General Practitioners Professional Expenses. June 2017

Transcription

1 General Practitioners Professional Expenses June 2017

2 TABLE OF CONTENTS Section Page 1 INTRODUCTION GENERAL PRINCIPLES EXPENDITURE RECORD-KEEPING CONCLUSION

3 INTRODUCTION Increasingly, General Practitioners are querying the nature and amount of Professional Expenses that they can claim against their locum or partnership income. From what we have seen of HMRC enquiries, the investigation tends to focus on motor expenses claims however all elements of your tax return are open to enquiry. HMRC are able to review up to 6 years previous should they identify any claims for the year in question that they do not agree with and subsequently disallow. Additional tax, interest and penalties can amount to an unexpected substantial amount very quickly. This briefing document sets out some of the key points of what expenses are allowable and disallowable for tax purposes. The expenses covered are not exhaustive and you should always seek specialist advice before making a claim. It is impossible to cover every eventuality, and if there is ever any doubt as to the nature of an expense, this should be highlighted. This document is prepared on our understanding of tax rules and legislation currently in force at the time of writing. As tax is a constantly evolving area, we cannot guarantee that the information contained within this document will be relevant in future tax years. 2

4 GENERAL PRICIPLES 2.1 Wholly and Exclusively The general principle of whether an expense is allowable for tax purposes for self-employed persons (including partners in practice) is whether or not it is wholly and exclusively incurred for the purposes of the trade. The law for self-employed persons is slightly less onerous on the requirements the expense needs to meet in order to be allowable for tax purposes, relative to someone who is an employee. To contrast, for an employee to be able to receive a deduction for expenditure incurred, it must be wholly, exclusively and necessarily in the performance of their duties. On the face of it, this may seem like a fairly minor difference, but it entitles self-employed individuals to a whole array of deductions that their employed counterparts are not entitled to. Throughout this document we will be focusing on the deductions allowable for self-employed individuals, and this should not be mistaken as allowable expenses for employees. 3

5 REVENUE CAPITAL 2.2 Revenue vs Capital Another important distinction to understand between types of expenditure, is the difference between revenue expenditure and capital expenditure. Revenue expenditure is the amount spent on general operating costs and is expensed in the year in which the cost is incurred. It is a direct expense incurred in generating the revenue created in that period. Capital expenditure, on the other hand, is usually incurred with a focus on expanding the business, for example by purchasing new assets. Generally, the accounting treatment of assets will follow the tax treatment, but when preparing the tax return we have to be certain that there is nothing of a capital nature contained within the expenses. This is particularly relevant for repairs and legal fees. 4

6 EXPENDITURE GPs will all incur different types of expenditure and different levels of expenditure. What is appropriate and relevant to one, may not be relevant to another (even a partner in the same practice). It is important that each individual satisfies themselves that any claim made on their tax return is justifiable as a business expenses and where any private use is relevant, the necessary adjustment is made. The level of expenditure claimed determines the level of profit which in turn determines the level of income tax, national insurance contributions and superannuation payments. Whilst your accountant may advise and guide you as to what may be deemed reasonable by HMRC, there is no set level of expenditure or private use adjustments. Each case should be determined on its own merit. Indeed, there is no guarantee that HMRC will accept your claim. This section of the report highlights the main categories of expenditure, some are more relevant to the medical sector than others, that you should consider each year when providing figures to your accountant. 3.1 Motor Expenses Tax relief on motor expenses can be claimed on the proportion of motor expenses that relates to practice business or other selfemployment. 5

7 There are two options for your motor expense claim: 1. 45p per mile for each business mile (for first 10,000 miles and then 25p per mile thereafter); or 2. A business use percentage of total car costs (excluding capital repayments of hire purchase contracts). It is advisable to maintain a detailed mileage record in which you identify all business journeys, and in which you record the total annual mileage of your car. This will enable you to identify total business mileage for option 1 or a business use percentage if option 2 is more efficient. You are able to claim lease payments and all costs associated with the use and maintenance of their car, including fuel, repairs, MOTs, insurance, roadside cover, etc. under option 2. Where the CO2 emissions of the car exceed 129g/km, the amount of the lease payment allowable as a deduction is restricted to 85%. Therefore, where less polluting cars are driven, a full deduction for the lease payment should be available. For those who have purchased a car on hire purchase, only the interest element of the monthly payment is available as a deductible expense. Your accountant should review both options in your first year and advise on the most tax efficient option. Once you have claimed either option 1 or 2, you must continue to claim on the same basis until you change your vehicle. At that point, you can then revisit both options again and ascertain which one is beneficial. In any year you change your car, you should provide the following to your accountant: Full details of the new car (model, make, registration number, CO2 emissions) and the date and cost of purchase; Details of the old car (model, make and registration number) and the date of disposal and proceeds or trade-in value; A copy of any hire purchase or finance agreement for the car purchased. 6

