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Notes of points for consideration re Doctors from SIG meeting – March 2002
Tax payments
For most GP Practices with a year end at 31 March, the Accounts
to 31 March 2002 will determine the tax liability for the 2001/02
tax year ending on the 5 April 2002.
Prior to the introduction of the Self Assessment rules in 1997, a number of Practices had a year end close to 30 June, and for a Practice which has retained that year end, the Accounts to 30 June 2001 will determine the 2001/02 tax liability.
A GP in Practice in 2000/01 will have been required to make 2001/02 Payments on Account (PoA) on 31 January 2002 and 31 July 2002, but a new Partner is unlikely to have made any PoAs.
The balance of the 2001/02 tax liability becomes due by 31 January 2003, and at the same time the first 2002/03 PoA also becomes due, a particular problem for new Partners.
If taxable income increases, this typically gives rise to 40% extra tax for 2001/02, and an increase in the 2002/03 PoA of 20%. While the top tax rate remains at 40%, both of these are payable in January 2003 which means the tax payments will increase by 60% of the increase in income.
Since 1997, tax bills have been personal liabilities but early warning of tax liabilities and a tax reserve retained in the Practice account can still prevent a cash flow problem.
Tax after retirement
A Doctor who retires on 31 March 2002 will have made a 2001/02
PoA on 31 January 2002, but still have a PoA due on 31
July 2002 and a balancing payment due 31 January 2003.
This outstanding liability is often overlooked and comes as an unwelcome
surprise.
It should always be remembered that part of all Self Assessment tax liabilities are paid after the tax year in which the income is earned or received.
Inland Revenue Receivables Management
The Collector of Taxes was given a new title in April 2001, and now has a
more aggressive approach to tax collection, nationally and locally – sorry we
can do little more than warn you to try to make tax payments when they fall due!
Doctors are being subject to Tax Investigations
Under Self Assessment the Inland Revenue have powers to investigate Tax
Returns at random, although most investigations are the result of unusual
figures.
It is possible to obtain tax investigation insurance. It is important to read the policy details carefully – there are a normally a number of exclusion clauses.
As a Practice we do not market this insurance, but details are available on our website at www.fowles.co.uk/TaxInvestigations.htm.
In general, good records and supporting evidence will result in an enquiry quickly being brought to a close.
Problem areas
The Inspector of Taxes gets particularly concerned with any cash
transactions and estimates. GPs
should have an effective method of recording all cash income, in particular any
Passport signing fees or “Ash cash”.
As well as any estimated expenses, estimates of private mileage or high estimates of business use of home phone attract attention. Recording business mileage using a form such as our www.fowles.co.uk/MileageRecord.htm is not particularly time consuming but will be a strong defence. The business proportion of mileage has reduced dramatically where deputising services are used.
Accounts and fees
Every well managed business is concerned to keep costs down.
Our fees are primarily based on the time we require to produce Accounts,
and providing us with detailed, well maintained records is very cost effective.
We like to receive –
o An analysed cash book of Practice Income (or computer equivalent)
o Supporting schedules of NHS fees, reimbursements, and other income
o An analysed cash book of Practice Expenses (or computer equivalent)
o Documentation in support of expenses, including photocopies of invoices where the originals have been submitted for grants
o A reconciliation of the cash book balance with the bank statements
o Petty cash records (if any)
o Details of amounts owed to the Practice at the year end (including schedules of fees received later)
o Details of amounts owed by the Practice at the year end.
We generally find that records which are written up continuously throughout the year are significantly more accurate than those written up occasionally (and in extreme cases once per year).
Details of individual GPs personal expense claims are sometimes not readily available. Since these have to be included in the Partnership Tax Return this delays submitting the Returns of all the Partners. It is important to be able to substantiate the expense claims in respect of home phone, mobile phone, books and course and other items.
The year end for most individual GPs and GP Partnerships is 31 March. If we are lucky the records are complete by June, and we would aim to be discussing draft accounts and potential tax liabilities during the summer.
Limited Companies
Where there is significant non-NHS income, there can be a tax saving by
routing this through a Limited Company. If
this is done, it is important that completely separate records are maintained,
and appropriate expenses correctly allocated.
Pension contributions
Those employees of hospitals and other members of the employed service NHS
pension scheme receive 1/80th of final salary for each year of
employment and therefore after forty years will have 50 % of final salary plus
tax free lump sum of three times that amount.
This can include GPs with hospital appointments.
GP Practitioners generally contribute to a separate dynamised NHS pension scheme. Typical superannuable earnings of £50,000 at the contribution rate of 6% gives an annual contribution rate of £3,000. Over forty years this generates a pension of £25,000 per annum plus £75,000 tax free lump sum.
