Wright Johnston and Mackenzie Solicitors

Making GP Practices More Sustainable - The Scottish Experience

1st October 2020

Summary

The Scottish GMS Contract 2018 and the introduction of government interest-free sustainability loans should prompt Scottish GPs to consider converting their practices to limited liability partnerships. The profession south of the border should follow these developments with interest.

Sometimes an idea is a good idea but its time has not come.

For general practitioners a limited liability partnership is one such example.

At present, most GP practices across the UK operate, in legal terms, as a ‘partnership’ regulated by the Partnership Act 1890. There are advantages to this model:

• it is easy to set one up
• administration costs are low
• partners continue to be taxed as individuals

There is, though, a high price to pay - the unlimited liability of the partners, with each one facing unlimited liability for its debts, its obligations and its other partners’ wrongful acts and omissions .

Limited liability partnerships

Then in 2000 the UK Parliament enacted a law to establish a new legal entity - a limited liability partnership (‘LLP’) – in order to cap liability . Lawyers, accountants and other professionals rushed to adopt them, but among GPs the idea has never taken off. In England and Wales GP practices have never been allowed to convert from partnerships into LLPs, although this is currently being re-examined following the Watson Independent GP Partnership Review .

As a strange anomaly, however, in Scotland practices can form LLPs , but few have bothered to convert - as of May 2020 out of 938 NHS GP practices, only 3 are LLPs . Why is this? Reasons given are varied but include:

• the limited liability status is illusory - if a practice has a bank loan, the bank will still expect the LLP partners to guarantee payment of the loan
• since GP practices don’t trade, they don’t need LLP status
• there are immediate costs in converting to an LLP and ongoing administrative costs
• some GP practices may not want to publish accounts at Companies House (a requirement of an LLP)

In short, many GP practices in Scotland have perceived the benefits as slight.

Sustainability loans in Scotland

The introduction of sustainability loans in Scotland, however, should make GPs consider converting to LLPs.

A centrepiece of the 2018 GMS Contract in Scotland, these government interest-free loans are intended to make GP practices that own their practice premises more viable. Qualifying practices can use these sustainability loans in any way they want, provided it is ‘for the purpose of the practice’. Situations meriting a loan include where a practice’s borrowing costs exceed NHS financial assistance, where ongoing partners need to buy out a retired partner’s share of the practice premises or where a loan would facilitate recruitment of a new partner.

A secondary aim of these loans is to allow the local health board to take over ownership of the practice premises. In simple terms, the board will cancel the outstanding loan in exchange for taking over the ownership of the premises. The practice then gets an option to enter into a lease between with the health board.

Since late January the Scottish Government has started to issue the draft legal paperwork for the first tranche of ‘sustainability loans’.

Advantages to establishing an LLP

What, though, have sustainability loans got to do with LLPs? Well, the answer lies in the detail of the sustainability loan agreement:

There are four clear advantages to a practice converting to an LLP before or shortly after it enters into a sustainability loan:

• first, unlike in the case of a bank loan, the sustainability loan conditions do not require the partners to give guarantees to repay the loan. This means a key benefit of an LLP ceases to be illusory. Instead of each partner being ‘on the hook’ for a bank loan, none of the partners in an LLP need have personal liability to repay the sustainability loan.

• second, the legal costs in keeping partnership ownership records up to date (an ongoing requirement of the sustainability loan) are likely to exceed the administrative costs of operating an LLP

• third, and perhaps most of important of all, is the onerous requirement that all partners in a traditional partnership must enter into the sustainability loan. This means that a salaried partner will be as liable as the partners who own the practice premises to repay the loan. It is hard to think of a stronger disincentive to a new partner looking to join a new practice than being faced with taking on liability for a loan that partner may not benefit from. Conversion of the practice to an LLP eliminates these problems.

• fourth, if the health board exercises its option to purchase and the practice exercises its right to take a lease of the premises, incorporation of the practice as an LLP will shield its partners from personal liability under the lease.

For these reasons, a practice in Scotland wishing to enter into a sustainability loan now has a stronger incentive to convert its legal structure to an LLP. And there are other benefits too that make an LLP an aid in the defence of a sustainable practice, including:

• a greater flexibility to GPs choosing how they wish to work, thus dissuading some in the profession from wishing to become locums
• a greater ease for partners wishing to retire
• perhaps the possibility that commercial lenders, knowing of the competition from sustainability loans, are more willing to forgo partners being guarantors of commercial borrowings to a practice

Conclusion

No two practices are the same and there is no certainty that a sustainability loan, even with a more sustainable legal structure, will be suitable to all. It is definitely, though, worth careful thought. And for practices south of the border, it will be interesting to see just how many practices in Scotland do convert to LLP status and what fresh opportunities this brings.

For any GP practice in Scotland wishing to discuss this further, please contact Michael Dewar (mjd@wjm.co.uk), a solicitor working in association with BMA Law Limited in Scotland and a partner of Wright, Johnston & Mackenzie LLP. (Published, October 2020)

 

------------------------------------------------------------------------------------------------------------------------

1. Section 12 of the Partnership Act 1890: “Every partner is liable jointly with his co-partners and also severally for everything which the firm while he is a partner therein becomes liable under either of the two last preceding sections [of the Act].”

2. The Limited Liability Partnerships Act 2000 provided for the establishment of LLPs from 6 April 2001 onwards. Even before that date, GP practices have been able to set themselves up as limited liability companies but different taxation rules often makes this impracticable.

3. GP Partnership Review: Final Report (https://www.wessexlmcs.com/gppartnershipreview; link accurate as at 30 June 2020)

4. Sections 17CA and 17L of the National Health Service (Scotland) Act 1978 (as substituted by sections 38 and 39 respectively of the Tobacco and Primary Medical Services (Scotland) Act 2010) allow a PMS and GMS contract respectively to be held by an LLP

5. Scottish Government figures: see https://www.isdscotland.org/Health-Topics/General-Practice/Workforce-and-Practice-Populations/ (link accurate as at 30 May 2020)

6. See Circular DL (2018) 22 (https://www.sehd.scot.nhs.uk/dl/DL(2018)22.pdf (link accurate as at 8 May 2020) and the BMA Scotland, ‘GP Sustainability Loans, Frequently Asked Questions’ available at https://www.bma.org.uk/media/2015/bma-scotland-gp-sustainability-loans-feb-2020.pdf (link accurate as at 8 May 2020)