LENTELLS LIMITED UNDERSTANDING THE PROFIT AND LOSS ACCOUNT

Transcription

1 LENTELLS LIMITED UNDERSTANDING THE PROFIT AND LOSS ACCOUNT MARCH 2011

2 OVERVIEW OF GP ACCOUNTS Why Are Accounts Required? 1. To determine partners tax liabilities. 2. So profits can be allocated between partners. 3. Aid management decision making and planning. Accruals Basis VAT 1. Include income earned and expenditure due NOT income received and costs paid. 2. To agree with GAAP (generally accepted accounting principles) and as required by HMRC. 3. Smooth out fluctuations due to timing differences on cash paid/received. VAT registered figures shown net of VAT Non VAT registered figures shown gross of VAT Format of Accounts No prescribed format (unlike accounts for limited companies) but should be easy to understand and include: Profit and loss summary Detailed income schedules Detailed expenditure schedules Dispensary trading account (if applicable) Profit allocation schedule Balance sheet Fixed assets schedule Partners capital/current accounts schedules Drawings schedule

3 PARTNER S SUPERANNUATION Monthly payments are made on account for each partner by deduction from the NHS income statements. These are based on the projected superannuable profits for each partner as declared on a form submitted by the practice, normally in March each year. In February each year a superannuation certificate is then submitted for each partner (normally completed by the accountant) calculating the superannuable profits for the period ending March in the preceding year. The total due is then compared to the payments on account and any under/overpayment adjusted for on the March NHS income statement. Example: 09/10 superannuable profits estimated at 100,000, but certificate submitted February 2011 shows superannuable profits are 105,000 Paid on account April 2009 March 2010 Due per certificate Balancing adjustment March 2011 Employer 14% 14,000 14, Employee 7.5% 7,500 7, Total 21,500 22,575 1,075 Employer s superannuation This is the 14% contribution paid into the NHS pension scheme by each partner. Employer s superannuation should be shown as a deduction from income and allocated to individual partners because: 1. Income (GMS/PMS) is inflated to take this into account. If not deducted from income, profits will be overstated. 2. Liability for individual partners varies even if on same profit shares because takes into account partner s personal expenses, personal income, loan interest etc.

4 Employee s superannuation Employee s superannuation allocated directly to partners individual current accounts because: 1. Not included in income, so incorrect to include in profit and loss account. 2. Liability varies (as for employer s) but also partners pay at differing rates of 5% 8.5% depending on earnings level as follows for 2010/11: Superannuable Earnings Contribution rate < 21,175 5% 21,176 69, % 69, , % > 110, % Added Years Some partners may make additional contributions through added years. These will be up to a maximum of 9%, and will be calculated/collected in the same way as employee contributions. The rate of contribution will vary according to individual circumstances, but will stay at the same rate until the GP retires. For some GPs, the amount of superannuable profits that apply for added years will be capped. For 2009/10 the cap was 123,600 meaning that if a GP earned over this amount, he/she would only pay contributions on a maximum on 123,600. No new added years contracts can now be entered into, but existing contracts still continue. Additional Pension Following the cessation of the added years option, the NHS Pensions Agency has introduced a new option additional pension. This allows members to purchase additional pension of between 250 and 5,000. A quote can be obtained from NHSPA for members interested in doing this and payment can be made as a lump sum or in instalments over a maximum of 20 years. If paying in instalments, the monthly contribution would normally stay the same. AVCs A less common way of increasing pension is to make contributions into an AVC. These are invested by NHSPA in an external scheme, not the NHS scheme, and are similar to a private pension scheme. The monthly contributions would remain the same with any benefits earned depending on the return on investment rather than the normal NHS pension entitlement calculation. Further Info

