Case study: Are you at risk of losing tax-free childcare?

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Case study: Are you at risk of losing tax-free childcare?

The client

A new partner at a long-established GP practice in Kent was at risk of a £4,000 claw-back relating to the government’s tax-free childcare scheme.

The dilemma

The tax-free childcare scheme was introduced in April 2017 to help working parents fund childcare costs. Earnings for the year must remain below a threshold of £100,000 and are assessed against adjusted net income. For a GP partner, this includes their partnership profit share after allowable expenses plus any external income; less pension contributions and donations where Gift Aid is claimed.

If a parent earns more than £100,000 during the tax year, the tax-free bonus of up to £2,000 per child per year can be clawed back and future tax-free bonuses denied.

“This is exactly the situation that one of our clients found themselves in for the 2021/22 tax year,” said Abi Newbury, managing director at AISMA accountancy firm Honey Barrett, who led the case.

The issue became apparent during the practice’s annual accounts meeting with Honey Barrett. “Although we request personal tax information from all partners well in advance of the annual accounts meeting, this particular partner was new to the practice and she had not provided this information to us,” says Abi Newbury.

“For the accounts meeting we prepared estimates of her tax and pension liabilities. However, as we didn’t have her full personal tax details, we were unaware that she had been participating in the tax-free childcare scheme. Consequently, and with her profit share for the year exceeding £100,000, her dilemma only came to light during the meeting.”

Already facing hefty tax bills in relation to the commencement of the partnership role, the partner was, unsurprisingly, daunted at the prospect of also having £4,000 of tax-free childcare clawed back (and losing access to the scheme going forwards).

Action required

“Client care is at the heart of everything we do, and anything we can do to ease the worries of our clients is paramount to the service we provide,” says Abi Newbury.  A plan was immediately put into place to try to mitigate the situation.

For practices with a non-31 March year-end, it is usual for accountancy firms to calculate the partners’ profit shares and estimated pension liabilities for the year ahead. “Doing this led to us identifying an underpayment of NHS Pension Scheme contributions. We recommended that the new partner accelerate the payment of these contributions, prior to 5 April 2022, in order to bring her adjusted net income below the £100,000 threshold for the 2021/22 tax year, thus preserving her tax-free child care for the year,” says Abi Newbury. “It also meant she retained her eligibility for tax-free childcare in 2022/23.”

The conclusion

A great deal of worry and money was saved for the GP in question by the team at Honey Barrett. “This is all part of the normal level of service and projections that we provide our clients,” says Abi Newbury. “The review of pension balances, and consideration of accelerated pension payments can have many benefits, and not just in terms of potential income tax savings.”

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Missing out on VAT claims when extending or refurbishing premises can be expensive

A thorough analysis of a practice’s financial history means the incoming accountant is able to provide the best advice going forward. So when AISMA accountant Haines Watts Kent took over a rural dispensing GP practice a few years ago, their first priority was to undertake a review to make sure the practice’s financial affairs were in order.

The five GP partners had, at their initial meeting with the Haines Watts team, mentioned a recent extension and improvement work to the practice. Overall this had added around a third to the floor space in the building, with both pharmacy and waiting area extended, four new consulting rooms added, together with a new large meeting room and more admin space.

David Lockitt, Associate Director at Haines Watts Kent, said: “My focus was to look at how the extension had been treated in the accounts since there were some complicated lending arrangements to understand. I also looked at the funding the practice had secured, which was a third of the build costs in return for a 10-year abatement in notional rent of 20%.”

The partners also wanted to make sure that the practice was managing its VAT correctly so during David Lockitt’s review he examined the calculations the practice had made for the current quarter’s VAT return.

His team discovered that:

  • No VAT had been reclaimed on the extension to the premises because the practice had been advised that there was none to recover.
  • Only VAT on drug purchases had been reclaimed with an annual adjustment carried out at the end of the year. The practice should have been reclaiming, on a quarterly basis, a percentage of their overhead VAT and the VAT on building costs put through the accounts as expenses.
  • The annual adjustment, and therefore the reclaim of input VAT, had not been calculated correctly in previous years.

David Lockitt explains how they were able to help the practice reclaim the VAT. “We agreed with the client to investigate this further and put in a claim for input VAT as well as dealing directly with HMRC to ensure that the claim was agreed. In the end we agreed a repayment of just under £70,000 from HMRC, of which £40,000 was for capital expenditure and so not liable to income tax.”

Unfortunately, the partners missed out on reclaiming a further £20,000 in VAT. This was for expenditure at the beginning of the extension and improvement work to the practice, mainly ground works. “These costs were more than three years old and the time limit for VAT reclaims had simply expired” explains David Lockitt.

