What Is Financial Due Diligence for a Dental Practice?
Financial due diligence is the process of verifying the financial information a seller provides before you commit to buying their dental practice. It is not the same as a valuation, though the two overlap. Valuation tells you what the practice might be worth. Due diligence tells you whether that valuation rests on reliable numbers.
For a UK dental practice purchase, due diligence covers the seller's accounts, tax returns, NHS contract performance, associate agreements, equipment ownership, property lease terms, and pension liabilities. Missing a single item can cost you tens of thousands of pounds after completion.
This guide sets out a practical checklist for financial due diligence on a dental practice. It is written for practice buyers, not generalist business owners. Every section uses UK dental facts and figures for the 2025/26 tax year.
Why Dental Practice Due Diligence Differs from a Standard Business Purchase
A dental practice is not a corner shop or a software company. Its value depends on factors that do not appear in standard company accounts. These include the stability of NHS contract income, the enforceability of goodwill, the treatment of associates as self-employed, and the condition of clinical equipment that qualifies for capital allowances.
Generalist accountants often miss these points. A dental practice purchase requires someone who understands UDA contract mechanics, the NHS Pension Scheme sections, and the VAT exemption rules under Schedule 9 Group 7 of VATA 1994.
The checklist below is organised into six workstreams. Each one addresses a specific risk area that commonly arises in UK dental practice purchases.
1. Seller Accounts Review: What to Look For
The seller's accounts are your starting point. You need at least three years of full accounts, not just tax summaries. For limited company practices, request management accounts for the current year as well.
Revenue Composition
Separate NHS income from private income. For NHS contracts, check the number of UDAs delivered versus the contracted UDAs. A practice that consistently under-delivers UDAs may face clawback or contract renegotiation. Over-delivery can also be a risk if the contract value does not increase proportionately.
For private income, ask for a breakdown by treatment type. High reliance on cosmetic treatments (tooth whitening, veneers) carries more revenue volatility than routine check-ups and hygiene. Cosmetic work can also be standard-rated for VAT, which affects the practice's VAT position.
Associate Costs
Associate fee splits typically range from 40% to 55% of gross fees. Check that the seller's accounts reflect the actual split paid, not a standard assumption. If associates are treated as self-employed, verify that the working arrangements match self-employment status under HMRC's tests: control, substitution, mutuality of obligation, financial risk, and integration. A BDA model associate agreement does not guarantee self-employment status. HMRC and tribunals look at the facts, not the paperwork.
Staff Costs
Review payroll records for all employed staff. Check that employer NI (15% on earnings above £5,000 per year in 2025/26) and pension contributions are correctly accounted for. Spouse employment is a common area where HMRC challenges deductions. The spouse must be paid a genuine market rate for genuine work.
Other Overheads
Look for large or unusual expenses: lab fees, materials, rent, rates, insurance, CPD costs, and professional subscriptions. Compare these to industry benchmarks. A practice with lab fees significantly above the norm may have a high proportion of laboratory-intensive private work, which affects both profitability and VAT treatment.
2. NHS Contract Verification
The NHS contract is often the most valuable asset in a mixed or NHS-heavy practice. Yet many buyers rely on the seller's word about UDA values and contract terms. You need to verify directly with the relevant NHS body.
UDA Values and Volumes
UDA rates vary by individual contract and region. The England average is roughly £25 to £35 per UDA, but individual contracts range from £15 to £45 or more. Wales and Northern Ireland use different contract types with different unit values. Scotland uses the Statement of Dental Remuneration (SDR) item-of-service fees, not UDAs.
Request a copy of the contract from NHS England (or the equivalent body in Wales, Scotland, or Northern Ireland). Check the contracted UDA volume, the value per UDA, and any recent variations. Ask about clawback history. A practice that has faced repeated clawback may have a contract at risk.
Performers' List
Confirm that all dentists providing NHS treatment are on the Performers' List. If a key associate or the principal is not listed, the practice cannot deliver NHS services lawfully. This is a due diligence item that can stop a purchase dead.
NHS Pension Liabilities
The NHS Pension Scheme has three sections: the 1995 section (closed to new members), the 2008 section (closed), and the 2015 CARE section (current). The McCloud remedy means members who had benefits in legacy schemes between 1 April 2015 and 31 March 2022 can choose at retirement which scheme rules apply to that period.
If the practice employs associates or hygienists who are in the NHS Pension Scheme, the practice has employer contribution obligations. These are not P11D-reportable benefits, but they are a real cost. Check that the seller has been paying the correct employer contributions. Any underpayment could become your liability after purchase.
3. Goodwill Valuation and Tax Treatment
Goodwill is typically 60% to 80% of the total practice purchase price. Valuation methods include earnings-based multiples (commonly 0.6 to 1.4 times adjusted EBITDA, depending on NHS/private mix and region) and rule-of-thumb percentages of fee income (roughly 25% to 60% depending on practice type).
Tax Relief on Goodwill
If you buy the practice through a limited company, goodwill amortisation gives tax relief at 6.5% per year for qualifying goodwill acquired after 1 April 2019. Goodwill purchased between 8 July 2015 and 31 March 2019 generally has no tax relief. This is a common trap: buyers who assume they will get relief on all goodwill may be disappointed.
