Finance and Tax Issuesfor GPs and locums

Tuesday 2nd February 2009Murray Royal Hospital, Perth

Neil Morrison

Neil Morrison

Partner with Campbell Dallas – the 3rd largest independent firm of Chartered Accountants

Firm has 5 offices in ScotlandOffice in Perth covers Tayside, Angus & FifePersonally acted for 30 GP Practices in Tayside and Fife and

many GP locumsWorking with GPs for 17 yearsContributor to Medical Press and presenter at various

Medical Seminars

Agenda

Practice Accounts : the basicsTaxCapital and Current accountsSuperannuation & SeniorityImproving Practice ProfitsGP Finances : Current Issues

Practice Accounts

The main 2 statements in a set of partnership accounts are a ‘Profit and Loss Account’ and a ‘Balance Sheet’

A Profit and Loss account is prepared for a period, e.g. the year ended 31/3/09 (i.e. 1/4/08 to 31/3/09)

A Balance Sheet is prepared as at a specific date, e.g. as at 31 March 2009. A Balance Sheet drawn up on one day can look quite different to one drawn up a day later

Accounts must be prepared on an ‘Accruals’ basis of accounting as opposed to a ‘Cash’ basis. That means income is recorded on an ‘earnings’ basis and expenditure on an ‘incurred’ basis.

Practice Accounts

Basis of Preparation :

Records kept by Practice Manager are usually on a ’cash basis’.

These can be computerised records (Iris or SAGE) or a simple cash book.

Accounting packages :Iris (formerly known as McLean McNicoll) – electronic cashbookSAGE – general accounting package (management accounts)Quickbooks – thankfully not used too often

Practice Accounts

Bookkeeping to Final accounts :

The process that takes a Practice’s records and ends up with a final set of accounts is, in essence, fairly straightforward.

The first step is to ensure that all the income and expenditure is complete and has been correctly analysed. (sounds simple but can take a tremendous amount of work!)

The reconciliation of the various Bank accounts is of paramount importance. If they have been reconciled then at least the income and expenditure is complete (it might not be analysed correctly, but at least it is in there somewhere!)

Practice Accounts

Bookkeeping to Final accounts :

Once all the transactions are in the right place it is time to make the necessary adjustments to move from the Cash Basis to the Accruals Basis:

Depreciation - writes fixed assets off over their expected useful livesDebtors - amounts owed to the practice for work done Prepayments - amounts paid by the practice which relate to future

accounting periods Creditors - amounts invoiced but not yet paid Accruals - liability incurred but no invoice yet raisedStock adjustments

These transactions would be entered dated the last day of the financial year.

Practice Accounts

Depreciation :

“Tangible Assets” reduce in value (“Depreciate”) over their expected useful life. The rate at which they reduce is dependent on the nature of the asset. The main factors affecting depreciation are:

Usage Technical Obsolescence Age

Assets would normally be grouped by type and depreciated as a class e.g Motor vehicles, Computer equipment, Buildings, Fixtures and Fittings, Equipment

Practice Accounts

Depreciation :

The calculation of depreciation seeks to reduce an asset in value over its life such that at the end of its expected useful life it is written down to its expected residual value.

There are two common ways of calculating depreciation – “Straight Line” and “Reducing Balance”

Practice Accounts

Depreciation :

Depreciation is calculated on the cost to the Practice of the asset. Any contributions from third parties, need to be deducted from the purchase price to arrive at a true cost.

Improvement grantsDrug incentive paymentsComputer reimbursementsDonations from patients etc

Practice Accounts

Depreciation :

Straight Line depreciation will write an asset off to a zero value. A reducing balance basis will never write an asset off totally.

Typical rates are:Computers 33% straight lineCars 25% reducing balanceFixtures and fittings 15% straight lineBuildings not usually depreciated

Practice Accounts

Partnership Profit Shares :

While it is not uncommon for partners profit shares to remain unchanged for a number of years, changes do happen from time to time (eg new partner moving to parity).

The arrangements for sharing income can vary between practices:

Share absolutely everythingPartners keep their Seniority and share the restKeep Seniority, Private income and share the rest

Practice Accounts

Partnership Profit Shares :

There is no “right” or “wrong” method.

The most important points are:

There must be a clear understanding of how profits are shared

Partners must avoid double counting (or failing to count!) income such as Private medical fees

Partnership Agreement should state basis of profit shares

Taxation

Tax Payments :

Again there is no “right” or “wrong” method.

There are two basic options:

Partners make drawings gross and pay their own tax bills (otherwise often known as the “let’s panic and scramble around for the money when the tax bill arrives” method)

The Practice holds back a percentage of the partners income and pays the tax bill when it arrives (otherwise known as the “trust a partner with their tax money – you must be joking” method)

Taxation

Tax Reserves :

If the practice holds on to the partners tax money it is probably easiest to open up a separate bank or building society for each partner and hold their money separately – it makes it much easier to keep track of how much each one has set aside.