 

 

 

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VAT can be a complicated business

A lack of clear advice and excessive accounting bills on a regular basis led this four-partner dispensing practice to appoint AISMA accountant Foxley Kingham on the basis of a fixed fee.

Early on in the process of preparing the first annual accounts Foxley Kingham noted that the VAT records and results were significantly out of line compared to their other dispensing clients. On reviewing the calculations, Foxley Kingham’s specialist VAT manager advised that the complex partial exemption calculations, as required by dispensing practices, had been incorrectly performed, not just for the previous year but for the past four years since dispensers were forced to register for VAT. There were significant overclaims in each month’s calculations, no adjustments for breaching the “de minimus limits” and no annual recalculation. An initial estimate showed the errors could result in the repayment of VAT, interest and penalties of around £200,000.

Chris Howe, director at Foxley Kingham, says: “When we questioned the practice manager we discovered that the practice had obtained a spreadsheet template from another practice and had used that without reviewing its results, with disastrous consequences.” The practice had also been advised by their previous accountants that due to the complexities of VAT registration their annual accounting fees would need to be increased by £1,800. Consequently the practice assumed that the accountants would be thoroughly checking the VAT workings when they prepared the annual accounts. It was clear that no such checks had taken place in any of the previous four years.

Foxley Kingham advised:

* The VAT calculations needed to be re-worked, and HMRC advised in writing of the significant overclaim

* That VAT repayment over 12 to 18 months should be requested from HMRC, with drawings restricted accordingly

* The retired partner would need to be advised that a contribution representing his past profit shares of the overclaim    would be required

* The new partner should be informed that only a minor contribution would be required as she had only recently joined  the practice

* That tax returns would need to be revised downwards for the past two years and recoveries of income tax made

* That superannuation certificates would need revision as pensionable profits had been overstated by the excessive VAT  claims

* Ongoing monthly VAT workings should be reviewed by Foxley Kingham until the practice was confident in its abilities

* That Foxley Kingham would perform an annual VAT review on the preparation of each years’ accounts.

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Checking the monthly payroll can counter employee fraud

The failure by their accountants to identify a long-running employee fraud costing over £300,000 led this large nine-partner practice to appoint AISMA accountants Foxley Kingham. The fraud was discovered by the GPs themselves who, realising that they had not received useful practice advice nor had personal meetings and financial advice for many years, had completely lost faith in their previous accountants.

The fraud had been committed by the former practice manager, now serving a prison sentence, who had been trusted fully with all matters to do with practice finance. So much so that nobody noticed when he awarded himself a significant pay rise. While monthly pay cheque sheets appeared to be offered for review, the summary sheet did not fully reflect the amount leaving the bank account. Staff salaries are the largest expense of any practice apart from partners drawings and hence merit regular detailed scrutiny.

This is not the only example of employee fraud encountered by Foxley Kingham director Chris Howe. “Cash paid by patients for dispensing fees or private reports is sometimes left “in the tin at reception”. It then becomes apparent subsequently that the amount banked from the tin is significantly less than the amount that should have gone into it.” This is just one example of the sort of employee fidelity issues experienced with dispensing practices, albeit infrequently.

Foxley Kingham advised that the newly appointed higher level practice manager should, with one nominated finance partner, make monthly reviews of expenditure, prepare cash-flow projections and generally oversee practice finances on a regular basis.

In addition to meeting the practice on two occasions in April each year to review draft and then final accounts, Foxley Kingham also attends for a full day in September each year for a practice finance meeting and to meet individual partners to discuss personal finance, tax and pension issues.

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Poor financial management puts practice on shaky footing

Concerned about cash-flow and with no helpful advice from his existing accountants without incurring a large fee bill, the practice manager at this large nine-partner practice recommended the appointment of AISMA accountant Foxley Kingham.

On preparing the first year’s accounts Foxley Kingham came across many anomalies from the previous year’s accounts. These had led to an overstatement of the previous year’s profits and had resulted in partners overdrawing. The PCT were also deducting excessive superannuation payments based on the overstated profits from the previous year.

Chris Howe, partner at Foxley Kingham who oversaw the untangling of the practice’s financial affairs, says: “On suggesting to the practice manager that the poor state of the accounts and other financial issues indicated that proper internal financial management had been lacking for the last year or two, he admitted that this was the case as the partner who used to manage the finances had left some time ago.”

Unfortunately, the ongoing partners had assumed all was in hand since drawings continued to be paid. They had not, however, taken account of the worsening cash-flow position, which meant that the practice could not now pay its bills.

There were superannuation shortfalls too but confusion over who should pay. Should the partners pay individually or should the practice pay and make relevant accounting adjustments against each partner?

“Not surprisingly, the partners were shaken when presented with the full extent of their financial problems and several were considering leaving or retiring” says Chris Howe. “If they did the recruitment of new partners could prove difficult.”

