There is a myth that 31 March is the best year end date for GP practices. It may be that another date makes more financial sense for you. For example, it may depend on whether you would prefer to pay tax on your share of practice profits later rather than sooner.
While these decisions are intertwined, GPs do not need to master the technical details. All you need to do before discussing this with your accountant is to be aware of the implications.
Self-employed GPs - including locums - are free to choose any annual date to make up their accounts to. Because payment of practices' NHS income is based on the 30 June, 30 September, 31 December and 31 March quarterly dates, the vast majority of GPs use one of these dates as their year end. The most popular practice accounting year ends are 31 March and 30 June.
Tax and accounting years
However, none of these dates coincide with the tax year. This runs from 6 April in one calendar year to 5 April in the next.
The tax year is central to the pros and cons of different accounting dates because the tax bills you pay each year are for profits earned during the tax years - not during your accounting years. Where your accounting date falls in the tax year determines how soon tax on profits will be due.
It will also affect the amount of 'overlap' tax relief (see boxes) self-employed GPs can to claim on retirement.
'Overlap' is the period by which the end of your accounting year overlaps the end of the tax year. Overlap profits and relief are a technical issue arising from the move in the late 1990s to the self-assessment taxation system. They involve profits being taxed twice in the first two tax years. Tax relief on these same profits is then deducted from your taxable profit (for tax calculation purposes) for the tax year in which you leave the practice.
Many practices have changed their year end to 31 March because there is no inflation adjustment to overlap profits even if it is many years after earning them that you leave your practice. A practice year end of 31 March avoids the overlap problem almost completely because it very nearly coincides with the 5 April tax year end.
The only problem is that when a practice changes its year end, it triggers the overlap profits, so the extra tax becomes payable at that point.
Any extra tax payable as a result of the overlap profits can be avoided. If the GP in the example had reduced his or her hours by half in the last 12 months, the final profit share would also halve to £65,000 and tax would be due on only £20,000 - £65,000 minus overlap relief of £45,000 - instead of being due on £65,000.
Other factors that need to be considered in choosing a year- end date include NHS superannuation.
For the 2005/6 tax year, GPs had their NHS profits pensioned for accounting years ending between 30 June 2005 and 31 March 2006. But superannuable profits to 31 March 2006 would in many cases have been significantly higher than in an accounting year ending 30 June 2005.
Limiting tax liability
If a GP wanted to limit his or her NHS pensionable pay, choosing a year end early in the tax year (soon after 6 April) would have been preferable. Likewise if practice profits are sliding, an accounting date earlier in the tax year is preferable.
Assuming the practice has its annual accounts finalised six months after the accounting year end, the partners will have 13 months to plan for their tax and superannuation payments with a year end of 30 June. With a 31 March year end, they will only have four months' notice. This is not a long if there are some significant increases in profits, and hence big tax and superannuation payments due.
Careful retirement planning is often better than changing the year end. A 31 March year end reduces the time period before tax is due. It also means that accounts and tax returns may not be ready in time if proposals for new filing dates of 30 September for paper tax returns and 30 November for online returns are adopted.
Not having a 31 March year end may reduce your pensionable profits marginally. However, this may be useful if you are close to the annual or lifetime pensions caps.
If overlap profits are a potential problem for you and your partners, my advice is to investigate whether changing the accounting date to 31 December might reduce the pain. This will also allow sufficient time for accounts preparation and to save the funds to pay the tax.
Do not worry if the best accounting date question is tricky to understand.
Instead, show this feature to your accountants - they earn their fees for resolving issues such as this.
- Laurence Slavin is a partner at north London medical specialist accountants Ramsay Brown & Partners.
EXAMPLE: YEAR END AND OVERLAP PROFITS
A GP joined a partnership on 1 June 2005 and leaves it on 30 September 2010. The practice prepares accounts to 30 September each year.
The GP's profit shares are:
1 June 2005 to 30 September 2005: £26,000
12 months to 30 September 2006: £90,000
12 months to 30 September 2007: £100,000
12 months to 30 September 2008: £110,000
12 months to 30 September 2009: £120,000
12 months to 30 September 2010: £130,000
First tax year's pre-tax profit (2005/6)
1 June 2005 to 5 April 2006 £26,000 + 6/12 x £90,000 =
Second tax year's pre-tax profit (2006/7)
6 April 2006 to 5 April 2007 12 months to 30 September 2006 =£90,000
Third tax year's pre-tax profit (2007/8)
6 April 2007 to 5 April 2008
12 months to 30 September 2007=£100,000
In the first two years, £45,000 of overlap profits are taxed
twice. Total profits earned from 1 June 2005 to 30 September 2006 are
£116,000 but total taxable profits for the period are £161,000.
When the GP retires on 30 September 2010, his final tax year will be
2010/11 and his penultimate year, 2009/10 (12 months to 30 September
Penultimate tax year's pre-tax profit (2009/10)
6 April 2009 to 5 April 2010
12 months to 30 September 2009=£120,000
Final tax year's pre-tax profit (2010/11)
6 April 2010 to 5 April 2011
12 months to 30 September 2010
Overlap relief in final tax year
Because the GP has only worked for six months of the 2010/11 tax year but is paying tax on 12 months' profits, overlap relief is given by deducting the £45,000 (overlap relief) that was taxed twice in the first two tax years.
£130,000 - £45,000 = £85,000 taxable profit.
This is more than six month's worth of the final year's profits (6/12 x £130,000 = £65,000).
TAXATION OF SELF-EMPLOYED PROFITS
- If a practice does not have a 31 March year end - or another year end that more of less coincides with the tax year - some of the profits a GP earns in the first year of self-employed practice are taxed twice.
- The profits taxed twice relate to the period by which the practice accounting year 'overlaps' the tax year.
- Each tax year runs from 6 April to 5 April of the following calendar year.
- There are special rules for taxing self-employed profits in the first, second and last tax years they are earned.
First tax year - From commencement date to following 5 April.
Second tax year - The 12 months to the accounting year end or if not possible, the first 12 months of self employment.
Third year and subsequent years - The 12 months to the accounting year end.
Closing year - The period beginning after the end of the basis period of the penultimate year to date of cessation.