As time-pressured professionals, it’s perhaps inevitable that many doctors, dentists and pharmacists struggle to find the time to keep on top of their finances. Paperwork and admin tends to be one of those jobs that is forever being put off until tomorrow.
Your accountant’s raison d’etre should be to take the hassle out of handling your financial affairs, making your life as easy as possible and leaving you free to concentrate on delivering first-class patient care. After all, that’s why you entered the profession.
However, in our experience too many accountants fail to take a pro-active approach when it comes to helping and advising their clients. So, as a physician, what should be your primary concerns when it comes to tax and bookkeeping?
Self-assessment tax returns
Many healthcare professionals lack the time – and sometimes the inclination – to file their annual self-assessment tax returns. One hospital consultant, who combined NHS and private work, told us recently that it was simply more financially advantageous for him to forget about his tax return and instead spend all his available time treating patients – despite the risk of a fine.
Perhaps alive to this indifference among physicians and other high earners, HM Revenue & Customs (HMRC) has increased the maximum financial penalty from a flat and potentially refundable £100 to a non-refundable £1,600 if no return is received after 12 months.
Under the new rules, anyone who fails to get a tax return in on time faces a fixed £100 penalty even if there was no tax to pay. Those who continue to fail to act are hit with a £900 fine after three months and a six-month penalty of £300, or 5% of the outstanding tax, whichever is greater. Those who fail to act before a year has passed face an additional fine of 5% of what they owe, or another £300.
On top of these penalties are extra charges for not paying the tax on time. A month after the deadline, the fine is 5% of the outstanding bill, after six months an additional 5% is added and after 12 months another 5%.
As well as financial penalties, failure to file a tax return on time can result in a tax investigation by HMRC. This has the potential to damage your reputation, and will also require considerable time and input from your accountant to address HMRC’s concerns. If your accountant doesn’t operate a flat fixed-fee structure, the extra work they are required to do will obviously mean increased costs for you. On the issue of HMRC compliance, physicians are reminded that they are required to keep hold of their tax records for six years. Many medical professionals that we work with don’t realise that failure to do so can result in a fine of up to £3,000.
Keeping track of your incomings and outgoings
If the thought of having to manage all of your receipts, bank statements and other papers fills you with dread, then you’re not alone. In order to make your life as easy as possible, your accountant’s book-keeping services should be made available both online and via post. If you opt for the postal service option, you should be able to send your receipts in an envelope every month and let your accountant take care of the rest. We recommend carrying out book-keeping services on a monthly as opposed to an annual basis.
A high-quality online service will allow you to take a photo or scan a copy of your receipts and email them to a dedicated personal accountant. Those who prefer to conduct their business electronically should also be able to rely on their accountant’s secure online portal to enter sales invoices, purchase invoices and bank statement details.
Sole trader, limited company or partnership?
A specialist medical accountant should offer advice on which business structure is the most suitable and tax efficient for you, and talk you through the benefits and drawbacks of each option. A limited company is the most popular choice for medical professionals, as it limits liability and offers the opportunity for profits to be re-invested. If you operate as a limited company, your accountant should offer you the option of using their office as your registered business address – allowing them to receive all relevant paperwork directly and therefore process it more quickly.
However, more and more medical professionals are entering into limited liability partnerships (LLPs). Under this structure, profits are shared among members and it is these individuals – rather than the LLP – that pay income tax on profits. Unlike limited companies, LLPs don’t have to pay corporation tax. An LLP is similar to a normal partnership but its members benefit from reduced personal responsibility. While this offers more security, it also comes with added complications.
For example, it’s important that each member of the partnership registers as self-employed with HMRC. This means each of you will need to include details of any profits on your individual-self assessment tax returns each year. Self-employed partners are also responsible for paying their own NI contributions. Consulting a financial advisor in the early stages can help ensure you meet all the necessary requirements and are fully up to speed with the legal requirements of operating as an LLP.
It is also worth noting that George Osborne’s recent Autumn Statement included plans to “ensure the tax advantages of partnerships aren’t abused”, whilst imposing immediate anti-avoidance measures.
For example, under the draft 2014 Finance Bill an LLP member would be treated as an employee for tax purposes if they performed services for a fixed fee or a fee unrelated to profits, they did not have significant influence over the LLP’s affairs, and if their contribution to the LLP was less than 25% of the disguised salary.
Such measures are unlikely to have a significant impact on partnerships involving physicians, but they are still worth bearing in mind.