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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.

The Basics

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.

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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 individuals

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%.

For companies 

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%.

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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.

Trivial Benefits

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:

  1. Electric vehicles and limited companies whereby there are tax advantages
  2. 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
  3. Extracting dividends before the additional 1.25% additional tax kicks in next year
  4. New equipment may be entitled to super accelerated capital allowances of 130%
  5. If not already done so, you may look at incorporation of your private practice
  6. For those of you with limited companies, check if you have alphabet shares

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In private practice, it can be common to think that your accounting system is just to record your activity to ensure an accurate computation of taxes – but it contains a wealth of useful information to help run your business. Ian Tongue looks at accounting systems and how to get the most from them.

What is an accounting system?

Systems can vary between businesses, but the key thing is that it records the financial activity of the business and that the transactions are complete and accurate.

From this source, your accountant can extract the information they require to prepare year-end accounts and tax. But there is plenty of useful information available real time to ensure you run your business as efficiently and profitably as possible.

Systems can range from simple spreadsheets to sophisticated computerised accounting packages. Often, consultants use a clinical management software package to run their business and many of those have accounting functions built in, although these would not be of the same functionality as a full-blown accounting software package.

Usually a full accounting package is not required and the necessary information will be available from the spreadsheets or clinical management system.

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Boris Johnson made his announcement yesterday of the additional National Insurance levy to be paid to help the NHS and fund Social Care and in addition added 1.25% to the rate of dividend tax payable.

Leaks from Whitehall centred around the intended increase in National Insurance that will take effect from April 2022 and how it broke the Government manifesto promise of no tax nor national insurance increases during the term of this Government.

The exact details of how the increment will be applied between employers, employees and self-employed is yet to be published.

What was below the radar was the intended increase in the rate of dividend tax, again from April 2022. The previous 7.5% for basic rate tax payers will increase to 8.75% , with higher rate increasing from 32.5% to 33.75% and upper rate increasing from 38.1% to 39.35%.

Hopefully, the additional monies generated will alleviate the backlog of consultations and operations and go a long way to improving your working environment. Similarly, for social care any additional money is badly needed.

Although much was publicised about breaking the manifesto promise everyone was acutely aware that money was needed to be found to help the NHS and Social Care to recover from the pandemic.

On 27 October 2021 Rishi Sunak will give his half yearly budget update and no doubt further leaks will surface prior to any announcement.

The main contents of the Budget, like most ministerial announcements these days, were leaked well in advance of yesterday’s announcement by the Chancellor, Rishi Sunak. He continues with his well-publicised aim to keep to the government manifesto promises and set the UK back on track to reduce its indebtedness arising from the pandemic.

Below is a summary of the main points that we understand will impact you.

The Coronavirus Job Retention Scheme - Extended

The Furlough Scheme has been extended until 30 September 2021 and the level of grant available to employers under the scheme will remain the same until 30 June 2021.

From July 2021, the Government contribution will reduce to 70% dropping down to 60% in August 2021.

To be eligible for the grant employers must continue to pay their furloughed employees at least 80% of their wages, up to a cap of £2,500 per month for the time they spend on furlough.

Income Tax Thresholds

The personal allowance will increase to £12,570 and remain frozen at this level through to the end of 2026. The basic rate tax threshold will increase to £37,700 and will also remain frozen at this level through to 2026.

Different rates and allowances apply to Scotland and can be found here

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On the 28th January the Department of Health and Social Care published their consultation on the proposed amendments to the NHS Pension Scheme.

The full detail can be found here 

The proposed amendments include an important and positive step forward in relation to final pay control charges with some new exemptions and key allowances for non-GP Partners such as Practice Manager and Nurse Partners. 

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