To compound matters, the partners’ capital accounts were in a mess. Several years previously, the practice had diversified into another medical venture via a separate company. This venture had failed, and the assets of the company were transferred at a book value of £50,000 to the practice accounts. Chris Howe comments: “On questioning the practice on how much these assets were really worth we were told that they had been trying to sell them without success. Our conclusion, therefore, was that they were worthless. However the practice accounts showed them valued at £50,000 and hence each partner’s practice capital account was overstated”. Chris explains that this would have meant that any retiring partners would have expected bigger payouts than they were actually due.

Finally, having reviewed the balances on the partners’ capital accounts, Foxley Kingham noted that one partner was some £25,000 below the others. The practice had not equalised partners’ accounts for many years and hence nobody could remember why this difference had arisen. Should the other partners have to give some of their balances away to make up the difference, or did the individual partner concerned have to pay in a large amount of extra capital?

To resolve the position Chris Howe and his team at Foxley Kingham:

* Prepared an accurate set of accounts, showing a poor result due to adjustments for previous errors.

* Prepared cash-flow forecasts.

* Recommended that partners take standard drawings with no quarterly bonus until the practice understood its cash-flow    position

* Contacted the PCT and asked them to significantly reduce superannuation deductions

* Advised the practice to pay any superannuation shortfalls on behalf of partners

* Projected an estimate of future years’ profits indicating that earnings would return to a good level thus providing        positive signals to potential new partners

* Reviewed 8 years of previous accounts to ascertain why one partner’s capital account was so low, and recommended    annual equalisations of capital.

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Incomplete service record puts big dent in doctor’s pension

A single six month rotation as a house officer in hospital can typically represent £1,000 a year and a tax free lump sum of £3,000 to a GP’s pension. However, the doctor will only receive this if the period of service is noted on his or her service record. Consequently, incomplete service records can significantly reduce the amount the doctor receives in retirement.

Take the case of a new partner at a practice represented by AISMA accountants Moore and Smalley LLP for several years. When the GP arrived at the practice Moore and Smalley asked for a full NHS career history, including, where possible, dates of joining and leaving. At the same time, the firm requested an estimate of the GP’s pension from the NHS Pensions Agency, including a full breakdown of the doctor’s service record.

David Walker, tax specialist at Moore and Smalley, says: “Once we received the estimate from NHS Pensions we compared the service record with the details provided by the GP. It’s surprising how often the two do not match and this case was no different.” Moore and Smalley discovered that NHS Pensions had over two years of service missing from their records. David Walker explains: “This GP had 20 years to go before his standard retirement age, but even at today’s rates this would have caused him to receive a pension of £4,300 a year less than it should have been and a reduction of £12,900 in the tax free lump sum.”

The case highlights how important it is for doctors to have an accountant who knows what to look out for and who understands the impact that missing service can have. “We were able to get the missing service added to the doctor’s records held by the NHS Pensions Agency, ensuring that he will receive his full pension entitlement when the time comes,” says David Walker. “It is unlikely that GPs on their own, or non-specialist accountants, would even notice that anything was amiss.”

Highlights

Doctor: Newly appointed GP partner

AISMA accountant: Moore and Smalley LLP

Theme: Incomplete service record at NHS Pensions Agency

Detail: Two years of service missing from GP’s service record, at today’s rates causing a reduction of £4,300 a year in pension and £12,900 in tax free lump sum

Action taken: Missing service added to records held by NHS Pensions Agency to ensure full pension entitlement is paid at retirement

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Practice in danger of losing cash by failing to claim refunds

Detailed questioning by AISMA accountant Honey Barrett revealed a pattern of persistent under-claiming at a small medical practice in the South East. The three-partner GMS practice had been without a practice manager for a year following the resignation without notice of the previous incumbent.

With no-one focusing on funding claims, matters slipped and it was only when Honey Barrett started to prepare the year-end accounts that the full picture emerged. Liz Densley, director, Honey Barrett said: “An important part of our function at the year end is to assess where funding claims have been made. It was clear that this practice was in a terrible mess and was in danger of letting cash slip through its fingers, all because legitimate claims had not gone in.”

To start with no reimbursements from the PCT had been claimed for water rates or refuse and the practice stood to lose more than £2,000. An overpayment of £2,000 made to the practice’s previous gas supplier had not been retrieved before switching to a new supplier. Payments of more than £3,000 the practice was entitled to through the flexible career scheme had not been claimed from the PCT. The practice had not notified the PCT of the correct salary for the practice’s salaried GPs and consequently had overpaid superannuation by nearly £3,000. Under-claimed VAT stood at £2,000. Finally the practice had failed to claim for processing disabled blue badges – an estimated £2,000. In all £14,000 of under-claimed or underpaid funding was identified by Honey Barrett.