It is unusual to achieve 40 working years, so GPs can buy added years. If the usual 6% contribution funds 36 years, the pro rata contribution rate for another 4 years would be an added 0.67% in total. The actual contribution rate required is 1.09% for each year, and other alternatives should be considered. In certain circumstances it is possible to stop buying added years.
Because it is a dynamised scheme, the first year superannuable income of a GP is vital and therefore new GPs should try to achieve a full profit share in the first year even if it means a capital payment to the other partners.
Contributions under the above scheme will fund a pension of approximately 50% of final salary in retirement. This is reduced by 25% for retirement at age 55, or by 40% at age 50.
A GP retiring at 60 will find he has more leisure time than previously, and only half the income. There may be non-superannuable earnings that, after deducting expenses, may permit a Personal or Stakeholder pension contribution to be paid. This is an investment and the proceeds are only limited by the investment performance, not by the final salary.
It is still appropriate to use the A9 concession especially every other year and relate back the premiums that are paid in the second year. The premiums may now have to be paid annually because of the difficulty of relating back to February and March payments. Typically the tax relief foregone every other year is 40% of £3,000, but it can enable tax relief of 40% on £26,250 to be obtained.
Stakeholder contributions
Although intended for employees who would
not normally contribute to a pension scheme, Stakeholder schemes can be
applicable to a GP as above, and also for a spouse, children or grandchildren.
Even for a non working spouse or child, contributions up to £2,808 can
be made and will attract a tax relief contribution of £792.
Cost Rent and Notional Rent Calculations
The allowable costs under a cost rent scheme are largely fixed by Health
Authority criteria but are affected by a location factor based upon the Building
Cost Information Service (BCIS) annual figures for local differences.
It can be important to get agreement from the District Valuer (DV) as to
the value of a green or brown field site before any proposals are put forward as
DVs have been known to quote different values for the same site.
Unlike most other professionals they are not restrained by a conflict of
interest and can be called upon to advise both sides, i.e. a selling authority
and the authority agreeing the cost rent.
DVs operate in their own individual areas and are not truly independent so their suggested notional rent should not be accepted without careful consideration. It can be worthwhile to consult a qualified Chartered Surveyor to agree the notional rent. There are specialist firms with experience of negotiating across the country.
The decision to change from cost rent to notional rent will depend upon the notional rent that can be negotiated with the DV and is a one-way decision. Technically the notional rent assessment is based upon a theoretical fifteen year term with three yearly upward only rent reviews, internal repairing only, vacant and to let, exclusive of rates and with a right to assign. The assumption is made that other suitable planning permission would be available.
Borrowing
The recently introduced “offset” accounts, such as those from
Intelligent Finance, the Woolwich Open Plan and Virgin One accounts, are
particularly attractive to higher rate taxpayers.
Where tax relief is not available on borrowings, such as a domestic mortgage, reducing the interest paid will generate a much higher rate of return than interest received net of higher rate tax.
Where the opportunity exists, a domestic mortgage or other borrowing should be paid off as quickly as possible in preference to repaying a loan to acquire surgery premises which qualifies for tax relief, normally at 40%.
Insolvency
Once virtually unheard of, insolvency of doctors is now occurring.
Owning a large house, two cars, paying school and college fees, a
commitment to buy into a practice premises can be a step too far.
Doctors have been tempted by “one low monthly payment” companies and consolidation loans. As for anybody else it is important to read the terms and conditions of these as they are not normally an appropriate solution and specialist advice should be sought.
Endowment policies
In respect of endowment policies it can be interesting to write to the
insurance company and ask for three values, the surrender value, the paid up
maturity value and the expected maturity value if premiums continue.
If it is decided that the policy is a poor investment and not to continue the policy, it will be necessary to consider replacing the life insurance cover before the policy is cancelled. This may be available from the same insurance company.
Inheritance Tax
GPs should consider their potential IHT liability and take appropriate
steps. They should have a Will and an EPA, and have life policies
written in trust. A nil rate band
discretionary trust will generally be appropriate to most GPs. Older GPs should consider using the annual gift exemptions.
Partnership agreements
Agreements should generally provide for health cover after one month because
typically doctors do not go sick for a long period of time.
After 12 months partnership agreements should provide for permanent
health insurance on which tax relief is not claimed on the premiums in order
that the proceeds are tax free. These
arrangements should allow for loan repayments if there is borrowing for surgery
premises.
New partners are sometimes reluctant to purchase into surgery premises at cost rent values and agreements should cover the replacement of a retiring partner’s interest in the property, taking into account the CGT taper relief rules.