5 CALCULATION OF INCOME ENTITLEMENT General Medical Services (GMS) Practices New GMS contract introduced 1 April 2004 and comprises two main elements: 1. Global sum For year end 31 March 2011 based on per weighted list size, adjusted quarterly to reflect changes in weighted list size. Covers the core services that the practice must provide. Weighted list size based on actual list size adjusted according to age, sex, nursing home residents, additional needs, list turnover, market forces factor and rurality. Also incorporates an amount for temporary residents. This is based on data per the historical claims made before the new contract was introduced. The figure has not been increased since. 2. Correction Factor When the new GMS contract was originally introduced in 2004, if practice income was based solely on the global sum, a number of practices would have experienced a significant decrease in income. In order to ensure financial stability for practices, a calculation was performed comparing global sum income with the total due from certain items under the old red book. The calculation of old red book income was known as Minimum Practice Income Guarantee (MPIG). Any shortfall was dealt with by an additional income allocation known as the correction factor. The correction factor is therefore an historical amount and has not been increased since the new contract was introduced. In recent years part of the increase in global sum has been clawed back by a reduction in the correction factor. This has meant in some instances that the correction factor has been completely eliminated. Personal Medical Services (PMS) Practices Between 1998 and 2004 some practices converted from the old GMS contract to a new contract Personal Medical Services. The main incentive for transferring initially was the allocation of growth money to fund additional nurses or salaried GPs in order to provide a more flexible and locally responsive service. Contract amounts and services to be provided were agreed on an individual basis between the practice and the PCT. This has led to wide fluctuation in the funding of PMS practices. Since the introduction of the new contract PCTs have been able to determine increases in PMS baseline amounts. In general, however annual increases have broadly been in line with that offered to GMS practices. It is important that the calculations for any agreed pay increases are carefully checked as errors often occur.

6 In addition, annual adjustments are normally made to the PMS baseline to reflect changes in practice weighted list size. Recently a number of PCT s have attempted to renegotiate funding for PMS practices in order to be seen to be achieving value for money. A significant number of practices have therefore seen a decrease in funding. All PMS practices have the right to transfer to a GMS contract. Any practices doing so would however not be protected by MPIG. APMS/SPMS Alternative/Specialist Provider Medical Services Contracts are agreed on an individual basis with the PCT according to the unique requirements of the service required. APMS contracts involve holding a list of registered patients. Opt Outs A charge is made to any practice that chooses to opt out of offering out of hours cover on the following basis: GMS 6% of the global sum PMS 3.31 per patient (has not increased since 2004) GMS practices reliant on the MPIG have seen the charge for OOH increase recently because of the way pay rises have been weighted towards increasing the global sum amount (and reducing the correction factor). It is possible for practices to opt out of some other core services (eg child health, cytology etc) for a fixed charge, but in practice this is rare. Seniority Entitlement to seniority commences once a GP partner has been registered with the GMC for six years and has been a partner for two years. The amount of seniority entitlement increases each year (see Appendix A). To be entitled to the full amount of seniority, a partner must have superannuable earnings of at least two thirds of the average superannuable earnings of a GP. If earnings fall between one third and two thirds, 60% of the total is payable. If earnings are below one third, no amount is due. Superannuable earnings for each GP are calculated based on the amount shown on the superannuation certificate less the seniority paid for that year. As the superannuation certificate is not completed until several months after the accounts year end, the seniority is based on estimated earnings.

7 In addition, average NHS earnings will not be known until some years later and amounts paid are therefore based on the estimated amounts. Corrections are made once the actual amount has been confirmed resulting in clawbacks/arrears adjustments if necessary. This may cause issues if a GP has since left. Average NHS earnings for GPs are as follows: 2004/ ,123 (actual) 2005/ ,123 (actual) 2006/ ,140 (actual) 2007/ ,355 (interim) 2008/ ,524 (interim) 2009/ ,743 (interim) 2010/ ,802 (interim) Quality and Outcomes Framework GMS practices can earn a maximum of 1,000 points from QOF. PMS practices are only able to earn a maximum of 891 points as a deduction of 109 points is made to account for items deemed to be incorporated in the PMS contract. Points are available from clinical, organisational, additional services and patient experience domains. Clinical entitlement is measured each year with the amount each practice is entitled to adjusted according to the disease prevalence of the practice as a proportion of the national disease prevalence. Points for an average size practice are worth each. Income from the clinical domain for each practice is calculated as follows: x points achieved x list size/average list size x practice prevalence/national prevalence. A small change will occur in 2010/2011 with the removal of the 5% rounding which was previously included. This should not have a significant impact on practice earnings. Payments on account are made monthly throughout the year based on 1/12 of 70% of the total income for the previous year. The final balance is then due in June based on the QMAS assessment on 31 March and patient experience results.

