Finance and Tax Issues for GPs and locums

1. Finance and Tax Issuesfor GPs and locums Tuesday 2nd February 2009 Murray Royal Hospital, Perth Neil Morrison

2. Neil Morrison • Partner with Campbell Dallas – the 3rd largest independent firm of Chartered Accountants • Firm has 5 offices in Scotland • Office in Perth covers Tayside, Angus & Fife • Personally acted for 30 GP Practices in Tayside and Fife and many GP locums • Working with GPs for 17 years • Contributor to Medical Press and presenter at various Medical Seminars

3. Agenda • Practice Accounts : the basics • Tax • Capital and Current accounts • Superannuation & Seniority • Improving Practice Profits • GP Finances : Current Issues

4. Practice Accounts • The main 2 statements in a set of partnership accounts are a ‘Profit and Loss Account’ and a ‘Balance Sheet’ • A Profit and Loss account is prepared for a period, e.g. the year ended 31/3/09 (i.e. 1/4/08 to 31/3/09) • A Balance Sheet is prepared as at a specific date, e.g. as at 31 March 2009. A Balance Sheet drawn up on one day can look quite different to one drawn up a day later • Accounts must be prepared on an ‘Accruals’ basis of accounting as opposed to a ‘Cash’ basis. That means income is recorded on an ‘earnings’ basis and expenditure on an ‘incurred’ basis.

5. Practice Accounts • Basis of Preparation : • Records kept by Practice Manager are usually on a ’cash basis’. • These can be computerised records (Iris or SAGE) or a simple cash book. • Accounting packages : • Iris (formerly known as McLean McNicoll) – electronic cashbook • SAGE – general accounting package (management accounts) • Quickbooks – thankfully not used too often

6. Practice Accounts • Bookkeeping to Final accounts : • The process that takes a Practice’s records and ends up with a final set of accounts is, in essence, fairly straightforward. • The first step is to ensure that all the income and expenditure is complete and has been correctly analysed. (sounds simple but can take a tremendous amount of work!) • The reconciliation of the various Bank accounts is of paramount importance. If they have been reconciled then at least the income and expenditure is complete (it might not be analysed correctly, but at least it is in there somewhere!)

7. Practice Accounts • Bookkeeping to Final accounts : • Once all the transactions are in the right place it is time to make the necessary adjustments to move from the Cash Basis to the Accruals Basis: • Depreciation - writes fixed assets off over their expected useful lives • Debtors - amounts owed to the practice for work done • Prepayments - amounts paid by the practice which relate to future accounting periods • Creditors - amounts invoiced but not yet paid • Accruals - liability incurred but no invoice yet raised • Stock adjustments • These transactions would be entered dated the last day of the financial year.

8. Practice Accounts • Depreciation : • “Tangible Assets” reduce in value (“Depreciate”) over their expected useful life. The rate at which they reduce is dependent on the nature of the asset. The main factors affecting depreciation are: • Usage • Technical Obsolescence • Age • Assets would normally be grouped by type and depreciated as a class e.g Motor vehicles, Computer equipment, Buildings, Fixtures and Fittings, Equipment

9. Practice Accounts • Depreciation : • The calculation of depreciation seeks to reduce an asset in value over its life such that at the end of its expected useful life it is written down to its expected residual value. • There are two common ways of calculating depreciation – “Straight Line” and “Reducing Balance”

10. Practice Accounts • Depreciation : • Depreciation is calculated on the cost to the Practice of the asset. Any contributions from third parties, need to be deducted from the purchase price to arrive at a true cost. • Improvement grants • Drug incentive payments • Computer reimbursements • Donations from patients etc

11. Practice Accounts • Depreciation : • Straight Line depreciation will write an asset off to a zero value. A reducing balance basis will never write an asset off totally. • Typical rates are: • Computers 33% straight line • Cars 25% reducing balance • Fixtures and fittings 15% straight line • Buildings not usually depreciated