The problem comes if partners have private work which does not go through the practice. The tax still has to be paid on that although the practice will probably not have made an adequate deduction from the partners drawings. Paying the tax from the practice in these circumstances will result in the partner drawing more than they are entitled to.

Taxation

Tax Payments :

Tax liabilities are calculated by reference to tax years – years ended 5th April.

The tax liability for any tax year is paid in two or three parts:1st payment on the 31st January IN the tax year2nd payment on the 31st July in the FOLLOWING tax year3rd and final payment 31st January the FOLLOWING tax year

Tax year ended 31st March 20081st Payment made 31st January 20082nd Payment made 31st July 20083rd and final payment 31st January 2009

Taxation

Tax Payments :

New partner 1 April 2006, previously a registrar, first year below parity.Partner’s profits and tax liabilities:

Profit TaxYE 31/3/07 75,000 23,000YE 31/3/08 115,000 38,000YE 31/3/09 120,000 40,000

Payments POA Balancing PaymentFor 2006/07 31/1/07 nil 31/7/07 nil 31/1/08 23,000

For 2007/8 31/1/08 11,500

31/7/08 11,500 31/1/09 £15,000

Taxation

Tax Payments :

New partner 1 April 2006, previously a registrar, first year below parity.Partners profits and tax liabilities:

Profit TaxYE 31/3/07 75,000 23,000YE 31/3/08 115,000 38,000YE 31/3/09 120,000 40,000

Payments POA Balancing PaymentFor 2008/09 31/1/09 19,000 31/7/09 19,000 31/1/10 2,000

Taxation

Tax Payments :

The overall tax payment profile is therefore:

31/1/07 nil 31/7/07 nil 31/1/08 34,500 31/7/08 11,500 31/1/09 34,000 31/7/09 19,000 31/1/10 22,000

Taxation

Tax Payments :

In times of increasing profits the 31st January payment will normally be higher than the previous 31st July payment.

This is a particular problem for partners working their way up to parity. Their income will increase as their profit share increases, but the corresponding increase in their tax bill will follow on a year or so later!

Taxation

Personal Expenses:

Types of expenses claimable are : motor, professional subs, use of room at home, telephone & internet, courses & conferences and equipment (eg medical or computer)

Claims should be reasonable, based on actual usage (eg motor mileage log) and supported by relevant invoices/receipts

Each partner needs to work out their own claim (as opposed to one rate applying to all partners)

Expense claims are dealt with through the partnership tax return and thus return cannot be completed until all partners’ expenses have been calculated

Taxation

Motor Expenses:

Two methods of claiming :

Claiming a business use percentage of total car costs (includes petrol, servicing, road tax, insurance, repairs and depreciation).

Claiming for each business mile under the FPCS. - First 10,000 miles @ 40p per mile - Thereafter @ 25p per mile Under 1st method you need to keep all invoices/receipts and

a mileage log whilst under the 2nd method a simple mileage log will suffice.

Taxation

Cars : changes to tax relief (post 6th April 2009)

New rules apply to cars purchased after 6th April 2009. Capital allowances based on CO2 emissions

Emissions 110gm/km or less = 100% FYAEmissions 111gm/km to 160gm/km = 20% WDAEmissions >160gm/km = 10% WDARestriction of £3,000 allowance per year removedAllowances still need to be adjusted for private usageQualifying cars - www.comcar.co.uk (eg BMW 320d)

Capital & Current Accounts

These cause more confusion in GPs accounts than anything else !

Capital Accounts reflect the equity interest that the (property) owning partners have in the Practice premises.

The total of the Capital Accounts should equal the Cost/Value of the premises less the borrowings relating to the premises.

An example : A building with a value of £1 million in the Practice accounts and £800,000 of borrowings attached to it has equity of £200,000.

Therefore, a partner with a 20% stake in that building should have a Capital Account balance of £40,000.

Capital & Current Accounts

Current Accounts reflect each partner’s undrawn profits and/or capital introduced

Working capital is required to fund the business. Not all income is received immediately (eg QOF achievement) and partners need to provide capital so that liabilities can be met as they fall due for payment.

Even if a partner does not buy into the property they still need to provide working capital. This is done either by introducing capital on assumption as a partner or by restricting drawings (usually over 2 years).

Most practices will try to bring the Current Account balances in line after the end of the financial year by using the final QOF payment to even out any imbalances.

Most practices aim to have closing Current Account balances in line with number of sessions performed by each partner.

Superannuation

New system from 1 April 2004

GPs now responsible for 5 - 8.5% (previously 6%) employees contributions AND 14% employer’s contributions

Payments on account deducted monthly by HB

Annual certificates to be submitted in February each year

Balancing payment of superannuation liability deducted in March each year (for previous year and current year)

Superannuation

New superannuation rates from 1st April 2008 :

Up to 19,682 - now 5% (previously 6%)

£19,683 to £65,002 - now 6.5% (previously 6%)

£65,003 to £102,499 - now 7.5% (previously 6%)

Above £102,500 - now 8.5%

The rate to be paid applies to the whole amountFor most GPs, the change meant an increased cost of 1.5% to

2.5% per annum.