8 Motor expenses should always be reviewed and restricted for private use. This will vary between GPs and there is no right or wrong answer. We would encourage all to keep mileage logs detailing the mileage travelled on their business journeys, which can then be compared to overall mileage in a period. This way an accurate private use add back can be applied to your motor expenses. If you are considering a change of car, it is worthwhile to discuss the tax implications with your accountant as there may be a more tax efficient option. 3.2 Mobile Phone Tax relief can be claimed on that proportion of your mobile phone costs that relates to practice business or other self-employment. All mobile phone bills should be retained to evidence any claim. An adjustment should be made for any private use element of your mobile phone. If your mobile phone is used for practices to get in touch with you, for house calls, accessing work related s, then any adjustment for private use may be minimal. There is no one size fits all answer for what would be accepted by HMRC as appropriate business use and it is for you as an individual to reasonably assess. Should you have two mobile phones, one which is solely used for business, the other personal, then the total amount of costs in relation to the business phone could be claimed. 7

9 3.3 Computers and Other Equipment Capital allowances can be claimed on the cost of computers and other equipment that you use for business such that you obtain relief on up to 100% of the cost. Whilst the likelihood is that most equipment will be purchased by the practice for your use, there may be instances when you have to purchase equipment. When you purchase an asset for business purposes, you should provide your accountant with a copy of the invoice. 3.4 Use of Home Relief for use of home for business purposes may be available if you: Write reports; Write up bookkeeping records; or Carry out research 8

10 You cannot claim if work at home amounts to only a few hours of administration per week and you undertake that work when the same room is being used by other fairly members at the same time. Tax relief may however be available if you use a room at home for business purposes and have sole use of that room for that time. The allowable cost will depend on: 1. The area of the total property used for that work; 2. The period of time for which the area is used; and 3. The extent to which the area is used for business use as opposed to any other use. A diary of time spent working at home in advisable in the event that you have to evidence a use of home claim. Fixed household costs, such as Council Tax, mortgage interest, insurance, water rates general repairs and rent, would normally be apportioned by the area and time that are set aside solely for business use. Such a claim would be restricted to take account of the following expenses: Mortgage interest a claim for relief on a proportion of the interest is appropriate only if part of the home is used solely for business; Rent part of the rent is allowable where the home is rented and part is used solely for business purposes. You cannot charge yourself rent; Repairs and maintenance consideration can be given to making a claim for relief in proportion to the extent that the house is used solely for business purposes. If the expense relates to part of the home that is not used for the business, no tax relief is available. 9

11 Examples of household running costs on which tax relief may be claimed on the basis of business usage include: Heat, light and power - the proportion of the costs for a room used at times solely for business purposes; Telephone costs: o business calls are allowable o line rental proportion that is related to business use (the itemised bills should be retained in order to determine usage). Broadband charges to the extent that the connection is used for business purposes. If there is only minor use of the home HMRC will accept a claim on a reasonable basis. In practice this will involve claiming only a small amount to cover any such expenses. There may be tax implications when you come to sell your home, than otherwise would be, if you choose to claim use of home allowance for a room used solely for business (e.g. an office). You should discuss this with your accountant to determine whether it is worthwhile to claim for the costs of a study for example. The simplified expenses rule allows a claim for a flat rate deduction in respect of use of home for business as an alternative method to recording actual expenditure and apportioning the business element. To be able use simplified expenses, you must work for a minimum of 25 hours a month from home. The flat rate deduction is calculated as follows: hours of business per month 10 flat rate claim per month hours of business per month 18 flat rate claim per month hours of business per month 26 flat rate claim per month As you can see from this, 312 is the maximum HMRC permit to be claimed in a year and highlights the level of expense they expect to be claimed for use of home. 10

12 3.5 Bad Debts Whilst highly unlikely, if you were to invoice a practice for work done and payment is not made to you and is not likely to be, this is deemed to be a bad debt. When a debt becomes bad or doubtful a deduction is available in the year of occurrence. Bad debt provisions are allowable but only where they relate to specific debts; general bad debt provisions are not an allowable deduction. 3.6 Depreciation and Disposal of Assets Any depreciation, or profit and loss on the disposal of an asset, is always added back when preparing the tax calculation. Tax relief is given for certain assets purchased by way of capital allowances. Given the highly complex nature of capital allowances, this is not considered in detail in this document. Should you wish any further information regarding capital allowances, please contact a member of our healthcare department. 11