12. Practice Accounts • Partnership Profit Shares : • While it is not uncommon for partners profit shares to remain unchanged for a number of years, changes do happen from time to time (eg new partner moving to parity). • The arrangements for sharing income can vary between practices: • Share absolutely everything • Partners keep their Seniority and share the rest • Keep Seniority, Private income and share the rest

13. Practice Accounts • Partnership Profit Shares : • There is no “right” or “wrong” method. • The most important points are: • There must be a clear understanding of how profits are shared • Partners must avoid double counting (or failing to count!) income such as Private medical fees • Partnership Agreement should state basis of profit shares

14. Taxation • Tax Payments : • Again there is no “right” or “wrong” method. • There are two basic options: • Partners make drawings gross and pay their own tax bills (otherwise often known as the “let’s panic and scramble around for the money when the tax bill arrives” method) • The Practice holds back a percentage of the partners income and pays the tax bill when it arrives (otherwise known as the “trust a partner with their tax money – you must be joking” method)

15. Taxation • Tax Reserves : • If the practice holds on to the partners tax money it is probably easiest to open up a separate bank or building society for each partner and hold their money separately – it makes it much easier to keep track of how much each one has set aside. • The problem comes if partners have private work which does not go through the practice. The tax still has to be paid on that although the practice will probably not have made an adequate deduction from the partners drawings. Paying the tax from the practice in these circumstances will result in the partner drawing more than they are entitled to.

16. Taxation • Tax Payments : • Tax liabilities are calculated by reference to tax years – years ended 5th April. • The tax liability for any tax year is paid in two or three parts: • 1st payment on the 31st January IN the tax year • 2nd payment on the 31st July in the FOLLOWING tax year • 3rd and final payment 31st January the FOLLOWING tax year • Tax year ended 31st March 2008 • 1st Payment made 31st January 2008 • 2nd Payment made 31st July 2008 • 3rd and final payment 31st January 2009

17. Taxation • Tax Payments : • New partner 1 April 2006, previously a registrar, first year below parity. • Partner’s profits and tax liabilities: • Profit Tax • YE 31/3/07 75,000 23,000 • YE 31/3/08 115,000 38,000 • YE 31/3/09 120,000 40,000 • Payments POA Balancing Payment • For 2006/07 • 31/1/07 nil • 31/7/07 nil • 31/1/08 23,000 • For 2007/8 • 31/1/08 11,500 • 31/7/08 11,500 • 31/1/09 £15,000

18. Taxation • Tax Payments : • New partner 1 April 2006, previously a registrar, first year below parity. • Partners profits and tax liabilities: • Profit Tax • YE 31/3/07 75,000 23,000 • YE 31/3/08 115,000 38,000 • YE 31/3/09 120,000 40,000 • Payments POA Balancing Payment • For 2008/09 • 31/1/09 19,000 • 31/7/09 19,000 • 31/1/10 2,000

19. Taxation • Tax Payments : • The overall tax payment profile is therefore: • 31/1/07 nil • 31/7/07 nil • 31/1/0834,500 • 31/7/08 11,500 • 31/1/09 34,000 • 31/7/09 19,000 • 31/1/1022,000

20. Taxation • Tax Payments : • In times of increasing profits the 31st January payment will normally be higher than the previous 31st July payment. • This is a particular problem for partners working their way up to parity. Their income will increase as their profit share increases, but the corresponding increase in their tax bill will follow on a year or so later!

21. Taxation • Personal Expenses: • Types of expenses claimable are : motor, professional subs, use of room at home, telephone & internet, courses & conferences and equipment (eg medical or computer) • Claims should be reasonable, based on actual usage (eg motor mileage log) and supported by relevant invoices/receipts • Each partner needs to work out their own claim (as opposed to one rate applying to all partners) • Expense claims are dealt with through the partnership tax return and thus return cannot be completed until all partners’ expenses have been calculated

22. Taxation • Motor Expenses: • Two methods of claiming : • Claiming a business use percentage of total car costs (includes petrol, servicing, road tax, insurance, repairs and depreciation). • Claiming for each business mile under the FPCS. • - First 10,000 miles @ 40p per mile • - Thereafter @ 25p per mile • Under 1st method you need to keep all invoices/receipts and a mileage log whilst under the 2nd method a simple mileage log will suffice.

