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.
Secretaries and assistants
When starting out in private practice, it is often the case that you engage your NHS secretary, who may carry out private secretarial work for you and other colleagues engaging in private practice.
The same applies to assistants you may work with in the NHS, whom you may also engage to help you in carrying out private work.
Often these arrangements are loose when it comes to formal agreements, the parties perhaps thinking it represents a commitment to have a contract. But a written agreement helps protect both parties from HMRC challenging the status of the arrangement.
Determining ‘status’ is a term used by HMRC and is important, as it looks at whether the terms between two parties are one of employment, self-employment or contracting.
It is often assumed that status is determined by simply agreeing to not be an employee and an invoice being issued by the secretary.
That may be fine based on the circumstances in question, but, conversely, it may be leaving the engaging party with potentially significant risk of financial loss through penalties, interest and surcharges for not operating a PAYE scheme and work-based pension scheme.
A rare but significant risk is a secretary or assistant claiming that they thought you were deducting their tax and National Insurance and they were your employee.
This situation can be difficult to navigate and the other party can twist the circumstances to fit their claim, making it expensive to defend. Thankfully, there are pro-visions to recover tax directly from an employee in this situation.
The best way to avoid any issues is to use the HMRC check employment status for tax (CEST) tool available on HMRC’s website. This tool asks pertinent questions for determining employment status and should always be discussed with your accountant if anything is unclear.
Related to the above employment status is anti-avoidance tax legislation known as IR35. In more recent times, it has been used almost interchangeably with the term ‘off-payroll working’.
It is not new, as it has been around since 1999, but has largely been an ineffective piece of legislation, as working arrangements are often complex.
IR35 was put in place due to individuals who were largely employees forming limited companies to carry out work which was a tax-saving for the employee and saving National Insurance for both employee and employer.
The use of an intermediary business in this way was targeted by IR35, which has reared its head in recent times, as the risk of getting the status wrong is shared between both contracting parties, which has given the legislation more focus.
HMRC would clearly like to establish an employment relationship, as it creates National Insurance payable, but the vast majority of private practice working arrangements do not fit under this status and are outside the scope of IR35.
The private hospitals have all had to consider their trading relationships with consultants carrying out private work and they will ask you to complete paperwork to allow them to complete a status determination statement, or SDS as it is known.
It is important that you keep all of the relevant paperwork to support your IR35 status. It is always a good idea to speak with your accountant when preparing your answers to ensure you understand each question.
Working in groups
It is common for consultants to work in groups, which is a popular way of sharing risk, supporting each other and providing opportunities.
Often the group is comprised of work colleagues and friends, which is always a risk to mix business and friendship, so it is extremely important that you set things out formally from the start to avoid any issues later.
The most common way of trading in a group is via a limited liability partnership, but a limited company is also often used.
In the case of a limited liability partnership, a member’s agreement is extremely important, as it sets the scene for how the arrangement will work in practice and covers the important matters such as sharing profit, entry/exit and other key areas.
The equivalent of a member’s agreement for a company is a shareholder agreement which is equally as important.
Business with spouse
It can be common for spouses to be involved in private practices in various capacities. Even though it may seem unnecessary to formally document matters, it is always a good idea to have everything set out whether they are employed or you are a partnership or perhaps joint owners of a limited company.
Unfortunately, it is a fact of life that not all marriages last and having something to refer to should the worst happen will save both parties a lot of financial pain arguing matters through solicitors.
Formalising working and financial arrangements is a normal part of running a successful and risk managed business. More often than not, the required paperwork does not take much time or money to put in place but can avoid a lot of potential financial pain.