Over the past 25 years there has been a striking evolution within general practice. From almost all GPs working as independent contractors and forming partnerships (and wanting to be partners), we now see many new GPs contemplating this model with ambivalence.
The reasons for this are multi-faceted and include a reluctance to be tied down to one practice for a long period; concerns over longer working hours without adequate reward; and an ever-increasing burden of responsibility and personal financial liability.
Nevertheless, with the majority of GP practices still currently operating as partnerships, and most partners earning around £15,000 per session compared with £9,500- £10,000 for a salaried GP, there are still obvious benefits to becoming a partner. These are not just financial; partnerships have status, and unlike salaried GPs, a partner cannot be made redundant.
Demonstrating the benefits
So, given many young GPs’ reluctance to commit to partnerships, practices recruiting partners need to be able to demonstrate what they can deliver to a incoming partner and the joining partner must be clear not only about what they are likely to earn, but will be expected of them.
The process should start at the interview stage. The prospective partner should be told what they are likely to earn when they join the practice, and the level of buying-in that is necessary.
Both these terms can create considerable confusion in their own right. If the applicant is coming from a salaried background, the concept of profits, drawings and self-assessment can appear daunting. After all, the profit share that will be predicted will include the employer’s superannuation.
Prospective partners often want to know what the net income will be, and without a PAYE system for partners this is not readily available. In truth, the existing partners may not be the best people to explain these concepts.
Buying-in is largely misunderstood. It is often thought only to affect practices that own their surgery premises, but that is too simple. Every practice needs working capital to function. Simply put, it needs a balance in the bank to pay the bills before the practice gets paid. These days, a value of £15,000 per partner is not uncommon. Every practice is different, and it is probably wise for the practice to discuss this with their accountant.
Once the prospective partner has been recalled for a further interview, it would be appropriate to let the GP have a copy of the latest accounts and a drawings projection. If the practice is anxious about the information in the accounts being shared, a simple confidentiality agreement can be signed limiting access to the accounts.
The prospective partner should be encouraged to make an appointment and discuss the accounts either with the practice accountant, or with another accountant who specialises in medical finance and understands core issues; e.g the fact that MPIG is being phased out over the next few years. Give them adequate time to seek this advice.
The accountant being consulted should be able to explain the profitability of the practice, what buy-in is reasonable, how the tax works and, by looking at the balance sheet in the accounts, the solvency of the practice. If the prospective partner has been given a projection of the drawings, they will be able to pass this on to the accountant, who can assess whether assumptions made are reasonable.
Depending on the profitability and the desirability of the practice, an incoming partner may be expected to join on a reduced profit share increasing to full value over a period of time. There is no universal route, but 80% in year one, 90% in year two and parity in year three would not be uncommon. The attached spreadsheet shows how this could work.
There are, however, different methods of working out the figures: suppose a single-handed GP with practice profits of £200,000 has a partner join him on 80% of parity. That GP might think that the calcaulation should run as follows: at parity the new partner will earn £100,000 so in year one the new partner gets 80% - £80,000 while leaving the existing partner with £120,000.
In actual fact, the new partner’s £80,000 is 66.67% of a the continuing partner. The correct calculation is to divide the profits up 100:80 so the new partner earns £88,888 and the existing partner £111,112. To avoid any misunderstadings it would be helpful to give the incoming partner a schedule of the rises to parity and the expected effect on profits.
Taxation is complicated enough for the self-employed, and the detail of this is outside the scope of this article, but it would be wise to let the prospective partner know whether he/she will be expected to pay the tax personally or whether the tax will be saved within the practice.
Partnerships are models of working that suit general practice very well and will continue to do so in the brave new world to come, getting the basics right when a partner joins should lead to a long and happy working life.
- Be clear about expected earnings and required buy-in to the practice and encourage prospective partners to seek advice from a specialist medical accountant. Give them adequate time to do this.
- Draw up a simple confidentiality agreement if you are worried about sharing your accounts with a prospective partner.
- Give the incoming partner a schedule of the rises to parity and the expected effect on profits, to avoid potential misunderstandings.
- Let the prospective partner know whether he/she will be expected to pay tax personally or whether it will be saved within the practice.
Laurence Slavin is partner with chartered accountants Ramsay Brown & Partners who specialise in the finances of GPs.