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GP PRACTICES in England are able to incorporate and trade as limited companies holding a GMS, PMS or APMS contracts and such GP incorporations have become increasingly popular over the past few years. Those that do are stepping into a largely untested minefield of tax, legal and accounting issues. Should GPs abandon their traditional partnership model in favour of the perceived benefits offered by a limited company? Should you believe the hype?

In today’s tax brief, Shipleys Tax looks at the some of the tax and accounting pitfalls facing GPs considering this route. It looks at why the current trend of the limited company model as being right for general practice is one that should be properly examined and tested, the perceived tax benefits having numerous side effects which many fail to consider when looking for an alternative trading model for NHS practices.

The attraction

Many advisers are increasingly advocating a limited company structure for traditionally partnership run GP surgeries. There are quite a few attractions that are bandied about:

• You will pay less tax – the company tax rate is 19%, the partnership is paying 40% and above
• You can get your spouse involved and use their tax bands too
• You don’t have to worry about VAT as medical services are exempt

Should GPs abandon their traditional partnership model in favour of the limited liability status offered by a limited company? Should you believe the hype?

In theory this may well be true, but in very limited circumstances and, as the saying goes, there is more to it than meets the eye. So, let’s look at some key headline issues.

You will pay less tax

This is the number one determining factor. It certainly is correct that it is easier to save tax and manage income by using a limited company, but this only works under certain circumstances and is more difficult than people realise. Under a company, the partners become employees and shareholders, and would typically extract profits either as salaries or through dividends. Dividends are taxed at lower rates than partnership profits (at certain income bands), however, once you factor in corporation tax of 19% (which is set to rise to 25%), the amount of income distributable to the shareholders tax efficiently becomes a much more complicated scenario. Whilst tax savings might be achievable, the problem is that partners in a practice may not have equal ambitions, so where one partner might wish to minimise tax and another might want to maximise take home income. Even then, at some point the profits earned in the limited company will need to be distributed, so you may end up creating a tax time bomb for the future where tax will be payable possibly at a higher rate.

It certainly is correct that it is easier to save tax and manage income by using a limited company, but this only works under certain circumstances

This is potentially compounded by putting any owned property (i.e. surgery) into a less favourable tax environment and triggering Stamp Duty and/or Capital Gains Tax, crystallising tax at an earlier point in time giving rise to major cashflow problems.

Profit sharing

Most GP practices have their own profit-sharing arrangement based on essentially the time spent and seniority of the partner.

The kind of complex profit-sharing arrangements in partnerships is not easily replicable in a limited company structure. Convoluted shareholder agreements and various alphabet share classes are employed to overcome this. The result tends to be an unwieldy instrument which neither does justice to the partnership agreement it replaces nor is it an improvement to it. Further complications arise where partners regularly change their sessions, or when a partner joins or leaves, the document is not always sufficiently flexible to accommodate this.

Disputes

Under the partnership model it is generally possible to exclude a partner from the practice and withhold their entitlement to share of the practice’s profits.  With a limited company, this is not as easy; a shareholder is entitled to a share of all dividends paid while they hold their shares. This includes if they are for any reason excluded from the surgery.  It is possible to put in place a legal agreement for such a scenario, but this would need to be agreed by all parties beforehand and not easily implemented.

NHS Pensions

Although using a limited company can help solve annual and lifetime allowance limit problems (by moderating income), it is likely that the final NHS pension will be lower. This is because when taking income from a limited company the reported superannuable income would be based on the dividend policy. If the aim of using a company is to optimise your tax bill then it is obvious that there will be a reduction in reported income for superannuation purposes and as a result the final pension may be lower than it would have otherwise been.

..using a limited company can help solve annual and lifetime allowance limit problems (by moderating income), it is likely that the final NHS pension will be lower.

Contractual position & VAT

Currently, GP practices wishing to incorporate need follow a set process which includes making a formal request to their CCG (Clinical Commissioning Group) to novate the primary care contract into a company vehicle. The process is lengthy and drawn out, requiring the applicant to provide a huge amount of personal and business information to mitigate perceived risks. Even then, the CCG has discretionary powers and is not obliged to grant the request. Historically, the process involved effectively handing over the contract and then having it granted again to the new entity, leaving the risk that the NHS contract could be put out to tender rather than automatically being granted to the limited company. In some cases, the CCG may want the contract to be an APMS one, or they ask for personal guarantees or bank bonds from the shareholders to cover certain income that is being received.

