When dealing with patients, doctors are all used to keeping copious notes, but when it comes to the financial paperwork, they can often be lacking. In many cases, financial arrangements can work themselves out, but if things go wrong, you can quickly be into a costly situation.
Partner, Ian Tongue looks at the areas where keeping adequate paperwork is essential in the commercial world.
Accounting records can take many forms and in recent years there has been a push to use digital packages and store records electronically.
There is nothing wrong with manual records, but changes to the tax system known as ‘Making Tax Digital’ will largely force businesses into keeping electronic records, as more frequent reporting of information will be required.
HM Revenue and Customs (HMRC) requires you to keep ‘adequate’ accounting records, but does not specify exactly what that means. From a practical perspective, this means that your records allow you to disclose a complete and accurate position of the business.
As a minimum, your system must record:
- Income earned;
- Income received;
- Bad debts.
A private practice should always be run through a separate bank account. For those that are VAT-registered, a higher standard of record-keeping is required.
Partner Ian Tongue presents a recap on Value-Added Tax (VAT) and how this may affect your private practice.
VAT is a tax we are all familiar with, as it is paid on the majority of the goods and services we buy.
Sometimes an invoice will separate out VAT, but in much of our day-to-day expenditure the price we pay is inclusive of VAT, particularly in the retail world.
When running a business, it is normal to have to be VAT-registered, but within the medical profession it is less common for private practices.
The reason for this is that medical services are usually exempt from VAT, meaning that VAT does not need to be considered. But there are some exceptions which this article considers further.
It’s not uncommon for doctors in private practice, especially those who are new to running a business, to run into financial problems. Sandison Easson's Partner, Ian Tongue, picks out some key areas to be aware of and shows how to stay out of trouble.
With the busy demands of a consultant carrying out private work, it is easy to encounter financial pitfalls that can result in significant financial pressure or loss.
Let's look at some of the more common areas to focus on to avoid a potentially costly mistake.
Running a business
One of the most common problem areas is not treating your private practice as a business.
It may sound simple, but the career path towards carrying out private work rarely sees you paid outside of the PAYE system.
Therefore, patients and insurers paying you without tax deducted – and robust chasing systems when they don’t pay or part pay – are essential to ensure that you are not working for free.
All private practices are required to maintain adequate accounting records and, as a minimum, this should enable you to understand the financial position of the practice at any time.
Records of work undertaken together with details of when payment was received are the absolute minimum required.
Likewise, expenses need to be meticulously recorded to ensure all your spending is included thereby minimising your tax liability.
Where payment is not received, systems to investigate and chase this money are required to avoid financial loss.
It is surprising how many consultants write off debts because they left things too long and didn’t deal with things at the time.
With the new tax year almost upon us, it is a great opportunity to ensure you have utilised your tax allowances, met important deadlines and your current circumstances are tax-efficient. Our Partner, Ian Tongue, looks at some of the important areas you should be considering.
There are several tax allowances that are lost if not used within a specific tax year. One of the most common ones is the ISA allowance for savings, which allows you to shelter from tax £20,000 per taxpayer per tax year. If you have not yet used your allowance, discuss this with your financial adviser. For individuals, there is a Capital Gains Tax annual allowance, which is lost if not utilised annually and is currently £12,300 for individuals. Therefore, if you are considering disposing of any assets or have high gains that are unrealised on shares, you may want to consider whether utilising the allowance would save you money. A UK taxpayer is allowed to pay into a pension up to £2,880 – £3,600 with the tax credit – in relation to a pension for their spouse or children. This would not form part or your £40,000 pension annual allowance. They may not thank you for it now, but paying this into a pension from an early age for your children should provide them with a significant pension in later life. For those with wealth in excess of the inheritance tax threshold, you may wish to consider giving away part or your estate, and £3,000 can be gifted in total to one or more persons which can actually be carried forward, so this would be £6,000 if you have not previously done this. Therefore, between a couple, you may be able to give away £12,000 without this being sensitive for inheritance tax. If you are thinking of paying into a pension and making gifts, speak to your accountant to ensure that you are within the acceptable limits for inheritance tax purposes.
