart of accounts listing your dental practice’s accounts and balances. Setting clear categories for income, expenses, assets, liabilities and equity can help you track and manage your finances effectively
Data migration
If you’re transitioning from another accounting or bookkeeping system, carefully migrate that data to the new system. Depending on the complexity of your practice accounts, you may need to work with a professional to ensure accuracy and completeness.
Training and support
Adjusting to a new accounting system can be challenging, but providing the right training can make the transition much smoother. Many cloud accounting software providers offer 24/7 support, while Boxwell’s live remote assistance and demos can guide you and your team as you adopt the new processes.
Establishing financial procedures
Once your new system is up and running, you must establish procedures to manage your finances as effectively as possible
Daily financial routine: Develop a daily or weekly routine for recording transactions, managing receivables and payables, and reconciling bank statements. Regularly attending to these tasks ensures your financial data remains current and accurate.
Stay up to date: Your accounting system is a living part of your practice, evolving as your practice grows, so regularly review and update your system to incorporate new technologies, adapt to changes in your practice, and improve efficiency.
Internal controls: Implement and manage your accounting system’s internal controls to safeguard your financial data, prevent fraud and minimise errors. This includes reviewing user access levels, regularly updating passwords, and routinely reconciling your accounts to ensure your books are balanced
Compliance and reporting: Ensure your system supports compliance with UK tax laws and Generally Accepted Accounting Practice in the UK (UK GAAP). Set up regular reporting schedules to oversee your practice’s financial health.
While the right software can streamline your financial management processes, staying on top of all your accounting tasks can still be complicated. Reaching out to an accountant for cloud accounting support can allow you to focus on your profession
Navigating taxes for dental practices
Navigating taxes is a crucial aspect of running a successful dental practice.
This chapter outlines the various tax obligations you may face in your dental practice, including VAT, corporation tax, income tax, and National Insurance contributions (NICs). Let’s take a closer look
Corporation tax
For dental practices operating as limited companies, you’ll need to calculate and pay corporation tax on business profits.
As of April 2023, the main rate of corporation tax is 25% for companies with profits exceeding £250,000. However, a 19% small profits rate applies to businesses with profits of £50,000 or less, offering some relief for smaller practices.
If your practice has profits between £50,001 and £250,000, you’ll pay the main rate of corporation tax reduced by marginal relief.
Income tax
Many medical professionals enter partnerships or become sole traders instead of incorporating their practice, and dentists are no different.
• Sole traders: If you operate as a sole trader, you’ll need to file a self-assessment return each year and pay income tax and NICs on the total profits.
• Partnerships: Each partner in a business partnership must file for self-assessment, with a nominated partner also responsible for submitting a partnership return.
• Company directors: While limited companies pay corporation tax on their profits instead of income tax, company directors must report their personal income in a self-assessment tax return
The current income tax rates are as follows:
(Details correct as of March 2024)
| Tax-free personal allowance | Up to £12,570 |
|---|---|
| Basic rate | Over £12,570 - £50,270 |
| Higher rate | Over £50,000 - £125,140 |
| Additional rate | Over £150,000 |
Many higher earners making £100,000 or more will also see their tax-free personal allowance gradually reduce
Tax for employers
If you hire staff members in your dentistry practice, you’ll be responsible for operating PAYR and deducting income tax and Class 1 NICs from employee wages.
Therefore, setting up an efficient payroll system is fundamental to ensure that you apply the correct deductions from your team’s salaries and pass on the tax to HMRC.
Regularly updating your payroll records and adhering to reporting deadlines is essential for compliance.
VAT
While many dental procedures are VAT-exempt, understanding VAT is still important, especially if you also provide cosmetic or facial aesthetic services as part of your practice.
As of 2024 and for the foreseeable future, the VAT registration threshold is set at £85,000 in taxable turnover within any 12-month period.
Because the majority of dental and medical services are VAT exempt, most dentists will stay within this threshold. However, you may register for VAT voluntarily for potential benefits such as reclaiming VAT on business purchases.
If you do register for VAT, it’s important to distinguish between the different types of services your practice offers so you can apply the correct VAT rates.
You will also need to comply with Making Tax Digital (MTD) for VAT rules. This involves using compatible software to keep digital records and submit quarterly updates to HMRC.
Making Tax Digital (MTD)
Making Tax Digital is part of the Government’s aim to digitalise the system. Currently, only VAT-registered businesses need to comply with MTD rules, but further legislation is rolling out for income tax self-assessment (ITSA) in 2026 and 2027.
To comply with Making Tax Digital legislation, you’ll need to do the following:
• Keep digital records: Ensure your accounting software can store your financial records digitally. This isn’t just about compliance; it’s about having your financial information at your fingertips, making it easier to manage your practice’s finances.
• Use MTD-compatible software: Your software should be capable of sending updates directly to HMRC. Most modern accounting packages are already equipped for this, but it’s a good idea to double-check, especially if you’re using specialist dental practice software.
• Stay up-to-date: Stay in the loop with any updates or changes to the MTD rules. HMRC occasionally updates these requirements, and your software provider should also keep their system in line with these changes. Working with your accountant can also help keep you on the right side of tax regulations.
Maximising deductions and tax relief for dental practices
Implementing a good tax plan is an essential part of financial management for any dental practice.
Costs such as dental equipment, professional services and staff training can quickly add up, but maximising these deductions can ensure you don’t pay more than your fair share of tax.
Meanwhile, knowing how to leverage tax reliefs while staying within HMRC guidelines minimises the risk of penalties or tax enquiries. An effective strategy will enable you to maximise tax savings, support business growth and allocate resources more effectively.