Partnership agreements will generally need to be reconsidered in respect of profit sharing on transfer to PMS or the new GMS contract expected from April 2003 – see below.
PMS v GMS
GP services have traditionally been provided under an individual contracts
between doctors and the Secretary of State under the GMS regulations commonly
known as the red book. Remuneration
is based upon the size of list, seniority and certain items of service.
The NHS (Primary Care) Act 1997 introduced an amendment to Part 1 of 1977 Act so that primary care can be provided under PMS. The GMS regulations form Part 2 of the 1977 Act and therefore none of these regulations apply to PMS as such, because it is governed by a completely different section of the Act.
That is an over simplification because the basic National Service Framework (NSF) requirements are repeated in each PMS contract to the effect that services must be provided by appropriately qualified personnel etc. The point to be made however is that none of the GMS regulations apply in law to a PMS contract, and can be negotiated in a PMS contract.
The suggestion that all single GP practices would have to convert to PMS by 2004 has been withdrawn.
In principle PMS is an application for flexibility and not for additional funding although if additional services are being provided then additional funding may be available. In theory this is to be achieved without discriminating against those practices remaining in GMS and therefore only that part of the practice allowance, capitation fees and items of service which would normally apply to an equivalent GMS contract is available for the PCT to fund a PMS pilot.
There is an option under PMS to provide additional services. In this case it will be known as a PMS plus pilot, otherwise as PMS only. These are descriptions of the reality and not optional descriptions.
There is an opportunity to negotiate for growth funding either on new services or a skill mix and that is one of the big attractions of PMS.
Under PMS the individual doctor does not have a contract with the Secretary of State, the contract is between the practice and the PCT.
PCTs now have a much broader function as the commissioners of services, the original Health Authorities having been abolished from 1 April 2002. In many cases the provider of services will be the contract holder and that will be the practice. The individual doctor will become the performer or deliverer of the care.
This creates additional flexibility. A PCT could now own what are currently practice premises and employ salaried doctors. However, there is no reason why doctors cannot retain their independent contract status for tax purposes and therefore remain subject to tax under schedule D. Most will want to and it is not necessary to become salaried schedule E employees.
The phrase “Salaried Partner” is sometimes used. For the avoidance of doubt, this is not an employee and a Salaried Partner will be assessed to tax under schedule D and not treated as an employee.
Employed or Self Employed?
Under PMS there is the option to be employed or self employed.
It is necessary to bear in mind that the self employed get deductions for
expenses “wholly and exclusively” incurred for the purpose of the business
whereas employees only get deductions for expenses “wholly, exclusively and
necessarily” incurred.
The extra word necessarily means that training courses are only allowed if paid for by the employer and the only normal expense of an employee is their medical subscriptions. A GP who is self employed can take part of the ownership of the surgery which can be a worthwhile investment and attract business asset Capital Gains Tax taper relief.
New GMS contracts
GPs who chose to remain in GMS will be subject to a new contract from 1 April 2003 although full details of the contract are not yet available.
It is suggested that the direct contract with the Secretary of State will
not apply under the replacement for GMS but it will be a contract with the
replacement for the Health Authority. Apparently
the legislation for the replacement for Health Authority has not yet been passed
by Parliament and therefore the position is in limbo.
From 1 April 2003 there will be a Practice based contract with patients effectively worth an amount of money with some adjustment for deprived and rural areas. There may not be seniority payments, reimbursement of staff and possibly no need for an earnings review body.
The BMA are keen to negotiate for a national contract but with local flexibilities. The BMA do not negotiate under the PMS contracts. The new system should include quality payments but these are likely to be subjective.
There is a wish for doctors to share their technical knowledge. An element of cooperation has largely been achieved with the deputising services. There is an intention for doctors not to be seen as in competition for technical purposes although they may be in competition in terms of the service they provide to patients in order to increase their remuneration.
PCG’s are effectively being replaced by PCTs and the introduction of strategic health authorities.
Action required
The new contracts will involve a lot of business planning, the need to be
forward looking, possibly the need to generate private fee income and to
consider the position of what do I do if…?
How much will I earn if…?
Partnership agreements will need to be varied to reflect the new contract and to divide profits in an appropriate way, much more akin to commercial arrangements for other professionals.
Until the position is a little more settled it is probably too early to make final decisions, but it is helpful to start thinking about new arrangements – watch the press, Medeconomics, etc.!
Since these notes were written some details of the proposed "contract" have been published together with comments from the IGPA . We express no opinion on those comments.
Reminder - disclaimer applies. Please feedback your comments. This page was last modified 18 June 2002.