By chance, I got sent a fax this week from a client, a letter from their PCT telling them that the interim seniority factor for 2012/13 is £96,646. Is this important? Yes – it is important because it is the figure the PCT will use to determine whether it should be paying the full seniority or not. If you earn less than two-thirds of this figure, it will abate your seniority by 40%. How does it know how much you earn?  – You probably told it recently! When you completed those forms for your estimated superannuable remuneration for 2012/13 for the PCT to work out the superannuation deductions, you mentioned your expected superannuable profits – the same figures the PCT will be using to assess your entitlement to seniority. You might want to check this.

Now that’s all very well, and a useful brief description of the process but it is worth pausing and looking at the figure being used. £96,646 for 2012/13 is £2,674 more than 2011/12. Can that be right? Most of my clients are expecting their profits to fall in 2012/13, so is the increase a cynical move to push up the barrier to seniority? Well, the detail of the calculation is shown on a paper produced by the Technical Steering Committee, so surely it should have some integrity.

The detail makes interesting reading, we are having to use interim figures because the final figures have not yet been calculated. In fact if you read the report, the last year that final figures were calculated was 2008/9. Now that means that there are three complete years where some partners will have been paid seniority that they are not entitled, and three complete years where some partners will have been underpaid seniority. Some of these partners will have retired, and the figures can be significant, around £7,000 per partner for a GP towards the end of their career paid at the wrong level over three years.

Why the delay? All the information for 2010/11 was submitted earlier this year so what’s the problem?

The other issue that can be seen from the paper is that looking at the calculations, there is no facility to cope with a reduction in profits, the lowest outcome is an uplift of 0%. Many GPs would be happy with static profits, but the reality is that profits are falling, and it would seem that the model in use can’t cope with this.

This needs to be addressed. So what should GPs be doing now? When you get your June payments, check the seniority levels that have been paid, you may need to look carefully to find if any adjustments have been made. You might also want to review the expected profits you have given the PCT for 2012/13.

The alternative calculation (my calculation) is to say that the new partner’s 25% share is discounted by 20%, so really there are three lots of 100 and one 80, so the new partner’s profit entitlement is 21.04% and the other three get 26.32%. The new partner now gets £126,240, and the continuing partners get £157,920

Is this difference significant? I think it is. I have seen partnerships fall out over smaller sums. I think the message is that it does not matter how you share profits, as long as all parties understand the basis of the calculations and actually agree with them.

Incidentally, don’t forget that a GP’s entitlement to seniority depends on two things, the number of years they have worked as a GP, and their superannuable profits. It is not based on whether they are half time, three quarter time or full time. To get your full seniority, you have to have more superannuable profits than two-thirds of the average GP’s superannuable profits. If your superannuable profits are less than two-thirds  but more than a third you only get to keep 60% of your seniority, and if your superannuable profits are less than a third than the average, you get no seniority at all.

So the way that parity is calculated will affect the superannuable profits and can affect the entitlement to seniority, and since average superannuable profits are calculated centrally some years after the seniority is paid, clawbacks can and do happen.

A partner is leaving a practice that I look after, and I am telling the practice to leave some of his current account in the practice to cover any clawback of seniority. The leaving partner is not happy, leaving their money in the practice, but there you are.

So two points here, get the basis right when a partner joins, and put aside enough when a partner leaves. That way, it only leaves holidays and workload to fall out over.

I went through the metal detector without beeping and waited for the tray with my possessions. I watched it come out of the scanner, stop, go back into the scanner, and then to my bemusement be taken aside by a security officer. I waited until another security officer had finished his work before bringing the tray to me. He confirmed with me that the tray was indeed mine, and then proceeded to tell me my transparent bag was too large. Let me tell you, it was not large, but I decided to say nothing as it was 5:30am and I did not think I could necessarily control the words falling out of my mouth.

The security man took out the deodorant stick, toothpaste and  hayfever spray, and put them into a slightly smaller plastic bag. He informed me that the tray would have to be rescanned. I can’t imagine why, but it was, and some 20 mins after walking through the metal detector I walked into the departure lounge.