Common tax relief options
Common forms of tax relief include:
1. Capital allowances: Claim allowances for dental equipment and tools, reducing taxable profits and aiding in the recovery of initial investments.
2. Research and development (R&D) tax credits: Companies involved in innovative activities such as refining treatments or developing new technologies may be able to use R&D tax credits to fund their research and reduce their tax bill.
3. Business expenses: Claiming all allowable business expenses on your self-assessment or corporation tax return can help minimise your tax bill and boost your gross profits.
4. Pension contributions: Regularly contributing to your workplace pension can provide you with tax relief, reducing overall tax liability while aiding in retirement planning.
Identifying eligible expenses for tax relief
Expenses can reduce your taxable income, thereby lowering your tax bill. Here’s an expanded view of common allowable expenses that dental practices can consider:
1. Dental equipment and tools: This category includes the costs of purchasing dental instruments, machinery, and other essential equipment used in dental care.
2. Lab fees: Expenses incurred for lab services, such as crowns, dentures, and orthodontic devices, are also allowable. These are direct costs related to patient care and, thus, are generally considered deductible.
3. Staff costs: Salaries, wages, training costs, and pension contributions for your dental practice employees are allowable expenses. As a result, investing in staff development through training not only enhances your practice’s service quality but also benefits your bottom line.
4. Office expenses: The costs associated with maintaining your practice’s premises, such as rent, utility bills and office supplies, are typically deductible.
5. Professional fees: Fees paid for legal, accounting, and other professional services necessary for your practice’s operation can be included as allowable expenses. These services are crucial for maintaining compliance and efficient business management.
6. Continued professional development: Expenses related to ‘continued professional development’ are often considered allowable. This training must improve the skills and knowledge you use in your practice. However, you cannot claim for training costs that aid you in starting a new business venture.
7. Continued professional development: The costs associated with promoting your dental practice, including advertising campaigns, website maintenance, and marketing materials, are essential for business growth and can be claimed as deductible expenses.
Maintaining accurate and comprehensive records of all expenses is vital to substantiate all your claims.
As a specialist dental accountant, Boxwell can provide tailored advice to maximise your tax relief opportunities while remaining compliant with HMRC regulations.
Capital allowances
Capital allowances can play a critical role in dental accounting, offering a way to obtain tax relief on capital expenditure by allowing practices to write off the cost of certain assets against taxable income.
These allowances can significantly reduce a dental practice’s tax bill, enhancing cashflow and facilitating further investment in the practice.
Annual Investment Allowance (AIA), for example, permits significant deductions for qualifying capital expenditures such as equipment purchases.
Furthermore, dentists who buy certain assets for use in their practice can often use 100% first year allowances to deduct the full cost of the asset from their taxable income. This can include the full expensing scheme, which allows companies to save up to 25p in tax for every £1 spent on qualifying plant and machinery
Statutory accounts and audits
No matter which business structure you opt for, you must keep accurate business records, file your taxes on time and meet all other reporting obligations.
If you incorporate your business, this includes preparing statutory accounts for Companies House each year and undertaking statutory audits, depending on the size of your business.
Preparing your annual accounts
Your reporting obligations will vary depending on your company's classification
Small practices
Dental practices classified as small companies may be able to file ‘abridged’ accounts with Companies House. Your business will fall under this category if it has:
• a turnover of less than £10.2 million
• a balance sheet total of less than £5.1m
• fewer than 50 employees.
If you file abridged accounts, you can send a simplified balance sheet and profit and loss (P&L) statement to Companies House, along with any notes. However, you must still send statutory accounts to members and HMRC as part of your company tax return.
Larger practices
Statutory reporting obligations are more comprehensive for dental practices that exceed these thresholds. These larger practices must prepare and file full accounts with Companies House, adhering to the more detailed requirements set out for medium-sized or large companies.
Larger practices must make their full financial statements publicly available, enhancing transparency and accountability. This includes:
• Balance sheet: Your practice’s balance sheet gives you a snapshot of its financial position at the end of the financial year, showing all its assets, liabilities and equity.
• Profit and loss (P&L) account: Also known as an income statement, this detailed account shows your practice’s financial performance over the financial year, including income, expenses, and net profit or loss.
• Director’s report: This report provides an overview of the business, its performance, and its prospects. It must include a statement of the directors’ responsibilities in preparing the accounts.
• Notes to the accounts: You can use the notes to the accounts to provide more detailed explanations and breakdowns of the figures presented in your practice’s financial statements.
Filing deadlines
The deadline for filing accounts is typically 9 months from the end of your company’s financial year. However, your first set of accounts is usually due 21 months after the company was registered with Companies House.
Audit requirements
Dental practices that meet specific criteria are liable to audits. Private limited companies may be exempt from audits if they meet two conditions:
• annual turnover of no more than £10.2m
• assets worth no more than £5.1m
• 50 or fewer employees on average.
However, if your company’s articles of association require an audit or shareholders owning at least 10% of shares request one, an audit will be necessary regardless of size.
To ensure audit compliance, you should consider consulting with a professional accountant or auditor.
Summing up
Managing the financial aspects of a dental practice, including navigating tax obligations and identifying eligible expenses for tax relief, is integral to sustaining a healthy business.
By understanding the intricacies of VAT, corporation tax and allowable expenses specific to dental practices, practitioners can ensure compliance with HMRC regulations, optimise their tax position, and ultimately enhance their practice’s profitability.
Key takeaways from this guide include distinguishing between various types of services for VAT purposes, taking advantage of tax relief, and tracking and documenting all eligible expenses to maximise tax relief.
Given the complexities involved, we’d recommend speaking to our specialist dental accountants. We can ensure that you comply with your tax obligations and thrive financially.
Contact us today to find out how Boxwell can support your dentistry practice.