As your private practice grows the accounting needs will inevitably change so it’s always best to set things up properly from the start as it will be more difficult to make changes later on.
The tax system
The tax system for both individuals and companies is on a self-assessment basis. As the name suggests, you are reporting the figures to HM Revenue and Customs (HMRC) and these are used to calculate your tax and national insurance due.
Of course, the nature of the system inevitably lends itself to misreporting due to error which is why a robust accounting system is essential for your private practice.
HMRC polices self-assessment through the inquiry system and not maintaining an adequate system can lead to fines as well as potentially under or over declaring your figures – resulting in penalties and interest.
As a minimum you should maintain a register of work undertaken which should include the following:
*Date work carried out
It is best practice for invoices to be issued for self-paying patients and medico-legal work but for insured patients you will often receive just a remittance statement, so make sure these are retained.
It is important to retain invoices for all items of expenditure and again it is best practice to keep a record of expenses in a similar format to recording income.
Most expenses incurred directly in carrying out your work should be deductible for tax but if in doubt speak to your accountant as special rules apply to certain types of expenditure.
It is vital that you maintain a separate bank account for your private work.
This is to enable a full reconciliation of your fee income to receipts in the bank.
It is important that your accountant can carry out this reconciliation to ensure your income and expenses are complete and accurate. And this will also identify any issues you may have with your accounting systems and the accurate recording of income received and expenses paid.
It is common for a private practice to have employees and these could be perhaps a spouse or family member who works for the business. For those with larger private practices they may employ a secretary or practice manager.
As an employer you have obligations to your employees and it is likely that you will have to maintain a PAYE payroll scheme.
Depending on the levels of pay and whether the employee has other employments you may have to maintain a monthly payroll scheme and could have pension obligations under auto enrolment requirement. So make your accountant aware of anyone that you are looking to employ through the business.
One other important factor to consider is that if you are engaging the services of a secretary it is not a choice for them to be self-employed and it is important to ensure this status is appropriate to avoid you being challenged by the HMRC.
Electronic record keeping
While manual records are usually fine in the early days, it is inevitable that with a growing practice you will need to consider an electronic record keeping system.
This could take the form of a spreadsheet or accounting package but often the best efficiencies are from using a practice management package which also includes billing and expense recording.
There are several very good practice management packages and your accountant should be able to accommodate the use of any of these. If you use the services of a secretary, they may have experience of a particular package but if not, the software providers will all provide demonstrations of their systems.
VAT is one of the more complex taxes as it is a tax on goods, supplies or activity and there are a vast array of good and services that businesses provide.
When it comes to the medical profession, there is a specific VAT guidance notice for healthcare and for many the contents are clear regarding their VAT position. For example, those that clearly carry out medical treatments will be exempt from VAT requirements but those carrying out medical-legal work may have to register for VAT and charge an additional 20% on their fees if their income from such activities exceeds £85,000 per year.
Often a mix of clinical and medico legal supplies are made and it is important to separate these for both tax and indemnity insurance purposes.
One area that is riskier for VAT is work that could be argued as ‘purely cosmetic’. This is a nebulous term and leads to HMRC often taking an ignorant view of the nuances of why a patient may undertake major surgery.
In my experience, the key evidence if you are subject to a VAT review are the medical notes and in particular the documentation of medical conditions both physical and mental leading to the patient wanting a procedure or surgery. Make sure that you keep comprehensive notes in that regard.
Making tax digital
Making tax digital, or MTD, is a fundamental change to the taxation system to report your taxation figures more frequently to HMRC.
It believes this will reduce errors in reporting but many in the accountancy profession believe it will eventually lead to changes to accelerate tax payments for those with income outside of PAYE.
The system was implemented for VAT registered businesses last year and it remains to be seen exactly when most other businesses will have to comply as the timetable has moved several times.
With the significant increase in consultants using companies to trade it is worth pointing out that most of the accounting and bookkeeping requirements are the same.
The main difference on the accountancy front is to ensure that personal expenditure is kept separate from the limited company. As a sole trader you can use the money within the private practice and this is simple treated as drawings but with a company, the money belongs to the company and you can only take money in certain ways.
It is important that your record keeping highlights anything of this nature and also record any costs that you may pay for the company personally as these can be reimbursed to you from the company.
Keeping robust and accurate records is an essential part of running your private practice. Your needs will change as your practice grows so speak with your accountant to ensure your systems keep pace.
Ian Tongue is a partner with Sandison Easson accountants