Given that resources are stretched, this was a utter waste of my time, the officer’s time and the resources available. I suspect that there is a template somewhere that puts a positive spin on recording this.

The other experience, much more uplifting was visiting a practice who were struggling with their finances last year. Since then, after meeting with the PCT who offered absolutely nothing, they have restructured their practice staffing, have increased the list size and started a number of non-nhs activities all of which have increased their profits by 15%. Hooray!

Looking ahead, with the CQC, revalidation, another new contract, it seems inevitable that all those who ‘do’ will be suffocated by those who police.

On my way in to work this morning I heard on the news that HMRC has won the latest battle on the tax avoidance front against a scheme known as Eclipse 35. The HMRC spokesman commented that this was a victory against aggressive tax avoidance. Now I am neither condemning nor condoning the people who set up the scheme nor the people who invested in it, and believe me, these schemes spend plenty of money taking advice from tax accountants, tax lawyers and tax counsels to ensure the schemes are within the law, but some schemes, like this one fail.

Most readers will be thinking that this doesn’t apply to them, and up to a point they are right, but the edges around what we call tax avoidance are now blurred. At what point does acceptable tax avoidance become aggressive tax avoidance, and perhaps more pragmatically, at what point will HMRC start making enquires to test this?

It is not uncommon for shares or investments to be held between spouses where the lower rate taxpayer has the greatest share. This is tax avoidance, and at present acceptable, but will it continue to be so?

The whole issue of tax avoidance is fluid, and we all need to keep our eyes open. One of the most useful ways to find out what HMRC thinks is to look at its own inspector’s manuals. These are published to give guidance to inspectors of taxes but are available for all to view on their website as part of Freedom of Information.

Partnerships, boring, commonly used, traditional methods of working remain one of the most tax efficient vehicles to use. I still get a number of questions especially from recently qualified GPs with their limited companies (who does tell them to do this?) on how they can use their company to save tax. But look at this link to the HMRC website, and just look at the first paragraph and the amount of flexibility that exists in sharing profits. Partnerships definitely have their place, and whatever profit sharing agreements exist seem unlikely to be attacked in the near future.

Is that assumption now safe? If not, the consequences are shattering. Last week, I received an email from a client who has just retired from his partnership. He is expecting the surgery to be valued at around £900,000 which will give him a modest gain, enough to cover the outstanding loan on the property. The valuation, from a highly respected firm of GP valuers, valued the surgery at £600,000 – in fact less than cost and the outstanding debt. In its covering letter, it explained that the valuation was reduced by £300,000 as it could no longer be certain the reimbursements would continue.

The consequences are enormous. At a micro level, this GP, having made his financial plans carefully, is faced with a hole in his finances at a time in his career where his options are limited.

From the practice point of view, there is considerable uncertainty. Suppose the retiring GP sells at the new reduced value to the incoming partner, and the new partner continues to get the full reimbursement – the retiring GP has sold too cheap and the buying GP is making an unreasonable profit. How are they going to manage this?

Looking at the profession as a whole, GP lenders may start to have the same concerns. If the value of the surgery (which is the security against the loan) is reduced, the lender would be entitled to be concerned, and typically would look for more security (second charges in GPs homes?) and an increase in the interest rate to reflect the risk.

If you are a young GP joining a practice, will you be willing to buy in with no certainty of recovering your investment?

It is easy to blame the valuers, but they are reacting to the climate generated by PCTs and their masters. Security in all its senses, practical, financial, career, -  is the foundation on which everything else is built. If you weaken this, then this is what happens.

Of course if the cash is not available, the problem becomes acute, but there are always solutions; from using an overdraft – to the partners introducing their own funds. More serious, is where the problem becomes chronic, where there is not enough funding in the practice to allow the practice to function on a regular basis. Where this occurs, the cause must be identified before the appropriate treatment can be applied.