Section 162 Incorporation Relief
If you are buying the practice as an unincorporated business and later incorporating it, Section 162 of TCGA 1992 can defer CGT on goodwill when the whole business is transferred to a company in exchange for shares. This requires careful structuring. A dental-specialist accountant should review the plan before exchange.
4. Property and Lease Due Diligence
Many dental practices operate from leased premises. The lease terms directly affect the practice's value and your future costs.
Lease Assignment
Check whether the lease is assignable to you. If the landlord has a right of veto, you may need to negotiate consent. Ask about rent review clauses, service charges, and repairing obligations. A full repairing and insuring (FRI) lease can add significant costs for a building with clinical fit-out.
Structures and Buildings Allowance
If the practice premises were constructed or acquired after 29 October 2018, you may qualify for Structures and Buildings Allowance (SBA) at 3% per year straight-line on qualifying costs. This is separate from plant and machinery allowances on dental chairs, compressors, X-ray units, and other fixtures.
Capital Allowances on Fixtures
Dental chairs, lights, compressors, suction units, autoclaves, and X-ray machines (including OPG) typically qualify for the Annual Investment Allowance (AIA) at £1,000,000 per year. But when buying a practice with existing fixtures, you need a Section 198 election under CAA 2001 to agree the value of those fixtures with the seller. Without it, you may lose the right to claim allowances on them.
5. VAT and Tax Compliance
Dental treatment by a registered dental professional is exempt from VAT under VATA 1994 Schedule 9 Group 7. This includes both NHS-funded and privately paid treatment. But purely cosmetic treatments without a medical purpose can be standard-rated. Tooth whitening is a known borderline case that HMRC scrutinises.
VAT Registration Status
Check whether the seller is VAT-registered. The registration threshold is £90,000 (raised from £85,000 on 1 April 2024). If the practice is below the threshold but you expect to exceed it after purchase, factor in the administrative cost of VAT registration and the potential impact on private fee pricing.
Partial Exemption
If the practice is VAT-registered and makes both exempt (dental treatment) and standard-rated (some cosmetic) supplies, it falls into partial exemption. This limits the amount of input VAT the practice can reclaim. Review the seller's partial exemption method and check whether HMRC has raised any queries.
Corporation Tax and Dividend Planning
If you buy the practice through a limited company, corporation tax rates apply: 19% for profits up to £50,000, 25% for profits above £250,000, with marginal relief in between. Dividend tax rates are 8.75% (basic rate), 33.75% (higher rate), and 39.35% (additional rate), with a £500 dividend allowance for 2025/26. Your profit extraction strategy should be modelled before you complete the purchase.
6. Hidden Liabilities and Post-Completion Risks
Some risks only surface after you take over. Due diligence should identify them before exchange.
Indemnity Claims History
Ask the seller for their indemnity claims history (MDU, Dental Protection, MDDUS). A history of claims may affect your own indemnity premiums or your ability to get cover. It can also indicate clinical or administrative weaknesses in the practice.
CPD Compliance
The GDC requires 100 verifiable hours of CPD over five years. If the seller or their associates have not maintained records, the practice could face regulatory action. This is a soft risk but worth checking.
Employment Tribunal Risks
Ask whether the practice has any ongoing or threatened employment claims. Under TUPE regulations, you inherit the seller's employees on their existing terms and conditions. Any tribunal liability transfers to you.
Data Protection
The practice holds sensitive patient data. Check that the seller has appropriate GDPR policies and that there have been no data breaches. An ICO fine can be substantial.
Building Your Due Diligence Team
Financial due diligence on a dental practice purchase is not a solo exercise. You need a team that includes:
- A dental-specialist accountant who understands UDA contracts, goodwill tax treatment, and capital allowances.
- A solicitor experienced in dental practice sales, including lease assignment and NHS contract transfer.
- A dental valuer or practice broker who can provide an independent valuation.
- Your bank or lender, if you are financing the purchase.
Each team member should receive the same information and coordinate their findings. A missed item in one workstream can affect another. For example, an incorrect UDA volume assumption affects the valuation, which affects the goodwill calculation, which affects the tax relief available.
Practical Next Steps
If you are considering a dental practice purchase, start your due diligence early. Request the seller's accounts, NHS contract, lease, and equipment list at the same time as you make your initial offer. Do not wait until you have exchanged contracts.
Use a structured checklist like the one above and tick off each item as you verify it. If something does not add up, ask for clarification. If the seller cannot or will not provide evidence, that is a red flag.
For a downloadable version of this checklist, see our Practice Purchase Financial Due Diligence Guide. You can also use our Practice Valuation Calculator to test different assumptions about UDA values, goodwill multiples, and EBITDA adjustments.
Every practice is different. The figures and rules in this article are general guidance for the 2025/26 tax year. Your specific situation may require different treatment. Speak to a dental-specialist accountant before committing to any purchase.
Our team at Dental Finance Partners works exclusively with UK dentists. We can review the seller's accounts, model the tax implications of different purchase structures, and help you negotiate from a position of knowledge. Contact us for an initial discussion.