This is usually the most significant decision when arranging your affairs to be tax efficient. Many consultants use limited companies for their private practices and, no doubt for a substantial number, this will still be appropriate. However, for some, the new tax changes relating to dividends from April 2022 and corporation tax increases from April 2023 will result in significantly more tax being paid and alternatives may need to be considered. One of the key factors here is whether you tend to draw out of the company the majority of the profits. If this sounds like you, then speak with your accountant to see if your current arrangements are appropriate for your circumstances.
Every year, you should receive a set of accounts from your accountant that summarise the financial activity of your practice. For many, the figures can be a challenge to understand, so Ian Tongue (left) looks at the key points of your annual accounts and some useful pointers on how to interpret them.
Accounts or financial statements normally comprise of a profit and loss account and a balance sheet and both are prepared up to a financial year/period end. The profit and loss account can also be referred to as an income and expenditure account and both are often interchangeably used, although subtly different. These are a summary of the income and expenses of the practice, which then result in a profit or loss for the business. The balance sheet is a snapshot of the assets and liabilities of the business as at the financial year end date and, for most private practices, can be regarded as the net worth of the business. The way in which your accountant prepares the figures is governed by accounting standards as well as tax legislation and often these can be different – i.e. the accounting treatment differs to the tax treatment. This is the reason why often your taxable profit from your private practice is different to your accounting profit. The financial year-end is normally the end of a month and, for ease, many businesses use the tax or fiscal year-end to prepare their figures up to. There can be cash flow advantages to not having a financial year-end the same as the tax year end and your accountant should explain the pros and cons of adopting this. One very important part of accounting standards and principles is what is known as the accruals basis. In simple terms, this means that you disclose your income on the basis of when you earn money and not when you are paid. When it comes to expenses under the accruals basis, you claim costs on the basis of being incurred rather than paid. For smaller private practices with earnings below the VAT registration limit – currently £85,000 per year – a receipts basis is possible, but generally it works out best to go with the accruals basis from the start to avoid having to transition from one basis to the other later on.
Many of you that had been transferred into the 2015 NHS Pension Scheme are aware of the 2015 Remedy also known as the McCloud remedy whereby you will be returned to the 1995 or 2008 scheme (if you had opted in the past to join the 2008 scheme) up to 31 March 2022 after which future pensionable service for all will be in the 2015 scheme.
The Scottish Public Pension Agency (SPPA) has dedicated webpages detailing the background of who is affected and what course action will be undertaken. By 1 October 2023 they anticipate to have implemented all the necessary changes. Click here to view the site.
This will be a Herculean task and hopefully free of errors or omissions.
To safeguard against any errors or omissions we would suggest the Annual Benefit Statement that is available each year and for previous years are accessed, downloaded and saved.
These statements might be removed/revised from March 2022 onwards, if not earlier.
New Annual Benefit Statements will be prepared and by retaining old copies it at least allows you to check they have the correct pensionable service history, added years (where applicable) and pensionable salary at the end of each year of service.
If you have suffered an Annual Allowance tax charge the new Annual Benefit Statements allow one to check or at least estimate any revised growth and whether a refund of tax is due.
Financial measures put in place during the pandemic made it inevitable the Government would make changes to the tax system to reduce its debt by seeking higher taxes from individuals and companies. With private medicine now seeing a surge in demand, Partner, Ian Tongue believes it is a good time to consider whether your current trading structure is still tax-efficient.
The main changes
For political reasons, the headline rates of income tax were left alone, but National Insurance (NI) rates for individuals and employers are increasing from 1 April 2022.
Politically, NI is portrayed as money which pays for health and social care, but clearly those services cost more than the NI paid and it is a tax in all but name.
The increased NI will be paid on both employment earnings and the profits of the self-employed. Additionally, an employer also pays more. The increase is 1.25% across the board.
Recognising that many choose to extract funds by way of dividends (investment income) rather than employment or trading income, from 1 April 2022 the income tax rates on dividends also increase by 1.25%.
The biggest tax changes relate to limited companies, as corporation tax rates will see a significant increase from 1 April 2023.
Instead of there being a flat rate of 19% payable on all earnings, the tax rate payable will be 19% on the first £50,000 of taxable profits increasing to 25% for those earnings more than £250,000.