8 Enhanced Services Enhanced services are available as directed, national and local. For many, a monthly/quarterly amount is payable on account and this is reconciled with actual performance quarterly/six monthly/annually. DIRECTED ENHANCED SERVICES These are available to all practices at nationally agreed rates. For 2010/2011 services available include the following: Influenza and pneumococcal vaccinations Extended access Childhood vaccinations Osteoporosis NATIONAL ENHANCED SERVICES The PCT is not required to make these available to all practices but where they are offered, agreed national rates apply. For 2010/2011 services available include the following: Alcohol misuse Anti coagulation monitoring Near patient testing IUD fitting LOCAL ENHANCED SERVICES These vary extensively between regions and the local PCTs are free to offer the services to practices at specified local rates. Local enhanced services available include: Pre and post operative Minor injury Shared care When deciding whether to offer an enhanced service, practices should consider the input required from GPs and staff and any additional costs. Practices should also consider whether more income could be earned elsewhere for the same effort.

9 Appointment Income GPs often have outside appointments, such as hospital appointments where they work as employees outside the practice. Often this income is paid to the practice and arrangements vary over whether this income belongs to the individual GP or the practice (pooled). Generally if the work is done in practice time, it will be shared by all partners, but if it is done outside practice hours, it will belong to the individual GP. Often deductions will be made from the income for superannuation, national insurance and tax. Income needs to be shown gross in the accounts and therefore it is vital that the accountant is provided with copies of the payslips so the relevant adjustments may be made. Any deductions will then be allocated to individual partner drawings. Any PAYE/NIC will be taken into account when calculating individual tax liabilities. If income is pooled, it is possible to obtain an NT Coding Notice for the appointment so that PAYE is not deducted at source. This then provides a cash flow advantage to the practice. Other Clinical Income Varies significantly between practices and includes private fees, medical reports, travel vaccinations, drug trials etc. There are no agreed fee rates but BMA does provide guidance, however no obligation to follow these rates. Main issues to consider are: 1. Credit control and how to ensure you are paid for work done and that it is all recorded. 2. VAT treatment (if practice is VAT registered). 3. Agreement and allocation of income to specific partners. REIMBURSEMENTS Historically, it was correct to show reimbursements separately as income rather than netting off related costs, because of the way pay increases were calculated (before 2004). Consideration was given to increases in GP expenditure, therefore expenses needed to be shown gross to ensure they were taken into account fully. It is still considered best practice to show reimbursements separately so that: 1. The income received can be verified in conjunction with costs. 2. Income is correctly treated for superannuation purposes. Cost Rent Now less common for new schemes to be financed through cost rent but a lot of practices have existing arrangements on this basis.

10 Cost rent reimbursement is linked to the costs of financing the surgery premises and in most cases will be a reimbursement for fixed rate borrowing. The reimbursement continues at the same rate unless there is a change to the financing arrangements. Practices are therefore obliged to inform the PCT if any such changes occur. Practices in receipt of cost rent have the opportunity to revert to notional rent reimbursement. It is therefore worth periodically checking the potential level of notional rent reimbursement that would be available to determine whether the practice would be better off. Notional rent can however decrease so the guarantee provided by cost rent would not apply. Notional Rent Notional rent is reassessed every three years and is based on a valuation provided by a district valuer. It is always worth appealing against the valuation using a specialist valuer, as increases are often achieved. It may also be worth liaising with a specialist valuer prior to the visit from the district valuer since it may be possible to achieve an increase in the valuation by making some small amendments at the property. Rates and Water In most instances, practices should receive full reimbursement for general rates and water rates. Practices may need to pay the bills themselves then submit to the PCT for reimbursement or the PCT may pay the bills directly. If the PCT pays the bills directly, details should still be provided to the accountant so that both the income and costs can be included. PMS practices often receive an allowance within their PMS budget for rates and water. In such circumstances the reimbursement will not match the costs and invoices will not need to be submitted. The position regarding reimbursement for waste and clinical costs is not clear and varies between PCTs. Practices should therefore confirm the position individually. Registrars Reimbursement should be received in full for all Registrars employed. This should include reimbursement for all expenses (subscriptions, travel etc.) and Employer s National Insurance. Payments to Registrars should be made through the payroll. The position of superannuation, however is complicated as follows: Employee superannuation and added years. A deduction should be made through the payroll for any relevant contributions, however these amounts should not be included within the monthly staff pension payment to NHSPA. Employer s superannuation. Should not be calculated or paid across to NHSPA.

