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Article:

How robust is your Partnership Agreement?

15 October 2019

As expert Medical Accountants, we are continually working with our GP practice clients to help them create sustainable profits and manage their business risks. One area which practices often overlook is ensuring their Partnership Agreements are up to date and robust - a costly mistake if a partnership dispute arises. 

Timing of partner changes

The Agreement should state the timing of buying out an exiting partner from their current account, working capital and property. Agreements often say this must be completed within a set number of months after their retirement. This creates practical difficulties: eg, is it practical to have concluded what their final pay-out will be by that date? Without interim accounts, the final current account balance will not be determined until after the next year end accounts are produced. Agreements should set out what happens in the interim.

It is also important to consider carefully the clauses needed to address the timing for a new partner to buy in. Aligning the timing of retirement/buy-in can prevent cash flow issues: eg, if the exiting partner is bought out at the end of twelve months but the incoming partner has two years to buy in, which can result the other partners having to inject further cash or incur financing costs. Of course, if you are not replacing a partner, capital levels would need reviewing and adjusting anyway.

Superannuation clauses

Pensions annual allowance charges are increasingly leading to partners opting out of the NHS pension scheme. In addition, there have been long delays in the deduction of some superannuation certificate balances. Does your Agreement cover what happens in these circumstances?

Ideally, the Agreement should state that where a GP partner opts out, they retain their full partnership profit and have adjusted drawings to equalise their position with other partners. As core contract funding includes an inherent amount of superannuation funding, we have seen arguments that a partners’ profit should be reduced as a result of opting out. We have never seen this applied, but it is easier and cheaper to include a clause covering this issue rather than risk a costly dispute.

Long delays in superannuation liabilities being deducted from practices’ NHS statements are common, but historic deductions are made regardless of whether a GP is still a partner. Seniority clawbacks can also be delayed for some years. Agreements should include clauses to estimate and hold back reasonable reserves to protect all partners.

Profits

Agreements should cover profit allocations in periods of partner absence or retirement. Clarity on arrangements when partners are on sickness or maternity/paternity leave is essential – including who covers the locum cost and who benefits from NHS or private locum reimbursements. In a year of retirement, are interim accounts to be drawn up and who bears the cost?

Signing

Having created a robust Agreement, don’t fall at the last hurdle: it is surprising how many practices fail to ensure that all partners sign it. Yet failure to do so means your practice will have to be administered according to Partnership law - a risky scenario for any practice.

For help and advice on your Partnership Agreement please get in touch with our team.

For help and advice on your tax position please get in touch with our team.