Valerie Martin is a partner and national director of medical services at PKF, chartered accountants and business advisers
T 01483 564646
The Department of Health (DH) and HM Revenue and Customs (HMRC) have been in protracted negotiations for months over the problem of superannuation. In September 2005 it was hoped that most of the issues were resolved and an announcement would soon be made, but it now transpires that the whole issue of the treatment of the employer’s superannuation is under review.
This uncertainty has caused delays in the finalisation of GPs’ accounts and in the preparation of the partnership and the partners’ personal tax returns. However, with the 31 January tax deadline looming, accountants now have to press on with the returns on the basis of the latest information available.
Responsibility for payment of employers’ superannuation contributions
Under the new GMS and PMS contracts, the responsibility for paying the employer’s contributions has passed from the Primary Care Trust (PCT) to the practice. Both employers’ and employees’ contributions are based on the superannuable profit of the partners, rather than on their superannuable income under the old system. By definition, the profit cannot be known until the end-of-year accounts have been prepared, and therefore the partners can make only estimated payments on account during the year and pay a balancing payment or receive a refund once the certificate of superannuable profit has been prepared.
The funding for the employer’s contributions has been added to the GMS or PMS budget, but this is based on a historic superannuable income figure, whereas the liability for payment is on the actual superannuable profit. As profits increase, the partners will therefore have to fund the 14% employers’ and 6% employees’ contributions out of the increased profit. For every £100 of increase profit, £20 will go to their pension and nearly £33 to HMRC (ie, 41% tax and NIC on the balance of the profit of £80).
These payments do need to be considered when calculating the partners’ drawings, and particularly any distributions of the quality achievement income, so that adequate funds are retained in the practice for a superannuation reserve in the accounts and a tax provision if tax is paid from the practice.
Most PCTs are proposing to collect the further superannuation contributions payable by offset against the May 2006 budget fees statement, so that they have effectively turned the liability into a partnership liability. This makes a provision for the payment in the practice accounts very important, particularly for a retiring partner who may have left many months or even a year before payment is due. Practices would be well advised to review their partnership agreements to ensure that the treatment of this joint liability is adequately covered.
Tax relief on superannuation contributions
The problem has arisen from the change in responsibility for paying the employer’s contributions. These were previously paid by the PCT, so there was no need for any tax legislation enabling GP and non-GP partners to claim tax relief on these contributions. Specific legislation enabling self-employed medical practitioners to obtain tax relief on their employee’s contributions (up to a ceiling of 15%) into an occupational pension scheme was sufficient in the past.
In order to get round the problem, accountants had expected the possibility for employer’s contributions to be claimed as an expense in the accounts on the basis of the payments due in respect of the year, in accordance with the accruals concept.
However, HMRC is now unable to follow this approach, due to a completely unrelated tax case decided by the House of Lords in May 2005, in which it was concluded that HMRC has no power but to follow existing tax legislation, and that it is the role of Parliament and not HMRC to amend legislation. Therefore, HMRC cannot take a liberal interpretation of the legislation to give tax relief to GPs.
The expected solution is that the tax section that gives tax relief on up to 15% of contributions allows for this percentage to be increased in certain cases, and therefore the board of HMRC could do a blanket increase of this to 29%. The employer’s contributions paid by GPs could then be treated as if they were further employee’s contributions, and this would enable them to be claimed on the GPs’ personal tax returns, along with the employee’s contributions. This does, however, mean that tax relief is available only on the contributions made in a tax year, so the relief for the payments in respect of 2004/05 would be:
- Relief in 2004/05 for monthly payments on account to 31 March 2005.
- Relief in 2006/07 if balancing payment is made in May 2006.
This is a potential problem for retiring partners with no self-employed earnings against which to claim relief in 2006/07. In that case, you will need to consider making a balancing payment to the PCT by 5 April 2006 for any partner retiring in 2005/06.
The new GMS contract made it possible for non-GPs to be partners in medical practices. Some practice managers have therefore been promoted to partner and are now self-employed.
Practice managers were previously members of the NHS pension scheme and had no inkling that there may be a problem with their claiming tax relief on their superannuation contributions following them becoming a partner in the practice. However, following the recent Wilkinson tax case, HMRC is now unwilling to extend the A9 concession by which GPs claim tax relief on their superannuation contributions.
From April 2006, there will not be a problem since, under the new pensions regime which comes into effect then, anybody can contribute up to 100% of their earnings, with a ceiling of £215,000, into any pension scheme.
For 2004/05 and 2005/06 there is currently a problem, and DH and HMRC have not yet resolved this. If HMRC is unable to give tax relief on employers’ and employees’ contributions paid by non-GP partners, then it may be necessary to leave the pension scheme for the two years and rejoin the scheme with effect from April 2006, backdated to April 2004. Practice manager partners would then be able to claim the relief on the full payments in 2006/07. This is one solution, but it may not be ideal, as it is possible that, although the tax relief would have been entirely at the 40% tax rate over the three years, some of it would only be at the 22% rate by pushing it all into one tax year. Any practice manager affected needs to watch out for the final decision on this. In the meantime, this will delay the completion of their personal tax returns and certificates of superannuable profit.
Certificates of superannuable profit
To add to the confusion, some PCTs have written to GPs advising them that the format of the certificate for 2004/05 is to be changed and that submission of certificates should therefore be delayed until the revised version has been
Again, the submission deadline, in this case 28 February 2006, has not been extended, so in reality it is very difficult to delay starting the completion of certificates for GPs and non-GP partners much longer.
It is expected that the only change to the certificate will be the removal of Box 14, as no employers’ contributions will have been deducted in the profit and loss account and, therefore, no add-back is needed. However, it would be easy to put a zero in that box, and that would not necessitate a new form. Revised instructions would of course be helpful to ensure that all GPs and accountants are aware of the changes, but these will follow from the revised treatment in the accounts and tax returns.
The only other change needed is a reference, on the form, to what proportion of fulltime-equivalent the GP is, in order for the average superannuable profit to be calculated on a fulltime-equivalent basis. Again, this information could be sent separately to the PCT once it has been determined how a GP should gauge their proportion of fulltime, and it should not be necessary to submit a new form to give this