Additionally, in some cases, badly drawn contractual positions and skewed trading structures mean VAT will potentially be chargeable on the supply of “medical services”. This is a common mistake made by practitioners but is beyond the scope of this article.

These are only some of the issues, not to mention the many legal and accounting hurdles that will need to be surmounted before a trading model akin to a partnership can be achieved.

…in some cases some badly drawn contractual positions and skewed trading structures mean VAT will potentially be chargeable on the supply of “medical services”.

However, in the right circumstances, a company can be a very useful tool for GPs. In the wrong circumstances, it can mean walking straight into a tax and contract nightmare. Questions about incorporation usually arise because of a desire to limit liability or to save tax. Both are attractive aims, but it is important to understand that there are many other considerations and there are many fatal pitfalls to navigate. Depending on what you want to do with the limited company, it may require a significant amount of due diligence, or it may not be the right fit at all.

At Shipleys Tax, we have a dedicated team of specialists who have developed GP practice incorporation options which gives you the best of both worlds. Talk to us about the following:

1. GP incorporations
2. Partnership with 20% tax rates

Using the right setup, the move to an incorporated trading model can bring benefits both from a taxation and succession planning point of view. There is no substitute for specialist advice as getting it wrong can be expensive and extremely stressful.

If you are affected by any of the issues above and would like more information, please call 0114 272 4984 or email info@shipleystax.com.

Please note that Shipleys Tax do not give free advice by email or telephone.

The Chancellor Rishi Sunak delivered his second Budget of 2021 on 26 Oct 2021 with a focus on increasing spending pledges. Here we summarise the key tax announcements.

As the major tax increases have already been announced earlier this year (increases to rates of corporation tax, NI and dividends) the Budget was extremely light on taxation measures. But the highlights are as follows:

• An overall increase in the national living and national minimum wage rates
• A further extension to the annual investment allowance, which will remain at £1 million until 31 March 2023
• Confirmation that generally unpopular basis period reform will go ahead, with the transitional year in 2023/24, and an automatic spreading mechanism
• A cut in the Universal Credit taper rate from 63% to 55%
• A 50% cut to business rates in 2022/23 for businesses in the hospitality, retail and leisure sectors
• An increase in the rate of relief for three cultural activities, including museums and galleries
• A welcome extension of the UK Property CGT reporting deadlines, from 30 days to 60 days
• The announcement that alcohol duty will be heavily simplified.

If you are affected by any of the issues above and would like more information, please call 0114 272 4984 or email info@shipleystax.com.

HMRC have started to open compliance checks into employers’ Coronavirus Job Retention Scheme (CJRS) claims after sending thousands of “nudge” letters earlier this year advising them that they may need to repay amounts received.

In today’s Shipleys Tax brief we look at what this means and what you should do if you are contacted by HMRC. If you have received correspondence from HMRC and require advice on an investigation or to appeal a penalty assessment, you should seek tax advice as soon as possible to understand your tax position and take necessary action.

What is the compliance check or tax investigation?

The compliance check starts by requesting very detailed information on every employee for which furlough monies were claimed. The letters will not necessarily be sent to the employer’s agent, as not many businesses have an agent for employment tax matters in the same way as for their corporation tax/income tax returns.   

The letter gives a short timescale to provide the information to HMRC. If HMRC issues a formal information notice to obtain the data (if it is not provided in response to the informal request, and there is no ‘good reason’ for the delay – this may detrimentally affect the investigation and potentially increase any CJRS penalties charged. 

The compliance check starts by requesting very detailed information on every employee for which furlough monies were claimed. 

The type and severity of the investigation is completely dependent on the facts of any individual case. HMRC have a specialist unit looking into these claims and you safely assume they will link with other employer compliance units to get the full picture.

It is strongly recommended that you consult a tax lawyer as soon as possible to receive detailed advice on how to take control of the situation and negotiate with HMRC.
 
What is CJRS/furlough fraud?

There are many ways in which a business could commit furlough fraud or abuse of the CJRS, for example:

• Getting a furloughed employee to return to work as a ‘volunteer’ without pay
• Not paying employees the full amount received from HMRC
• Failure to inform staff that they have been furloughed
• Not paying employees the full amount received from HMRC
• Incorrect calculations and errors in furlough claims
• Employers making backdated claims in periods in which the employee was working
• Employers pretending to hire staff shortly prior to the qualifying period to take advantage of the payments.

It is strongly recommended that you consult a tax lawyer as soon as possible to receive detailed advice on how to take control of the situation and negotiate with HMRC.

What happens if you were not entitled to claim furlough?