11 The reimbursement received will effectively be received net of the employee and added years superannuation deductions. The employer s superannuation contribution will be funded directly by the PCT. In addition, the reimbursement will include a monthly training grant of 7,287 per year per registrar. This is an allowance rather than a reimbursement and should be shown separately within the accounts. Errors occur frequently with the level of reimbursements, most commonly when registrars leave/join or are on maternity/sick leave. Practices should therefore ensure that they check and confirm the level of reimbursements received. PA Drugs Practices are able to claim a monthly reimbursement for the cost of PA drugs used within the practice. Care is needed to ensure claims are correctly made for all items used. The reimbursement for certain items may be lower than the cost of the item and in such circumstances, the practice should consider issuing a prescription. Reimbursements are normally received two to three months in arrears. Therefore you will need to provide your accountant with details of drug reimbursement income received two to three months after the accounting year end. Contribution to Costs If practices charge rent to other users of surgery premises, this may impact on rent reimbursement. Where other professionals make use of the surgery premises it is therefore better to charge users a service charge to cover the running costs. Unfortunately this often yields fairly minimal income. OTHER NON CLINICAL INCOME This will vary significantly between practices and will often include bank interest received, donations received and rental income (eg for a pharmacy). Where bank interest is received, the amounts are shown within the accounts net of tax then the partners are given credit for this on calculation of their income tax liabilities. If donations received are spent on specific items of equipment, details should be provided to your accountant so that the income can be correctly treated. Donations received from NHS patients are not taxable. DISPENSARY TRADING ACCOUNT Income Recognition Normally income received 2 or 3 months in arrears therefore need income statements post year end so can account for income due at the year end. Debtor will be reduced by advance received in final month of accounting year.

12 Script Income Would normally expect script income received to approximately equal amounts deducted by PPSA. A large discrepancy could indicate not all income is being recorded. Discounts Received Should be netted off drug costs rather than shown as income to reflect true costs of drugs. As received in arrears, will need to account for debtors at year end. Other Dispensing Costs Drug costs need to take into account amounts due to suppliers at the year end (normally 1 2 months in arrears). Stock valuation amount net of VAT to be carried forward to match with income generated in subsequent period. Dispensary staff useful if costs can be identified separately so true profit from dispensing activities can be calculated. Dispensing subscriptions should be allocated to dispensing account. Irrecoverable VAT VAT that cannot be recovered on expenses connected to non Vatable income and a proportion of general overheads. PRACTICE EXPENDITURE Staff Costs What do staff salaries cost the practice? Gross salary + Er s NIC + Er s superannuation So a nurse with a basic gross salary of 30,000 would cost the practice: Gross salary 30,000 Employer s NIC at 11.4% on earnings over 5,720 2,768 Employer s superannuation at 14% 4,200 Total costs to employer 36,968 Employer s NIC costs increasing by 1% from 6 April Some practices are considering alternatives to pay increases.

13 Locums Need to distinguish between internal (paid to partners) and external locums so can ensure correctly treated for tax purposes. Need to distinguish between employees and self employed to ensure correct tax treatment. Establishment Expenses Rent Where a building is leased, the service charge element and any recharged costs (e.g. insurance) should be shown separately so that the amount paid can be compared with the reimbursement received. Repairs and Renewals Light and Heat Clinical costs This is a common area that comes under scrutiny by HMRC as it can be difficult to determine whether an expense is capital in nature or a repair. In general, it would benefit HMRC if more items were treated as capital expenditure since this would extend the period over which tax relief is available. Full details of all major repair expenditure should therefore be provided to your accountant in order that they can ensure the correct treatment is applied. Gas and electricity suppliers are notoriously poor at issuing accurate bills and many practices have been subject to large unexpected bills because of problems with inaccurate meters, estimated readings, failure to request correct payments etc. Practices should ensure they regularly review their bills in order to try and identify any potential errors early on. If an unexpected bill does appear, practices should attempt to negotiate a lower compromise figure and a repayment plan. A number of practices we act for have been successful in this manner. Of course, all practices should regularly review their costs and consider switching suppliers if they can obtain a better deal elsewhere. Clinical costs will normally comprise costs of consumable items and PA drugs. The cost of consumable items has increased recently as practices have made more use of disposable instruments. Unfortunately no reimbursements are available for such items.

