Keeping adequate clinical records is a given but business records must also meet certain requirements and HM Revenue and Customs (HMRC) has the powers to fine businesses that do not comply.
There is also an important link between the two as certain procedures may be subject to VAT and therefore it is vital that the clinical notes support the VAT status. More on that later.
Why so much emphasis?
The two words that HMRC will highlight are ‘complete’ and ‘accurate’ and in ensuring records meet this basic criteria you can rely on them to prepare a tax return and pay the appropriate amount of tax.
Your accountant should also encourage you to keep appropriate business records to ensure their job is not compromised and this should also help ensure your fees are kept reasonable.
What are the basics?
The first advice I always give consultants when discussing record keeping is to keep everything separate from your personal finances from the off no matter the size of private practice.
This ensures that should HMRC look into your affairs years down the line it won’t be asking you to prove that reimbursement of money from a family or friend was not income!
Records can be sophisticated software packages with some acting as a clinical database and bringing together the clinical and accounting requirements. These can be particularly good and the investment usually pays for itself in a short time.
For more modest practices or perhaps those who do not need to maintain a practice management software package, a simple spreadsheet will suffice, for now at least.
In relation to income recording, the following are a minimum:
- Date of procedure
- Patient details
- Description of work carried out
- Date paid
- Date reminder letter(s) sent if payment not received.
Any invoices issued should be retained as well as remittance advices. These are important to be able to match up income received into the bank particularly if an insurer is paying more than one patient in a batch.
The date of receipt and chasing the debt is important as should a debt be written off, HMRC would have expected you to make reasonable efforts to recover the debt.
This is an important part of running your private practice and again comes back to the point of running a business; why do work for free?
In relation to expenses recording, the following are a minimum:
- Date of expenses
It is important that you retain all hard copy invoices should they be required. It is also very important that the invoices are made out to the business and this becomes a vital part of recovering VAT if your business becomes VAT registered at any time.
Business records visit
Some years ago HMRC introduced new powers to fine businesses up to £3,000 for not keeping adequate accounting records. It does not define what is adequate but any accountant will have had this drummed into them so they can explain things in more detail and whether you are at risk.
Most likely down to resource constraints, it is not particularly common to have HMRC actually visit a consultant who is carrying out private practice and the volume of checks has been wound down.
A client of mine that springs to mind literally received a knock on the door of their clinic and inspectors requested to see the records and go through the systems! A shock to the proprietor and disruptive to the business.
Historically, the more common scenario is for your accountant to receive a letter as agent and a quick call to HMRC deals with matters.
Those dreaded three letters, VAT!
Outside the medical profession, VAT is an accepted part of running a business of a reasonable size but in the medical world it is still relatively uncommon to be VAT registered.
VAT is not actually supposed to be an extra tax on the business and your role in being VAT registered is to act as the tax man and collect VAT for them. However, if you can’t put the price up by 20% it effectively does become your cost net of the tax you would have paid on those earnings.
The reason for this is that medical services generally have an exemption from VAT and therefore the vast majority of private medicine is not subject to VAT. There are three key areas where this is not the case and you could be caught out which are:
- Medico-legal work
- Royalties or licences
- Purely cosmetic or aesthetic work
The VAT threshold is currently £85,000 per year and this is on rolling 12 month basis and represents the aggregate of all services that are subject to VAT or ‘standard rated’ as it is known.
Medico-legal work is standard rated because the principle reason for the work to be carried out is for a third party to make a decision rather than suppling medical care.
Royalties and licences could arise from various areas but the most common one is the development of a machine, drug or other intellectual property which generates income over time.
VAT and record keeping
There is no doubt that being VAT registered increases the burden of record keeping as HMRC wants to make sure that you are collecting its tax for them and not claiming VAT back on expenses you shouldn’t be.
However, for those that are not VAT registered and have an income over the VAT threshold, it is vital to keep adequate records to support your status that you don’t need to be VAT registered.
This is particularly important if you are carrying out a range of exempt and standard rated services. If HMRC proves that you should have been VAT registered in the past they can go back to that date to recover the VAT and charge you interest and penalties.
If HMRC are looking to challenge your position, particularly in relation to cosmetic work they will always say that you need to review things on a case by case basis rather than being able to rely on the headline points of the VAT rules. This ultimately means that you have look at things on a patient by patient basis.
The key factor is that where a medical condition is being treated you clearly record this in the notes. It may be obvious to you but think of a third party looking at these records, would they think that a medical condition is being treated?
HMRC is not qualified to question a medical diagnosis so it is important that the notes highlight all factors leading to the medical diagnosis. This is a complicated area and your accountant should be able to discuss this further with you.
One thing is clear though, if you are relying on the medical exemption for VAT, you must document the medical condition within the notes to have a chance of being successful as HMRC has been taking a largely ignorant view of focussing on a procedure rather than the medical reason for having it.
Making tax digital is a relatively new HMRC project and it seems completely committed to this.
Digital tax is a fundamental shake up of the tax system and the basic principle is that you will report your earnings on a more regular basis and through a digital tax compliant software package. The reporting will be quarterly and an annual ‘adjustment’ can be made to allow for everything to be reconciled.
Digital tax will change the relationship with your accountant but could increase your risk errors if adequate accounting records are not maintained.
Change is on the horizon and the next few years will see fundamental changes to the tax system and you must ensure that your obligations are met.
Ian Tongue is a partner with Sandison Easson accountants