I visited a client last week where one partner had grave concerns over the practice’s finances. We went over the accounts as usual, but spent a great deal of time looking at the practice’s balance sheet. The difference between the current assets (stock, debtors – how much the practice is owed -  and the bank balance) and the current liabilities (creditors – how much the practice owes) is known as either ‘net current assets’ or ‘working capital’ and it is sometimes referred to as the oil that lubricates the engine of the business. If the working capital dries up, the business will stop.

In this practice, the balance sheet had shown net current assets of around £60,000 for the last three years, but this year it had dropped to £5,000. The effect was being hidden as there was plenty of money in the bank. The problem was some large creditors falling due in the next year. Once paid, it will leave the practice with just £5,000.

The immediate action required is to establish the cause; it could be the practice is inherently unprofitable in which case the decision to continue should be examined, it could be that it had an exceptional cost that it was not expecting, or (as in this case) it could be that the partners had taken too much money out of the practice.

This practice, I am pleased to say remains viable, the partners just need to re-float the practice by paying back some of the additional funds they withdrew.

The point here is that you can learn a lot from the accounts, looking at the movements in the net current assets can point towards a potential acute shortage of cash, and also highlight an underlying trend towards a chronic problem.

With a worthy reference to Blue Peter, you can even do this in your own practice. Each month, on the last day of the month work out the debtors, estimate the stock, find the bank balance and deduct all known creditors and then compare the net figure (the net  current asset) each month. The trend will tell you something!

As if to underline the point, it is now becoming clearer how the annual allowance charge is going to work. Not only is it absurdly complicated but it looks as if a large number of unsuspecting GPs are going to get caught by this.

So what is this annual allowance charge? All taxpayers are now capped on how much they can pay into their pension with a limit of £50,000. If you pay more, the excess is added on to your total income and taxed at your highest rate.

That sounds straightforward, but the first complication is that in order to work out how much a GP has paid into the superannuation scheme; you don’t look at how much the GP has paid in to the superannuation scheme – that would be too simple. Instead, you have to find out the increase in the GP’s projected pension from one year to another, and multiply the increase by 19.

In calculating this annual increase, HMRC has stated that the effect of CPI inflation is to be ignored. Since GPs’ pensions increase by dynamisation which is CPI +1.5% we only need to consider the 1.5%  – or so we thought. It now turns out that there are two CPIs to worry about, HMRC’s CPI is 3.1% but the dynamisation CPI is 5.2%. What does this mean?

It means that the CPI increase included in the annual increased pension (which is used to calculate the  x 19 for the annual allowance) is not being offset as intended by the HMRC discount.

Putting this into figures, a GP we were looking at has had his annual allowance value increased by a whopping £17,157 by the mismatch in CPI. Admittedly this is a high earning GP, but it looks as if the effect of this mismatch is going to push a lot of GPs over the £50,000 limit

In fact the rules are so complicated that the Pensions Agency is not going to be able to give GPs the information they need to do these calculations until October 2013 – which is a problem as the tax is payable on these sums in January 2013.

It is hard to think how they could have made this more difficult. So come on Mr Osborne, tax is difficult, messy, unfair and frequently opaque. It is anything but simple.

Most Budgets just tinker with the figures, but this year there were some interesting ideas. Now before you all get too excited, many of the issues that get announced in the Budget never make it into practice, they get knocked out during the passage of the Finance Bill.

However, there was something that is relevant to GPs in more ways than one. All self employed taxpayers have to declare their income for any given tax year on the basis of what they earn rather than what they receive. In our language, this is the ‘accruals vs the cash basis’.

Some taxpayers and their accountants insisted on using the ‘cash’ basis (ie money received) and so in 1998 the then chancellor formally ended the cash basis, in the interest of what he called ‘fairness’.

In this Budget, there is a reversal. It is suggested that businesses  with a turnover (ie total income) of less than £77,000 can declare their income on the cash basis (ie income actually received and expenditure actually spent).

Of course most GP partnerships will have turnover in excess of this sum, but if the GP does outside work, or keeps the private fees themselves outside the practice accounts, then they could use this new ‘cash’ basis. How could it help?

