Hundreds of GPs face a major hike in the tax rate they pay on profits from next year, after the Government launched a consultation on closing a loophole in the current rules surrounding ‘corporate’ partners.
Accountants say the change in the tax rules would mean that PMS practices who have set up a company would have to pay the full 60% tax rate on any profits paid to a coporate partner, rather than the current 20%.
HM Revenue and Customs issued a consultation document setting out the proposed changes to partnership tax rules this month, and they are expected to be implemented from April next year.
Corporate partners are essentially a limited company set up for partners to pay a proportion of their profit to in order to reduce their tax bill. Accountancy firms have advised GPs to bring in the structure, particularly if the partners fell into the 60% income tax bracket or where a practice wanted to build up working capital in the practice.
Accountants say that the new rule change will close this tax loophole, meaning that all profits from NHS work would be taxed as income first even if the partners wanted to divert money to a corporate partner. For the share diverted this would mean a tax hike from 20% to 60%.
Luke Bennett, accountant at Francis Clark LLP and a specialist adviser to GP partnerships, said he estimated the proposals would affect around 5% of PMS GPs.
He said: ‘If you chose not to change the structure, you would end up paying some tax twice, because the proposal is that the corporate partner would be ignored, so you would pay the normal level of income tax.
‘But then you’ve got the problem in that the money is in the corporate partner and not in your own personal name. So when you come to withdraw it from the corporate partner, usually by way of dividends, there would be another levy of tax to pay. So you would end up with a higher tax charge than if you were just operating a normal arrangement. You end up in a worse position than you were.’
‘What you don’t want is to have this change and then to still have those costs on top of it, so you really want to try to bring the arrangment to a tidy end before next April so you don’t end up worse off than you were before.’
Mr Bennet said those practices would do best to seek advice from their accountant now as he said he would be ‘very surprised’ if the proposed changed did not go through.