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A guide to tax for practice managers

The taxes practice managers need to understand to help ensure the practice's finances stay on track. By Jenny Stone.

If the practice pays the partners' tax liabilities it should set aside money for this each month (Picture: iStock)
If the practice pays the partners' tax liabilities it should set aside money for this each month (Picture: iStock)

Practice managers are key to the smooth running of a practice, and usually this will include dealing with the practice finances. It is important that practice managers have an understanding of the various tax issues that they will need to deal with in a timely manner.

Pay As You Earn (PAYE) issues  

Even if the payroll is not run by the practice manager and it is outsourced to a third party, it is still the responsibility of the practice manager to ensure that the PAYE and National Insurance Contributions (NIC) are paid to HMRC on time.

The deadline for payment is the 22nd following the end of the month to which the payroll relates. This means the PAYE and NIC for the month of January needs to be paid by 22nd February.

If the PAYE and NIC is paid late, HMRC will charge a late payment penalty. The first late payment of PAYE and NIC does not count, however after this the following penalties will apply:

Number of late payments in a tax year Penalty percentage applied to the amount of tax that is late in the relevant month
1-3 1%
4-6 2%
7-9 3%
10 or more  4%

HMRC will also charge daily interest on the outstanding PAYE and NIC until it is paid.

If the payroll is not outsourced to a third party, it will be the responsibility of the practice manager to ensure that monthly Real Time Information (RTI) returns are submitted to HMRC every month.  If these returns are late, there is a monthly penalty which is based on the number of employees as follows:

No of employees Monthly penalty
1-9 £100
10-49 £200
50-249 £300
250+ £400

Tax year and accounting year

The tax year runs from 6 April to the following 5 April, however the practice accounting year end may be different to the tax year-end (31 March year ends are considered to be co-terminus with the tax year). If the practice manager is dealing with the bookkeeping, this will need to be maintained to the accounting year-end.

For example, a practice may have an accounting year-end of 30 June 2017. All records will need to be kept to this year-end. The accounts for 30 June 2017 will be included on the partnership and partners’ self-assessment tax returns for the tax year 6 April 2017 to 5 April 2018 (2017/18).

How partners are taxed

Although the completion of a partner’s tax return is not the responsibility of the practice manager, quite often partners will ask the practice manager questions about this. Having an understanding of how tax returns works will help you deal with the partners’ queries.

The accounts are prepared by the accountant based on the accounting records supplied by the practice manager. The partners will pay tax on their share of the practice profits. Profit is income less expenses. However a common misunderstanding is that partners think that they pay tax on their drawings whereas they pay tax on their share of profits, regardless of whether these profits have been drawn out of the practice.

The taxable profits included on a partner’s tax return will never be the same as the profits per the accounts. HMRC require certain adjustments to be made before arriving at taxable profits, for example, depreciation is listed in the accounts as an expense, but it is not allowable for tax purposes, instead capital allowances are claimed.

Also the partner’s personal expenses such as claiming for the use of their motor car, mobile phone, home etc will be deducted from their share of profits in the accounts.

Paying the partners’ self assessment tax liabilities

Each partner will be required to submit a self-assessment tax return by the 31 January following the end of the tax year. This is the responsibility of each partner. However, in some practices, the practice manager will be responsible for paying the partners’ tax liabilities.

There is a penalty of £100 if the 31 January deadline is missed. If it is more than three months late there will be further penalties.

The tax payment dates are 31 January and 31 July each year and payment needs to have cleared HMRC bank account by these dates.  Therefore if cheques are used they need be sent in good time or paid into a bank to ensure they are cleared.

Each partner will receive a self-assessment statement of account detailing the actual amount of tax to be paid, they should give this to the practice manager to ensure payment can be made on time.

If the tax is not paid by 31 January and 31 July, daily interest will be charged. The January tax payment is made up of a balance for the previous tax year and an advance payment on account for the following tax year. If the balance is paid after 28 February, a 5% surcharge will apply.

It is extremely important that the cash flow is managed to ensure there is enough cash to pay the partners’ tax liabilities by the due dates. Usually the practice accountant should give you an estimate of tax payable after the accounts have been completed, even if the partners have not submitted their tax information.

It is advisable to have a separate bank account for the partner’s tax liabilities to which monthly transfers are made to ensure this money is set aside from practice funds.

Some partners have other income they earn outside the practice and the partners will need to decide if the practice pays the tax on this income or if the partner saves for this separately. If the practice pays, the partner’s drawings should be adjusted to ensure that enough money is withheld. Alternatively when the partner’s tax return is completed the accountant will need to advise on the split of tax liabilities between the practice and personal.

If the practice does not pay the partners’ tax liabilities, the practice manager does not need to worry about saving for the tax as the partners will take more drawings and save for the tax themselves.

Partnership tax return

In addition to the partners’ self-assessment tax return, the practice needs to submit a partnership tax return.

If the accounting year-end is different to the tax year-end, the practice manager will usually need to send their accountant details of any interest earned on bank accounts and superannuation deductions in the tax year.

The partnership tax return will be completed by your accountant and sent to the practice manager or senior/finance partner for approval. However, only the precedent partner can sign it. The partnership agreement will indicate the arrangement for appointing this post.

If the partnership tax return is not submitted by the filing deadline of 31 January, each partner will incur a £100 penalty.

Appointing new partners

When a new partner is appointed at the practice, HMRC will need to be notified and the new partner will need to register as self-employed.

Normally the practice accountant will provide all the relevant forms to do this. As soon as a new partner is appointed the practice manager should contact the accountants to notify them so the relevant paperwork can be completed and submitted to HMRC.

Value added tax (VAT)

The majority of practices will not need to worry about VAT as the provision of medical services is exempt. However, income that is not 'in respect of protecting, maintaining and restoring the health of the individual' will be a standard rate of supply.

For example, some private fees or service charges for use of rooms may be subject to VAT. A large practice will need to keep a record of this income because if it exceeds the VAT threshold (the threshold for VAT from 1 April 2017 is £85,000) the practice will need to register for VAT.

All dispensing practices will be VAT-registered so that they can claim the VAT on the cost of the drugs they dispense. VAT will need to be charged on income that does not come under the VAT exemption. As a dispensing practice also provides exempt medical services, they can only recover VAT on their expenses using the partial exemption method.

VAT returns would need to be completed each quarter and submitted to HMRC.

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