Well, if a GP prepares accounts to 31 March 2013, they might choose to pay lots of bills, or delay banking their cheques until 1 April 2013 – Especially if they happen to be a 50% taxpayer and are looking forward to he reduction to 45% that comes in on 6 April 2013.

These changes are being proposed to help make tax simpler, and the thinking is that using the cash basis will make it much easer for taxpayers to access and understand the tax system.

Personally, I think it is a waste of time. The problems with understanding tax are not dissimilar to the problems with understanding medicine – neither of these are simple. Using flowcharts to diagnose medical problems tries to simplify something that cannot be simplified. Suggesting that the cash basis makes tax more accessible is silly.

The unintended consequences of these impossible simplifications undermines the respect that tax , medicine and many other issues deserve.

In the meantime, we (accountants) watch the passage of the Bill……

If you want to be reminded just how civilised we are in the UK, try Googling ‘slutgate’ and see just how awful the politics and public office is in the USA. And if you are not bored with that, there are a myriad of magazines and TV adverts here telling you how to de-age by 30 years with a magic cream, find out who has been abducted by aliens and how most people in the street can sue someone, anyone in fact, for millions of dollars.

So you can see that it is with a sense of relief that I get my daily GPonline bulletin, to read intelligent reports by intelligent people on complex issues. But one headline caught my eye: ‘GPC says MPIG will continue for 20 years’.

Now I don’t know about you, but if that were true it would be fantastic. Twenty years of having your GMS income protected. But hang on a minute, is this more National Enquirer than Financial Times? Lets look at the article for evidence to support this statement:

For:

- there is no official date for the end of the MPIG
- lots of people think it would be bad for general practice if they were defunded (not my word – promise)

What is the evidence against believing such a statement

- it was not made by government
- even if it did, governments change their mind in less than five years let alone 20
- PMS practices are being defunded (sorry) and closed now and nobody with any power is doing anything to help them
- MPIG was only intended to be a short term fix

So you can call me cynical, but I don’t think there is much comfort here. I think the future is not that bright, in fact I think it could be very difficult indeed. I might be wrong, but I think there is going to be a major assault on the GP contract in the next few years, and this where attention needs to be addressed now.

Perhaps it would be a good idea to practise looking after those PMS practices which have already been defunded (again – sorry) on an arbitrary basis by their PCT to get ready for the big fight.

Sorry chaps, it is the National Enquirer after all!

In my lecture I mentioned that a GP with a projected pension of £65,300 would be caught by the rules and then went on to show the enormous additional tax payable by a GP with a pension of £95,000 who did nothing about it. There was some consternation from the audience who complained that no GPs were in receipt of pensions anything like this.

While it’s true that most GPs will not have pensions as high as this, some will and some will have more. Perhaps they prefer to keep this news to themselves?

And so it was that a GP contacted me this week to ask what he should do about his projected pension of £105,000 at age 60. There are a number of options he needs to consider, but taking fixed protection is one of them. If you don’t know what fixed protection is – look it up now.

Failure to do so could literally cost you thousands of pounds in tax, and there will be many GPs who should be considering it.

There are some particular traps that GPs could fall through, and I recommend thinking carefully about the following:

* If you already have primary or enhanced protection, don’t automatically apply for fixed protection. You can’t have fixed protection and primary/enhanced protection so check out which is most valuable to you.

* The application for fixed protection needs to be received by HMRC by 5 April 2012, so don’t leave it until the last minute.

* You cannot continue to make pension payments after the acceptance of your fixed protection – or the fixed protection will be lost. Make sure you cancel all existing payments and keep evidence that you have done so. HMRC has confirmed that if a payment is made by mistake after fixed protection is granted you will not lose the fixed protection, so make sure you keep evidence of stopping contributions to prove the payment was a mistake.

* GPs can’t go a week without someone commenting on pensions, whether it is the Hutton report, the BMA and industrial actions, 1995 or 2008 schemes but this lifetime allowance is a real issue and you need to think about it.

Talk to your accountant or financial adviser about the implications, and/or read the HMRC link above, doing nothing could be very expensive and the clock is ticking.