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Taxation - Self assessment basic rules

Simon Gray outlines how the tax assessment and payment system works if you are a self-employed GP.

The HMRC will not calculate the tax owed by a self-employed GP, but checks GPs’ own calculations (Photograph: iStock)
The HMRC will not calculate the tax owed by a self-employed GP, but checks GPs’ own calculations (Photograph: iStock)

I have written this with GP partners in mind but the same basic rules apply to freelance GPs, such as self-employed locums.

Self employment
When a GP becomes a partner or takes on a single-handed practice, they cease to be an employee and become self- employed for tax purposes.

Pay As You Earn (PAYE) does not apply to trading profits and you are required to calculate the tax you owe - hence the term 'self-assessment' - and include it in tax returns.

Instead of HM Revenue and Customs (HMRC) working out your tax, it will instead check the calculations and may raise queries with you.

Partners are taxed on their profit shares, not on their monthly drawings (which are advances on profit shares).

In other words, the income tax you pay as a GP partner has nothing to do with how much money you take out of the practice. Rather, it is based on how much of the partnership profit is attributable to you.

When partners' 'current accounts' in the balance sheet (part of the annual accounts) are in credit, it means they are owed the balance of their undistributed profits.

Saving for tax bills
For salaried doctors, PAYE is a convenient way to meet your tax obligations as your employer deducts tax before you receive your net pay.

However, under self assessment there is no such mechanism. You need the foresight to save enough money to meet twice-yearly tax payment deadlines.

Some practices retain the tax element from partners' drawings, acting as a kind of 'tax bank' to ensure the proportion representing income tax is not spent by the partners.

Other practices pay full profit shares to the partners as part of their drawings, and the partners themselves save up for their tax bills.

With both methods, it is still the responsibility of each partner to ensure their individual liabilities are met. The legal principle of partners having 'joint and several liability' for partners' debts, actions and so on does not apply to tax.

Tax due dates
Tax years run from 6 April in one calendar year to 5 April in the next, and tax is collected by HMRC twice each year on 31 January and 31 July.

So your liability for the 2009/10 tax year was payable in two instalments: 50 per cent by 31 January 2010 and 50 per cent by 31 July 2010.

In other words, half your liability for any given tax year is due two months before the end of that tax year and the other half is due four months into the following tax year.

Taxed in advance
Partners do not always know their exact liability for a given tax year at the time the first instalment is due - the practice's 12-month accounting period may not have ended and the annual accounts may not have been finalised. HMRC therefore lets taxpayers base their current year's obligations on the previous year's liability as a best estimate.

If it turns out that the GP's profit share went up, additional tax will be due and this is payable by the following January - on 31 January 2011 if you owe tax for 2009/10.

If the practice suffered a dip in earnings (which was not compensated by an increase in any other income the GP partner may have) then the GP would be due a refund for that tax year, normally obtained by deducting the overpayment from the first instalment due of the next year's tax.

Tax returns
In addition to each partner having to complete an annual tax return, there is also a partnership tax return due by 31 January annually.

Even though the partnership is not liable to tax or for the liabilities of the respective partners, a partnership return must nevertheless be prepared and submitted each year. This is usually the responsibility of the senior partner who also signs it.

Essentially the partnership return is for HMRC information purposes and it acts as the starting point for the individual partners' tax returns: the last entries on the partnership return are each of the partners' profit shares.

As well as income tax, class 4 National Insurance on your profit share is payable at the same time: with 50 per cent due on 31 January and 50 per cent due on 31 July.

Overlap tax
Note that there is a further complication in the first year of self-employment known as 'overlap tax'. This occurs whenever a person becomes self- employed and the accounting year end of their business is any date other than 31 March.

Relief is given for this overlap tax by reducing tax paid at a future date when either the partner leaves or the practice chooses to change its year end.

Many GP partners are unaware they were subject to this overlap tax when they became self-employed - ask your accountant to provide further clarification.

Fast Facts
  • Each tax year starts on 6 April and ends on 5 April in the following calendar year.
  • Self-employed people calculate (self assess) their tax liability for each tax year and must submit a tax return by 31 January annually.
  • Income tax (and class 4 National Insurance) for each tax year is due in two 50 per cent instalments on 31 January and 31 July.
  • For the 2009/10 tax year, tax on self-employed profits were due on 31 January 2010 and 31 July 2010. Any balance still owed is due on 31 January 2011.
  • Partnerships also submit a tax return by 31 January annually but are not liable for the partners' tax.

Simon Gray is a tax partner with medical specialist accountants Henton & Co LLP, www.hentons.com

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