23. Taxation • Cars : changes to tax relief (post 6th April 2009) • New rules apply to cars purchased after 6th April 2009. Capital allowances based on CO2 emissions • Emissions 110gm/km or less = 100% FYA • Emissions 111gm/km to 160gm/km = 20% WDA • Emissions >160gm/km = 10% WDA • Restriction of £3,000 allowance per year removed • Allowances still need to be adjusted for private usage • Qualifying cars - www.comcar.co.uk (eg BMW 320d)

24. Capital & Current Accounts • These cause more confusion in GPs accounts than anything else ! • Capital Accounts reflect the equity interest that the (property) owning partners have in the Practice premises. • The total of the Capital Accounts should equal the Cost/Value of the premises less the borrowings relating to the premises. • An example : A building with a value of £1 million in the Practice accounts and £800,000 of borrowings attached to it has equity of £200,000. • Therefore, a partner with a 20% stake in that building should have a Capital Account balance of £40,000.

25. Capital & Current Accounts • Current Accounts reflect each partner’s undrawn profits and/or capital introduced • Working capitalis required to fund the business. Not all income is received immediately (eg QOF achievement) and partners need to provide capital so that liabilities can be met as they fall due for payment. • Even if a partner does not buy into the property they still need to provide working capital. This is done either by introducing capital on assumption as a partner or by restricting drawings (usually over 2 years). • Most practices will try to bring the Current Account balances in line after the end of the financial year by using the final QOF payment to even out any imbalances. • Most practices aim to have closing Current Account balances in line with number of sessions performed by each partner.

26. Superannuation • New system from 1 April 2004 • GPs now responsible for 5 - 8.5% (previously 6%) employees contributions AND 14% employer’s contributions • Payments on account deducted monthly by HB • Annual certificates to be submitted in February each year • Balancing payment of superannuation liability deducted in March each year (for previous year and current year)

27. Superannuation • New superannuation rates from 1st April 2008 : • Up to 19,682 - now 5% (previously 6%) • £19,683 to £65,002 - now 6.5% (previously 6%) • £65,003 to £102,499 - now 7.5% (previously 6%) • Above £102,500 - now 8.5% • The rate to be paid applies to the whole amount • For most GPs, the change meant an increased cost of 1.5% to 2.5% per annum.

28. Seniority • Calculation of pay depends on two factors: • Firstly, the number of years of 'reckonable service' the GP has accumulated. This is based on the number of years worked as a doctor in the NHS - not just as a GP principal • Secondly, the level of NHS pensionable profits under the 'two-thirds rule'. • Less than 1/3rd average income, no Seniority • Between 1/3rd and 2/3rds , 60% of Seniority • Over 2/3rds of average income then full Seniority • Average pensionable profits (interim figs) : • 2004/05 - £81,000 (revised from £75,000) • 2005/06 - £91,000 (revised from £80,490) • 2006/07 - £95,335 • 2007/08 - £97,500 • 2008/09 - £105,524 • None of the figures have been finalised yet

29. Improving Practice Profits • Maximise income • Control costs/expenditure • Monitor monthly results • Benchmark your results

30. Improving Practice Profits • Managing NHS workload : • Only do work that you are paid to do, and YOU are the best person to do…. • Can patients be seen by less expensive members of your team? • Are you being firm enough when it comes to visiting patients? • Are you maximising the use of your premises? • Are you charging appropriate rates for medical reports?