The jump in these rates creates a zone between £50,000 and £250,000 where the effective tax rate is 26.5%.
This seems excessive, but the principle here is to gradually increase overall tax paid such that you approach a rate of 25% as you near £250,000 of earnings.
For example, earnings of £200,000 would attract £50,000 of tax at 19% and £150,000 at 26.5% which is £49,250 of tax on £200,000 of earnings – an effective rate of 24.6%.
Hopefully, this year staff Christmas parties can go ahead and thoughts turn once again to gifts for staff.
Whether you are a partner in a GP practice, a consultant with a limited company, or practicing as sole practitioner or indeed as a partnership, so long as you have employees, which may include yourself, say, a director of a limited company or family member, then carrying on reading what benefits are available.
Social Functions & Parties
The Revenue allow social functions and parties that cost £150 or less per person. The cost is tax deductible for you as the employer and not taxable on your staff.
To be eligible it must be available to all staff and be an annual event like Christmas or summer barbecue.
It need not all be spent at once and can be spread to other functions and if for some reason Covid hits Christmas again it can apply to online or virtual parties.
More details can be found here.
In addition to the above, a tax deduction is allowed for gifts given to your staff, provided they cost £50 or less to provide, are not a reward for their work performance and are not included in any contract. These gifts are not taxable upon your staff. Gifts could include non-cash vouchers that can be used for a turkey or a Christmas hamper and even alcohol. Normally, the Revenue restrict tax relief on alcoholic products for businesses.
Major online platforms provide gift vouchers.
Multiple vouchers can be given to an employee in a year with the only restriction being directors of ‘close’ companies being limited to £300 in any year.
A ‘close’ company would include the majority of practitioners with limited companies.
More details can be found here.
The partners, associates and all staff at Sandison Easson & Co hope that the above will bring some festive cheer and should you have any questions please feel free to get in touch.
Sajid Javid has agreed to GP’s delaying the declaration of earnings over £150,000 after mounting pressure from GP bodies.
Thankfully, sense has prevailed, at least for the short term. This controversial requirement to published earnings over £150,000 was seen by many, including professional advisors, as unnecessary intrusion of privacy allowing the tabloid press to fuel more unwarranted anti-doctor sentiment.
The requirement to declare was originally published on 5 October 2021 and led to confusion amongst many accountants as to whether outside earnings was to be declared also as the guidance did not correlate with the published Statutory Notice.
The requirements to publish earnings, its timing and guidance were ill conceived.
The partners and associates of Sandison Easson & Co are more than happy to assist in whatever way possible and can be contacted below.
The Budget announcements were FAB in the sense that the Fizz of champagne would be taxed less, Airport passenger duty for domestic flights would be reduced and the tax on Banks effectively cut compared to other businesses.
Other main beneficiaries from the Budget were the NHS getting an additional £5.9 billion and individuals on income support by way of the universal credit taper.
Most of changes that will affect you next year and beyond had already been announced previously by way of additional 1.25% national insurance and dividend tax to take effect from April 2022 and the corporation tax rates increasing from 19% to 25% for investment companies from April 2023 and trading companies rate of corporation tax increasing from 19% to 25% in a step wise fashion as profits progress from £50,000 and under to £250,000 and over.
Thankfully, entrepreneurial relief for disposal of business assets and winding up of companies remains unaltered as do the rates of capital gains tax and inheritance tax.
In the run up to Christmas, thoughts will be diverted to obtaining presents that may be difficult to source what with lorry driver shortages and issues of containers ships unable to offload goods. Once the present list has all hopefully ticked off then some attention can be addressed to tax planning.
There are still plenty of tax planning opportunities ranging from:
- Electric vehicles and limited companies whereby there are tax advantages
- Setting up PAYE scheme for spouse and children who already undertake work for you. You never know furlough may be reintroduced but separate from that there are benefits from increasing State Pension entitlements and other benefits from such schemes
- Extracting dividends before the additional 1.25% additional tax kicks in next year
- New equipment may be entitled to super accelerated capital allowances of 130%
- If not already done so, you may look at incorporation of your private practice
- For those of you with limited companies, check if you have alphabet shares