Liz Densley concludes: “Like many doctors and practice managers, the GPs and practice manager at this practice were worried about the depth and quantity of the questions we asked. However, when the questions revealed the amount the practice stood to gain, the doctors realised the value of our approach.”

Highlights
Practice: Small GMS practice with 3 partners
AISMA accountant: Honey Barrett
Theme: Practice fails to receive legitimate funding of £14,000
Detail: With no practice manager in post the practice had lost focus on claims and reimbursements.
Action taken: As part of the year-end accounts preparation, Honey Barrett made detailed enquiries which enabled the practice to collect money due to them and make retrospective claims.
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Calculation errors trigger black hole in practice reserves

When AISMA accountants Coveney Nicholls took over the taxation and financial affairs of a large London practice, they inherited a group of worried and financially stretched doctors who had lost all faith in their previous accountants.

The practice had a non 31st March year-end and, although their accounts reflected reserves for tax and superannuation, calculation errors by the previous accountants meant these had been substantially underestimated.

The practice had been advised that the partners could draw large sums out of the current accounts, only to find that their tax liabilities had not been adequately reserved for. Effectively, a whole year’s tax liabilities had been missed.

After 31st January, the date by which they had to pay their tax liabilities, the practice had disastrous cashflow problems, made worse by the overpayment made to a partner, based on the previous accountants’ figures, who was no longer at the practice.

Furthermore, no account had been taken of the requirement under the partnership agreement to retain a working capital sum per partner based on weekly sessions worked. All partners faced a reduction in drawings.

Sue Beaton, director, Coveney Nicholls says: “Our priority was to put a rescue plan in place as soon as possible so that the practice could regain a firm financial footing.” She describes how the Coveney Nicholls team set to work. “First we reviewed practice performance to assess what recommendations could be made to improve profitability and cash flow. Forthcoming tax liabilities were assessed and consideration given to changing the year-end in a year or so to bring the practice affairs up to date.”

All partners’ requirements were looked at individually and a recovery plan set up for each. Half-yearly management accounts will be prepared by Coveny Nicholls so that the practice can keep a close eye on progress. Sue Beaton concludes: “So far the practice is making good progress and is well on the way to achieving better financial control. We are in regular contact and are always on the end of the phone if needed.”

Highlights
Practice: Large London practice with 8 partners
AISMA accountant: Coveney Nicholls
Theme: Reserves miscalculated by previous accountant
Detail: A whole year’s tax liabilities had been missed and the partners had overdrawn on their reserve accounts, severely impacting practice cash flow. Partners faced a reduction in drawings.
Action taken: Practice performance reviewed, recommendations made on improving profitability and cash flow, individual recovery plans made for all partners. Half yearly management accounts prepared to ensure progress is monitored closely.
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Are you paying too much National Insurance?

This was certainly the case for a client of AISMA accountants Moore and Smalley LLP. On taking over the financial affairs of a hospital consultant employed by the NHS who also worked privately, Moore and Smalley uncovered a catalogue of errors over the previous six years and found that the doctor had overpaid National Insurance contributions that, with interest, amounted to more than £5,000.

Moore and Smalley began by reviewing the doctor’s 2007/8 tax return, which had been submitted by the previous accountant. This revealed that the full rate of National Insurance was being paid on both the doctor’s employed and self-employed earnings. David Walker, tax specialist at Moore and Smalley, explains: “If a doctor pays the full rate of National Insurance for employed income, then the rate paid on any self-employed income, in this case the doctor’s private fee income, should be reduced. Consequently, this doctor was paying more than was needed.”

After obtaining information for the previous six tax years Moore and Smalley calculated the refunds due and made an application to HM Revenue & Customs on the doctor’s behalf. A refund of £5,082.77, including interest, was paid.

David Walker continues: “We come across similar cases frequently since it can affect doctors working as hospital consultants and also salaried GPs who earn non-NHS income. With this particular case we not only obtained a refund for National Insurance contributions but also found that we could reduce the doctor’s tax payments due for 2007/8 and subsequent years.”

Highlights
Doctor: NHS hospital consultant with some private fee income
AISMA accountant: Moore and Smalley CA Ltd
Theme: £5,000 refund obtained for overpayment of National Insurance contributions
Detail: Full rate of National Insurance paid on both employed and self-employed income resulting in overpayment over six years
Action taken: Tax returns examined, refund calculated and application to HMRC made on doctor’s behalf
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  • Abi Newbury
  • AISMA Secretary
  • Honey Barrett Ltd
  • 48 St Leonards Road
  • BEXHILL ON SEA
  • TN40 1JB
  • T:01424730345
  • F: 01424730330