31. Improving Practice Profits • Practice List Size : • How big should a list size be ? Main factors are age of the population and deprivation • Young (more than 81.4%<65) – 2,300 • Middle Aged (mainly in their 40s) – 2,100 • Greater social need – 2,000 • Significant elderly (more than 25%>65) – 1,850 • Over 2/3rds of your income is effectively based on patient numbers • An aggressive approach to skill mixing can allow a practice to cope with much higher lists per FTE

32. Improving Practice Profits • Income – areas to watch • NHS • Global Sum/PMS Baseline – list size changes • Superannuation – correct deductions • Enhanced Services – correct recording • Childhood Imms & Pre School boosters - appointments • Reimbursements – formal record • Seniority – length of service correct?

33. Improving Practice Profits • Income – areas to watch • Private and Non Core NHS • Salaried appointments – commercial rate ? • Teaching • Room Rental, Nursing home fees etc. • Insurance and Solicitors requests – payment pre release of information ? • Certificate fees – review charges regularly

34. Improving Practice Profits • Minimising Expenses • Typically over 60% of your practice expenditure is on staff • Salaried doctors • Flexible career scheme doctors • Retainer/Returner scheme doctors • Health care assistants • Nurse practitioners • Nurses • Management and admin staff • THIS is the area where most of your management time and effort needs to be focused as the potential for savings are greatest.

35. Improving Practice Profits • Minimising Expenses • Other expenses: • Locum costs (quality of life choice?) • Utility costs – regularly review charges & obtain quotes • Cleaning – own staff or contract in • Professional fees – value for money ? • Printing, postage & stationery – use of email ?

36. Improving Practice Profits • Monitor Monthly Results • Review where you are financially on a monthly basis • Compare totals for income and expenditure by type with the previous year (for the month and year to date) • What’s gone up, what’s gone down? • Can you do anything to improve the situation? • How has your cash flow been affected ? • What is happening to the bank balance ? • How will drawings be affected ? • How does the projected out-turn for the year differ from original forecasts ?

37. Improving Practice Profits • Benchmark your results • How does your practice compare with the national averages for : • Income • Costs • Profitability • Explore the variances - which may highlight areas that can be easily worked on to improve profitability • Review benchmark statistics on a FTE and per patient basis

38. Improving Practice Profits • Some Statistics 2008/09 (Scotland) : • Profit per FTE - £95,000 (UK - £114,000) • Average list size – 1,539 (UK – 2,035) • GMS Income per patient - £104.43 (UK - 109.79) • Gross other income per patient – £15.15 (UK – 10.65) • Resulting practice income per patient - £119.58 (UK - £120.44) • Expenses per patient (net of reimbursement) - £57.85 (UK – £64.42) • Profit per patient - £61.73 (UK - £56.02)

39. GP Finances : Current Issues • No uplifts in pay award for 2007/08 nor 2008/09. • Uplift of 2.29% for 2009/10 • For practices on MPIG, average increase is 1.3% • Current proposal for future increases in GP’s pay based on mix of the main funding streams: • Global Sum 7 • Correction Factor 2 • QOF 5 • Enhanced Services 5 • Thus, future increases will be allocated in nineteenths. • Negotiators are working with NHS Employers to see how to cut practices’ reliance on MPIG over a number of years without reducing practice funding

40. GP Finances : Current Issues • QOF – remaining at 1,000 points but prevalence arrangements being phased out over 2 financial years. • QOF - possible 16% rise in indicator thresholds meaning more work to get same income • Seniority pay – talks are continuing

41. GP Finances : Current Issues • Practice profits are likely to at best remain at same level, but more likely, decrease in the current year. • Pay freezes in future years ? • Practices need to look very hard at how they deliver services • Changes to skill mix have been talked about for years, and in many practices changes have already been introduced. In order to improve profits, further changes may be necessary.

42. Thank You • Neil Morrison, BCom, CA • Campbell Dallas, Chartered Accountants • 4 Atholl Crescent, Perth, PH1 5NG • Tel: 01738 441888 • Email: neil.morrison@campbelldallas.co.uk