If you are found to not have been entitled to the grant in the first place, or have used the funds inappropriately, the payments can be clawed back by way of a 100% income tax charge regardless of whether the claim was made innocently or deliberately.

As such, HMRC will be able to assess the tax due (and thereby impose the clawback) within four years after the grant was made in the case of an innocent error, six years if the error was careless, and twenty years if the claim was fraudulent.

In cases of serious fraud, HMRC may involve the police and prosecute. This might be using legislation which allows the indictment of a company for the facilitation of tax evasion even if senior management was unaware of the offence, unless reasonable preventative measures were in place.

Businesses are therefore required to notify HMRC if they know (or discover) that they have received a grant to which they were not entitled. Penalties and interest will apply for failure to notify and to the repayment clawback.

Expert Tax Investigation Advisers

If you need HMRC Tax Investigation advice, we have experts that are available to aid you at every stage of the HMRC investigation process. Members of our investigation team are ex-HMRC and have first-hand experience and knowledge of the internal workings of HMRC. Our team specialises in successfully challenging HMRC decisions and will assist you in every aspect of the investigation.

If you are affected by any of the issues above and would like more information, please call 0114 272 4984 or email info@shipleystax.com.

Please note that Shipleys Tax do not give free advice by email or telephone.

PAYING for childcare can be expensive. The tax system, however, can provide somewhat of a helping hand. In recent years, there has been a shift away from tax relief for employer-supported childcare and vouchers to a Government top-up scheme.

In today’s Shipleys Tax brief we quickly cover how it works, who’s eligible and how it can benefit you.

Government scheme

The Government operate a tax-free childcare scheme whereby parents deposit money into an account which can be used to meet childcare costs and the Government provide a tax-free top up.

To qualify for the scheme, the parent (and their partner if they have one) must each expect to earn at least £1,853.28 over the next 3 months. This is equivalent to 16 hours a week at the National Living Wage of £8.91 an hour. However, if either the claimant or their partner expect to have adjusted net income of more than £100,000 in the current tax year, they cannot benefit from the tax-free top up.

The Government operate a tax-free childcare scheme whereby parents deposit money into an account which can be used to meet childcare costs and the Government provide a tax-free top up.

Eligible parents can access the tax-free top up by setting up an online childcare account for their child. For every £8 that is deposited into the account, the Government will add a further £2, to a maximum of £2,000 a year (or £4,000 a year where the child is disabled). The funds can be used to provide approved childcare, including that provided by childminders, nurseries, nannies, after-school clubs and playschemes, as long as the provider has signed up to the scheme. The care can be provided until the September after the child’s 11^th birthday (or up to the child’s 17^th birthday if the child is disabled).

The Government top-up scheme is not available to universal credit claimants, and cannot be used in addition to employer-provided vouchers or employer-supported care.

Employer-supported childcare and childcare vouchers

Where an employee joined their employer’s childcare or childcare voucher scheme on or before 4 October 2018, they can continue to benefit from the associated tax relief while their employer continues to operate the scheme. Childcare vouchers and/or employer supported childcare are tax-free up to the employee’s exempt amount. Where the employee is a basic rate taxpayer or joined the scheme prior to 6 April 2011, the exempt amount is £55 per week. Otherwise the exempt amount is £28 per week where the employee is a higher rate taxpayer and £25 per week where the employee is an additional rate taxpayer. The exemption also applies for National Insurance purposes. Employees only have one exempt amount for employer-supported care and vouchers, regardless of the number of children that they have.

It is also possible for employer-provided childcare and childcare vouchers to be made available under a salary sacrifice scheme without triggering the alternative valuation rules.

Where the employee is a basic rate taxpayer… the exempt amount is £55 per week. Otherwise the exempt amount is £28 per week where the employee is a higher rate taxpayer and £25 per week where the employee is an additional rate taxpayer.

Workplace nurseries

No tax charge arises under the benefit in kind rules where childcare is provided in a workplace nursery. Unlike the exemption for employer-supported care and vouchers, there is no cap on the value of childcare that can be provided tax-free in a workplace nursery. However, there are stringent conditions that must be met for exemption to be forthcoming.

Which is best?

Where a parent could potentially benefit from more than one scheme, they should evaluate the options and can choose the one best suited to their needs. Employees in an employer-supported scheme or employer voucher scheme will need to leave that scheme if they sign up for the Government scheme, and will not be able to re-join the employer’s scheme if they change their minds.

If you are affected by any of the issues above and would like more information, please call 0114 272 4984 or email info@shipleystax.com.

Please note that Shipleys Tax do not give free advice by email or telephone.