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.
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%.
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.
One of our partners Ian Tongue is a regular contributor to Independent Practitioner and this month he covers 10 Financial Considerations for Succeeding in Private Practice in light of COVID19.
You can read his full article here
Remember, if you haven't paid your 31 July 2020 tax payment yet, you do not need to make payment until 31 January 2021. HMRC have been sending out the usual 31 July 2020 payment slips but have automatically changed the due date for payment to 31 January 2021.
If you would like to discuss your private practice please feel free to contact us
In our previous private practice post we set out some points for you to consider as the lockdown eases and there is some return to normality. This is available on our website.
Independent Practitioner Today has also kindly published our pointers here.
Towards the end of the article we highlighted some tax planning opportunities and advice that will be set out below and for which further detailed guidance can be provided on a personal basis.
The tax planning will be split between those who practice as individual practitioners or in partnership say with their spouse or partner and those of you that have limited companies.
If you have a 31 March or 5 April financial year end then for the year 2020/21 the first part of the year will have seen little or no private practice activity.
The Revenue will allow the 31 July 2020 tax payment (your second payment on account for the tax year 2019/20) to be deferred until 31 January 2021.
With the NHS and private hospitals triggering the de-escalation clause to allow some private work and NHS elective surgery, we take a look to the future from a financial perspective of how private practice can survive during the pandemic.
Income for all practitioners has taken a huge hit in the last couple of months and will continue over the coming weeks.
New protocols to deal with patient consultations, investigations and procedures will mean less patients can be seen, investigated and operated on within the time span compared to pre COVID 19.
This means less income unless fees are reassessed upwards.
The private hospitals by way of the NHS block booking of their facilities effectively received a subsidy to assist them over the 3 month period that in most cases saw little use of their facilities.
The private hospitals will be acutely aware of the huge list of NHS patients needing treatment and will no doubt seek contracts to treat them for the NHS. This will provide an opportunity for additional private work but at what rates?
In this months' publication of Independent Practitioner, one of our partners, Ian Tongue, explores some of the more common ways consultants work together.
You can read his article here