by Laurence Slavin, Partner
For as long as I can remember (30 years+!) GP claim their personal expenses as a deduction from their profit share outside the practice accounts. To explain – let’s say there are two partners sharing profits equally and profits are £100,000. Partner A has personal expenses of £5,000 and Partner B has expenses of £10,000. Let’s also say that Partner A is attentive and anxious about their tax, and sends in the expenses to be claimed promptly while Partner B is far more relaxed and sends in the expenses at the last minute. Thus far, the partnership accounts are completed and show the profits of £100,000, but when the partnership tax return is submitted – and sometime later, the expenses for each partner are deducted from each partner’s profit share. So, on the partnership tax return, Partner A will declare profits of £45,000 and Partner B £40,000. Clients often wonder why the profits on the partnership tax return are not the same as those in the accounts – this is a major factor.
This process works very well. In fact HMRC produced a Helpsheet for GPs expenses – HS231 which gives an example of the process I have explained above.
However……earlier this year, HMRC changed their mind. Expenses, they said “will be included in the accounts of the partnership and deducted in arriving at the commercial profits of the partnership”.
In practice, this would mean that the personal expenses of a partner would have to be woven into the partnership accounts. That is not an intellectual challenge, but a practical problem. There are a number of GPs whose approach to their taxes is not unlike Partner B above. Indeed some partners have separate accountants who then send the expenses to the partnership accountant. The practical application of this HMRC change would be that the partnership accounts could not be completed until all the partners had submitted their expenses – and for those partners who have separate accountants, until they have in some shape or form advised the partnership accountants of the expenses for that partner.
Partners who needed accounts to support a mortgage application, prospective partners who needed to see accounts to assess the viability of a partnership would have no accounts to see until all the partners had sent in their expenses claims– unless the accountants were willing to prepare multiple sets of accounts as the personal expenses roll in – and then probably for an additional charge.
Fortunately, in March this year, HMRC revised their guidance – “an expense will normally be included in the accounts of a partnership…but provided the expense otherwise meets the wholly and exclusively test…a deduction may be allowed through the partnership return”.
The wholly and exclusively test is the same criteria that has always existed for the self-employed and their expenses, but it is a relief for GPs that the rules are back to where we thought they were, and a great relief for their accountants!
This article was written by Laurence Slavin, a partner at Ramsay Brown who specialises in the finances of Primary Care and GPs. He can be contacted at [email protected] or 020 8370 7710