Seniority

Calculation of pay depends on two factors:Firstly, the number of years of 'reckonable service' the GP has

accumulated. This is based on the number of years worked as a doctor in the NHS - not just as a GP principal

Secondly, the level of NHS pensionable profits under the 'two-thirds rule'. Less than 1/3rd average income, no SeniorityBetween 1/3rd and 2/3rds , 60% of SeniorityOver 2/3rds of average income then full Seniority

Average pensionable profits (interim figs) :2004/05 - £81,000 (revised from £75,000)2005/06 - £91,000 (revised from £80,490)2006/07 - £95,3352007/08 - £97,5002008/09 - £105,524

None of the figures have been finalised yet

Improving Practice Profits

Maximise income

Control costs/expenditure

Monitor monthly results

Benchmark your results

Improving Practice Profits

Managing NHS workload :

Only do work that you are paid to do, and YOU are the best person to do….Can patients be seen by less expensive members

of your team?Are you being firm enough when it comes to

visiting patients?Are you maximising the use of your premises?Are you charging appropriate rates for medical

reports?

Improving Practice Profits

Practice List Size :How big should a list size be ? Main factors are

age of the population and deprivation

Young (more than 81.4%<65) – 2,300Middle Aged (mainly in their 40s) – 2,100Greater social need – 2,000Significant elderly (more than 25%>65) – 1,850

Over 2/3rds of your income is effectively based on patient numbers

An aggressive approach to skill mixing can allow a practice to cope with much higher lists per FTE

Improving Practice Profits

Income – areas to watchNHS

Global Sum/PMS Baseline – list size changesSuperannuation – correct deductionsEnhanced Services – correct recordingChildhood Imms & Pre School boosters -

appointmentsReimbursements – formal recordSeniority – length of service correct?

Improving Practice Profits

Income – areas to watchPrivate and Non Core NHS

Salaried appointments – commercial rate ?TeachingRoom Rental, Nursing home fees etc.Insurance and Solicitors requests – payment pre

release of information ?Certificate fees – review charges regularly

Improving Practice Profits

Minimising Expenses

Typically over 60% of your practice expenditure is on staffSalaried doctorsFlexible career scheme doctorsRetainer/Returner scheme doctorsHealth care assistantsNurse practitionersNursesManagement and admin staff

THIS is the area where most of your management time and effort needs to be focused as the potential for savings are greatest.

Improving Practice Profits

Minimising Expenses

Other expenses:Locum costs (quality of life choice?)Utility costs – regularly review charges & obtain

quotesCleaning – own staff or contract inProfessional fees – value for money ?Printing, postage & stationery – use of email ?

Improving Practice Profits

Monitor Monthly Results

Review where you are financially on a monthly basisCompare totals for income and expenditure by type

with the previous year (for the month and year to date)What’s gone up, what’s gone down?Can you do anything to improve the situation?

How has your cash flow been affected ?What is happening to the bank balance ?How will drawings be affected ?How does the projected out-turn for the year differ from

original forecasts ?

Improving Practice Profits

Benchmark your results

How does your practice compare with the national averages for :

IncomeCostsProfitability

Explore the variances - which may highlight areas that can be easily worked on to improve profitability

Review benchmark statistics on a FTE and per patient basis

Improving Practice Profits

Some Statistics 2008/09 (Scotland) :

Profit per FTE - £95,000 (UK - £114,000)Average list size – 1,539 (UK – 2,035)GMS Income per patient - £104.43 (UK - 109.79)Gross other income per patient – £15.15 (UK –

10.65) Resulting practice income per patient - £119.58 (UK

- £120.44)Expenses per patient (net of reimbursement) -

£57.85 (UK – £64.42)Profit per patient - £61.73 (UK - £56.02)

GP Finances : Current Issues

No uplifts in pay award for 2007/08 nor 2008/09.Uplift of 2.29% for 2009/10For practices on MPIG, average increase is 1.3%Current proposal for future increases in GP’s pay based on

mix of the main funding streams:Global Sum 7Correction Factor 2QOF 5Enhanced Services 5

Thus, future increases will be allocated in nineteenths.Negotiators are working with NHS Employers to see how to

cut practices’ reliance on MPIG over a number of years without reducing practice funding

GP Finances : Current Issues

QOF – remaining at 1,000 points but prevalence arrangements being phased out over 2 financial years.

QOF - possible 16% rise in indicator thresholds meaning more work to get same income

Seniority pay – talks are continuing

GP Finances : Current Issues

Practice profits are likely to at best remain at same level, but more likely, decrease in the current year.

Pay freezes in future years ?

Practices need to look very hard at how they deliver services

Changes to skill mix have been talked about for years, and in many practices changes have already been introduced. In order to improve profits, further changes may be necessary.

Thank You

Neil Morrison, BCom, CA

Campbell Dallas, Chartered Accountants

4 Atholl Crescent, Perth, PH1 5NG

Tel: 01738 441888

Email: neil.morrison@campbelldallas.co.uk