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Understanding practice accounts – the five key areas of expenditure

Accountant Mike Gilbert outlines the main costs of running a practice and offers advice on how to control spending in each area

By Mike Gilbert

Accountant Mike Gilbert outlines the main costs of running a practice and offers advice on how to control spending in each area

Practice expenditure falls under five main headings:

• staff costs

• medical expenses

• premises

• administration

• finance.

It is important to understand what falls within each category so you can account for expenses accurately and learn to control costs.

1 Staff costs

Staff costs comprise not only the salaries of administration and nursing staff (including employer's national insurance and 14% employer's superannuation contributions) but also the costs of practice-employed salaried GPs, retainers and those practice-employed GPs on flexible careers schemes. PCT contributions to staff salaries are now subsumed within the overall PMS budget or GMS global sum and separate funds are also available towards salaried clinical staff by way of growth money (although this may be under threat in future), reimbursements via registrar salary reimbursements, retainer scheme allowances and, in the short term, the flexible career scheme.

Although no new FCS posts are being created so funding will be limited to existing posts, 50% of an existing flexible careers scheme doctor's salary can be reimbursed in the first year, falling to 25% in the second year and 10% in the final year.

Some practices (or their accountants) prefer to disclose salaried GPs, retainers, registrars and flexible career scheme GPs as medical expenses – there is no right or wrong approach.

Correct recording of staff salaries is essential to comply with the law and avoid expensive conflict with the HM Revenue and Customs. To mitigate any problems, it is worth ensuring that:

• correct tax code numbers are operated for all employees

• all employees' national insurance numbers are recorded

• the correct tax is paid to the collector of taxes and on time

• forms P9D and P11D have been completed where relevant

• all bonuses in cash or in kind have been taxed correctly

• P45 forms are completed correctly

• P46 forms are completed correctly for all staff employed for more than one week

• P38a forms are completed correctly for all casual employees.

2 Medical expenses

Every practice will incur medical expenses, and items falling within this category include drugs and medical supplies. It is important to divide the two so that a close eye can be kept on profit margins when comparing income from appliances with the costs incurred and reimbursable drugs.

Other typical items falling within the medical expenses heading may include medical committee levies, locum costs and deputising costs where the practice has not opted out of out-of-hours work. As stated above, medical expenses could also include the salaries of technical as opposed to administrative staff.

3 Premises expenditure

All practices will incur premises expenditure, but this will vary depending on whether or not it is a surgery-owning practice. If some, or all, of the partners own the property, they will incur costs on property insurance and potentially ground rent, plus mortgage interest (a finance cost).

All practices, whether or not they own the premises themselves, will suffer costs in respect of maintenance and repairs, council tax, light, heat, water rates and cleaning.

For those practices that lease their property from a third party, there may be clauses within their lease requiring them to redecorate certain areas every few years.

If this is the case, it may be advisable to create a sinking fund, estimating the likely annual charge to the practice rather than leaving it to crystallise every, say, three to five years when the partners within the practice may well have changed or altered their profit-sharing ratios.

By doing this, a smoothing of the expenditure over the number of years affected produces a truer picture of year-on-year practice profits, and greater fairness between the partners in terms of sharing those costs.

Sinking-fund provisions are not allowable for tax-deduction purposes, however, and tax relief is instead given in the year in which the cost is incurred. An ‘equity adjustment' can be made to take this tax effect into account, normally by a ‘deferred tax account', and the practice accountants can give advice on this.

4 Administration costs

Administration costs of a practice are often similar to any other business. Typically, they include items such as phone charges, postage, stationery, accountancy charges and sundry and computer expenses.

Whereas PCTs have largely taken over the responsibility for acquiring and maintaining practice computer equipment, some elements are not covered, such as payroll maintenance and computer consumables, and practices will continue to incur such costs.

5 Finance costs

If the practice has any business loans, such as loans for the purchase of equipment or introducing new capital into the practice, the associated interest would fall under the finance heading, along with bank charges and overdraft arrangement fees.

In addition, where some or all of the partners own the surgery property and have taken out a mortgage to do so, interest on this will be reflected as a finance cost. If the property is owned in different ratios to those in which profits are shared, a prior charge should be made to the property-owning partners, although a prior share of any incoming rental income will also need to be made.

Mike Gilbert is a partner at RMT accountants and business advisers and former chair of the Association of Independent Specialist Medical Accountants

This is an extract from Managing Money for General Practitioners (2nd edition) by Mike Gilbert. Pulse readers can buy the book at the special price of £19.99 plus P&P (usual price £24.99 plus P&P). To claim the discount, visit Radcliffe Publishing's website at and enter the discount code D932 at the checkout. Alternatively, order by phone on 01235 528820 and quote the same code. Offer ends 31 August 2009.

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