Getting to grips with partner's capital
Many GPs are hazy on the partner’s capital in their accounts. Bob Senior explains what it is and why you need to know how much you’ve got
Many GPs are hazy on the partner's capital in their accounts. Bob Senior explains what it is and why you need to know how much you've got
The issue of partner's capital causes no end of confusion to partners both young and old. Sometimes it is simply ignored, either because it's thought to be too complicated or because in the past partners have been told it's not ‘real money'.
Well, although the factors that affect how much money is tied up in partner's capital can indeed be complex, they are not fundamentally too difficult to understand. And when a partner joins or leaves the practice, how much partner's capital needs to be invested or withdrawn becomes very relevant.
In essence the balance on a partner's capital account at the end of the year is made up of two things. First, an underlying amount to fund the GP's share of the practice investment in property, equipment, drugs stock and a working bank balance. The second part is undrawn profit and is sometimes listed separately under the partner's current account.
Most GP practices prepare annual accounts to 31 March, which coincides with the NHS year end and the tax year. Confusion often arises at this point because a partner's capital includes a year's worth of outstanding QOF and enhanced services pay. This means that at the end of March, a partner might appear to have a balance on their capital account of, say, £35,000.
But only £15,000 of this may be real capital, sunk in buildings, equipment, drug stocks and the working bank balance. The other £20,000 may be undrawn profit from QOF and enhanced services payments that will be paid over the next few months and subsequently drawn by the partner.
A joining partner
The breakdown between working capital and undrawn profit becomes relevant when a partner joins, as although they will build up the same amount of undrawn profit as the other partners, they will still need to provide the £15,000 of real capital. That's typically done in one of two ways; either by restricting their drawings for a year or two, or by borrowing the money from a bank.
At this point, tax efficiency raises its head – any interest paid on a loan to provide practice capital is tax deductible at the GP's top rate, typically 40% for most GPs. Assuming that a GP has a mortgage, it makes more sense for them to take their full drawings and use them to reduce their domestic mortgage, on which there is no tax relief, and borrow their practice capital.
An alternative that some practices are adopting is for the practice to use bank lending to provide all the necessary capital, avoiding the individual partners having to raise their own finance. This approach, as with all things in life, has it pros and cons.
On the plus side, partners do not have to worry about sorting out their own capital and things are generally smoother when partners leave and join, since there are no large amounts going in and out of the practice. But funding of this sort is a joint and several liability – so for a five-partner practice where each partner puts in £20,000, the overall sum is £100,000. Each partner, who would otherwise only be exposed to a loan of £20,000, becomes potentially liable for the full £100,000.
When a partner leaves
The accounts at the point the partner left would show a figure for undrawn profit and for working capital. If nothing has been paid out to them between the point of leaving and the date of final settlement of the practice accounts – usually September – they can expect to be paid the full sum.
Bob Senior is director of medical services at medical accountant TenonThe issue of partner's capital causes no end of confusion to partners both young and old