13 3.7 Entertainment All client entertaining is a disallowable expense for tax purposes and must be added back in the tax computation. Gifts to clients are only allowable where the item is branded, under 50, and neither food, tobacco nor alcohol. The 50 limit applies to the total of all gifts given to the same client throughout the year. Staff entertaining is an allowable expense. However, for the event to be allowable, it must be open to all staff in that location. There is an exception to the client entertaining rule, where clients are included in an event that is primarily intended for staff. In this case, the cost relating to the client is an allowable deduction. The term staff can include retired employees and the spouses/partners of existing and past employees. However, the actual partners of the firm are not considered staff, and so the element relating to the partners should be disallowed. Conversely, where staff are included in an event that is primarily for entertaining clients, then the full amount, including the expenditure on the staff, should be disallowed. Where the total cost of the events over the year exceed 150 per head (inclusive of VAT, transport, etc.) then this becomes a taxable benefit on the staff members. If one event exceeds 150 per head, then this is a cliff edge benefit, so if the total comes to 151 per head then the whole amount is a taxable benefit in kind, not just the 1 that exceeds the 150 limit. However, where there are multiple events, and the total costs exceed 150 per head, it is possible to pick and choose the events which best use up the 150 limit, and only the events which cannot included in the sub- 150 total become a taxable benefit in kind. Therefore, you cannot allocate part of the cost of an event to this 150 limit to bring it up to just under 150, the full amount would have to be taxed. 12

14 3.8 Hotels, Travel & Subsistence Expenditure relating to hotels, travel and/or subsistence should be incurred wholly and exclusively for business purposes. There should be no amounts relating to transporting clients around and any amounts relating to non-staff members travelling or staying with members of staff should be disallowed. Care should be taken that only genuine business travel is paid for employees, in order to prevent benefits in kind arising. Travel cannot be paid from home to a permanent workplace but can be paid from home/work to a temporary work place. These rules are particularly intricate when deciding whether or not a benefit in kind should arise on the employee so, if there is ever any doubt in regards to a payment, please contact us for further information. 3.9 Legal, Professional & Consultancy The main area of concern with legal, professional and consultancy fees, is ensuring that none of the expenditure is incurred on a transaction where the underlying purpose is capital in nature. Where the transaction is capital, the associated costs will need to be added back in the tax calculation. Accountancy fees relating to the day to day running of the business are revenue, whereas any fees incurred around long term leases (over 50 years), expansion of the business, partnership agreements, etc. are capital related. 13

15 3.10 Partner Related Payments Partner related payments, more commonly known as drawings, are not allowed as a deduction for tax purposes. Health insurance premiums for example paid by the practice for any of the partners are not allowable and would be added back in the tax computation. Such payments are not tax deductible expenses for the partners, as they are not employees of the firm, and they are not incurred wholly and exclusively for the purpose of the trade. Any other expenditure of this nature for the partners should either be added back or allocated to drawings in the first instance Repairs Repairs are one of the most commonly looked at figures in HMRC enquiries. Anything that is a genuine repair is allowable but distinction needs to be made between a repair and a capital improvement. If the work done is bringing the asset back to its original condition, or replacing a like for like, then this is considered a repair. However, where there is an element of improvement, this is likely to be capital expenditure and must be disallowed in the tax computation. The work done is allowed as a deduction against any capital gain which is later made on the sale of the asset. Other items which are commonly added back are assets which have been incorrectly allocated to repairs. In this case the asset is added back and then, in most cases, capital allowances can be claimed on the asset. The amount that can be claimed depends on the type of asset and the total of other capital allowances claimed in the year. It is often the case that the full cost of the asset can be claimed in the same year, so the net tax effect of moving the asset over is nil.where large expenditure on capital items are being planned, it is always prudent to contact your accountant so that they can advise on the capital allowances aspect of the transaction. 14

16 3.12 Various Miscellaneous Points Any penalties or crime related payments (e.g. parking fines) are not allowed as a deduction for tax purposes. 15

17 RECORD KEEPING Throughout this document, we have often referred to the need to keep records to evidence any claims in the event of an HMRC enquiry. There are no set rules on how you must keep records however there is a penalty for failure to maintain adequate records (up to 3,000). Records can be maintained on paper, digitally or as part of a software package. You should keep your records for at least 5 years after the 31 January submission deadline of the relevant tax year. Records in relation to an online return for 2016/17 submitted by 31 January 2018, should be kept at least until 31 January

18 CONCLUSION Within this document we have covered off the main areas relevant to GP locums and partners. We have provided some basic information regarding the types of expenses that can be claimed and those that should either be adjusted, or disallowed entirely, when calculating the tax adjusted profit. If there is ever any doubt regarding the treatment of an amount of expenditure, you should contact your accountant prior to incurring the expenditure, so that they can advise accordingly. 17