Terminations by GPs? Have we lost our moral courage and backbone?
Richard Vickery explains how you can avoid next year's possible cash-flow crisis with a little careful planning
crisis with a little careful planning
There has been much discussion recently about the potential impending cash-flow problems for February to April 2005. The reasons for this are a little complicated but boil down to quality money under both old and new GMS and income tax.
In the run-up to the end of old GMS, practices were encouraged to provide additional services to the public and were rewarded for running antismoking clinics, well women clinics, watch your weight clinics, enhanced access and a host of other services. For go-ahead practices this additional income was substantial and boosted
profits for the year to March 31, 2004, significantly.
So far so good. Practices should, by now, have received their accounts for the year to March 31, 2004. No doubt where a regular drawings policy had been adopted there were large surpluses on partners' current accounts. It is entirely likely that these balances were paid to partners, and why not; the practice is likely to have been cash rich at March 31, 2004, and the tax payments due on July 31 would have been reasonable being based on 50 per cent of a partner's final liability for 2002/3.
Practices will have noticed a reduction in income for 2004/5, primarily down to all the additional service money being replaced by quality money in 2004/5, which is of course paid partly (one-third) during the year, partly (two-thirds) after the year end.
Many practices will have established regular monthly drawings for 2004/5, but alarmingly many of these calculations seem to have been based on 2003/4 profits, plus a fairly large percentage increase to reflect the increased profits that are expected for 2004/5.
This is all very well but there will be a significant debtor (the achievement money) on March 31, 2005, that, although included in the profits for the year, crucially remains unpaid until at least April 30, 2005. Monthly drawings should therefore be calculated on a back-to-basics cash basis and not simply applying a percentage increase to 2003/4 profits and dividing by 12.
All this might not be so bad, but the January 31 2005 tax bill could be shocking because
of the way self-assessment and payments on account work. The 2003/4 payments on account (payable in equal instalments on January 31 and July 31, 2004) were based on a GP's 2002/3 liability, with the balancing payment due on January 31, 2005 (along with the first payment on account for 2004/5) being 50 per cent of the final 2003/4 liability. With luck this is not news for GPs, but the amounts may be.
This is probably explained using an example:
Approximately £16,000 of the 2004/5 profit is deferred achievement money, reducing the profit available for drawings purposes to £84,000.
The tax payable in January 2005 would be the balancing amount for 2003/4 of £5,000 (£29,000 less £24,000) plus £14,500 (£29,000 x 50 per cent), totalling £19,500. This is payable from a lower fund than was available for 2003/4 (100,000 less 16,000). So if drawings have simply been calculated on 2003/4 profits, plus an addition for extra available money, then there simply won't be the money available to fund drawings. If there are five partners, the practice could be short by up to £80,000. Even if drawings had remained the same in 2004/5 as 2003/4 there could still be a £4,000 per partner shortfall.
It is difficult to reduce drawings. So if formal tax/NIC provisions are not included in the accounts, and reasoned drawings not computed, one solution would be to arrange a short-term overdraft from January to April and perhaps look forward to a distribution when the achievement money comes in.
Richard Vickery is a senior manager with PKF Medical Services Group, Guildford