How GPs can cut the risks of being the taxman’s next target
GPs are still in the taxman’s sights – even with HMRC’s Tax Health Plan (THP) disclosure deadline now past. David Walker explains why and shows how to cut your risk factors
HM Revenue and Customs has utilised its powers to obtain information from third parties that leads it to believe some doctors have not declared income in their tax returns.
For GPs, we are probably talking about cremation fees, BUPA medicals fees, insurance reports, and out of hours income. If the disclosure opportunity was unused, then GPs suspected of tax malpractice will now be pursued and may suffer severe penalties.
The taxman intends to go after other professions later but believes doctors will produce a substantial initial return. Dave Hartnett, permanent secretary for tax at HMRC, said recently that medics were chosen ‘on the basis of risk-assessment which showed there was likely to be non-compliance.’
GPs had a ridiculously short deadline to use the THP facility. It was announced in January, required doctors to notify their intention to use it by 31 March, and pay the tax and penalties by 30 June 2010.
Personally I believe HMRC is barking up the wrong tree with this initiative. I can imagine it did its sums and found that, say, insurance companies paid UK GPs £5m for completing medical reports yet could only identify half of this from GPs’ tax returns.
But doctors have complex tax affairs. Numerous income streams can be fed into numerous different business structures. Insurance report fees, for instance, may be taken personally as self-employed income, pooled within a GP partnership, or paid to a personal service company – sometimes all of these in one year for a single GP.
All are legitimate vehicles for the receipt of such income and, in the continued absence of the promised income shifting legislation, could well involve a spouse.
So it will be extremely difficult, if not impossible, to specifically match income entries from a doctor’s tax returns to the information received from third parties.
I suspect the tax recovery will be relatively small. But what we see here is a new way of tax collection and it will become more common. HMRC is undergoing an internal efficiency drive, staff morale is low, and 130 offices are earmarked for closure with the loss of 1,700 jobs.
For the first time in recorded history this year the government had to borrow money in January and there is huge pressure to increase tax revenue. But rather than mend a broken system, schemes like the THP merely put sticking plasters over it. Meanwhile, protect yourself by following these tips:
Don’t be a target!
• If you are resident, ordinarily resident and domiciled in the UK, you are taxable in the UK on your worldwide income, no matter where it arises, even if foreign income is not brought in to the UK. Do not hide it.
• Your income and expenses for tax purposes should be calculated on an accruals basis, not just on a cash received or paid basis. Speak to your accountant – get it right.
• Keep your records for the requisite period – this is reducing to four years from 2011, but is now seven. If there are no records, worst case scenarios will be taken. All funds banked will be treated as taxable if they cannot be identified specifically as private money, and no expenses will be allowed without a receipt. Do not let this be an option.
• The above applies to your statement of personal income and expenses as well. It should be prepared with just as much diligence as the main practice accounts and on the same principles. Do not cobble it together at the last minute using the ‘a bit up on last year’ method.
• Expenses for a self-employed/partnership business must be incurred wholly and exclusively for the purposes of the profession. Technically that means you cannot even have car expenses and capital allowances as there is some private use and the expense is not therefore ‘wholly incurred’. To allow a business element you need to be able to specifically identify the business portion of the usage. So, no mileage log, no car claim. Remember that.
• Yes, your spouse has to do enough work for you, payable at a market rate, to earn the wage that is claimed against your income. And yes, you have to pay them the money.
• A claim for the use of a room in your home as an office is perfectly legitimate, but must be justifiable and based upon fact. Is yours?
• Interest and dividends from savings and investments are still income and need to go on your tax return. Keep on top of your portfolio.
• You should not entertain a single thought of tax evasion, through either undeclared income or fictitious/overstated expenses. This is illegal, and the THP does not prevent a criminal prosecution should HMRC deem it necessary.
• If you had undeclared income and used the THP then begin again with a clean sheet. If you did not use the THP, prepare to face the full range of charges HMRC can impose.
• The rules are the rules but with planning, tax can generally be saved. Make sure that is done legitimately.
This article first appeared in the Spring 2010 issue of AISMA Doctor Newsline, the newsletter of the Association of Independent Specialist Medical Accountants.