14 In theory, practices should be able to generate a profit from PA drugs. In order to ensure this is being achieved and monitored, practices should attempt to split the costs on their accounting systems between reimbursable drugs and non reimbursable drugs/consumables. A comparison can then be made with the drugs reimbursement received in order to determine whether a profit is in fact being achieved. Administrative Costs Subscriptions LMC Levies Practices may pay for partners indemnity cover and other subscriptions or it may be a requirement that partners fund this individually. Whichever method is adopted, the practice should ensure it applies consistently to all partners. This relates to the quarterly deduction made from the practice s NHS income to fund the LMC. The amount is calculated at the committee s standard amount per patient. Legal and Professional Fees Sundries Finance Costs Loan interest The tax treatment of legal and professional fees often comes under scrutiny by HMRC as tax relief is not available on all costs incurred. It is therefore important that the practice provides the accountant with full details of the nature of such costs in order that the correct tax treatment can be determined. Sundries is really a mop up account for small expenses that do not belong under any other expense category. When things are analysed as sundries on the practice accounting system it would be useful if full details are provided so the accountant can ensure the items are treated correctly for tax purposes. Only the interest element of any loan repayments is shown as an expense with any capital repayments being used to reduce the loan balance on the balance sheet. Occasionally interest will be due to a former partner (e.g. if they are due a capital payment) and this will also be shown under loan interest. The practice would receive tax relief on this amount and the individual partner would need to declare this as income on his personal tax return.

15 Bank charges and interest These would include normal current account charges, loan arrangement fees, overdraft fees, overdraft interest etc. Any interest received is shown as income. PROFIT ALLOCATION What is a Prior Share? Normally an allocation of income or expenses directly to one partner before balance shared in profit sharing ratios. Why Are Prior Shares Needed? So partners retain income that belongs to them personally (e.g. if earned in own time). To allocate expenses directly to relevant partners where not fair for partnership to bear cost. So employer s superannuation allocated to the relevant partners. Common Prior Shares Employer s superannuation Rent reimbursement Mortgage interest Seniority Profit Sharing Ratios SALARY ISSUES Common errors Used for remainder of profit after prior shares In line with partnership agreement Normally according to sessions worked, but can be on any agreed basis May be restricted for partners working to parity Superannuation for salaried GPs deducted from NHS income but also paid across with monthly NHSPA payment (paid twice) Employer superannuation for registrars calculated on payroll Superannuation for registrars included with monthly NHSPA payment Payments to casual/cleaning staff not put through payroll

16 Maternity pay errors Bonuses not put through the payroll Treatment of staff benefits Vouchers to be entered on payroll unless PAYE settlement agreement arranged Trivial gifts tax free 150 per head per year for staff parties tax free Uniforms (apart from protective clothing) a taxable benefit unless have stitched on logos Subscriptions are taxable benefits unless a dispensation has been applied for Payroll deadlines Monthly by 19 th PAYE/NIC payments to reach HMRC (22 nd if paying electronically) 19 April pay any balancing PAYE/NIC amount for tax year 19 May File P35 employer s annual return 31 May P60 to be provided to each employee 5 July PAYE settlement agreement to be submitted 6 July P11d benefits forms to be submitted 19 July payment of Class 1A NIC relating to benefits 19 October payment of any balance due for PAYE settlement agreement Locums employed or self employed? HMRC are likely to look closely at long term locums or those that perform regular sessions, to determine whether they should in fact be treated as employees. This would result in further costs being incurred by the practice, if a locum was deemed to be an employee, as any payments made would be deemed to be net of Employee NIC and PAYE and in addition Employer s National Insurance of 12.8% (increasing to 13.8% from 6/4/11) would be due. The fact that a locum works elsewhere does not necessarily mean that they are selfemployed. There are a number of factors that need to be considered, but there is no definitive checklist. If in doubt, seek professional advice. Locums paid for through limited companies or agencies would not be deemed employees by HMRC.