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PCNs may face tax bill for funding unspent by 31 March

Primary care networks (PCNs) could be taxed on the funding they receive from CCGs that remains unspent by the end of the financial year, accountants have warned. 

When the network contract DES was released last year it was announced that all PCNs would receive an annual uplift of £1.50 per patient as an entitlement to cover general administration costs.

Accountants said that any of this funding that is unspent may be classed as ‘profit’ by HMRC – even if it has been earmarked for future spending – and, as a result, they may face a tax bill at the end of the financial year.

This could see networks paying up to 65% of any surplus funding in some cases.

The accountants also said that HMRC is reviewing the tax status of clinical directors, which means their income payments could be taxed.  

There has been much confusion around the treatment of VAT for PCNs. The BMA last year released guidelines that suggested some structures of PCN are more likely to be liable for VAT than others.

Now, accountants are warning that there may be other tax charges that will be applicable to PCNs.

James Gransby, partner at RSM Tax and Accounting Ltd and board member of the Association of Independent Specialist Medical Accountants (AISMA), said: ‘PCNs that haven’t spent all of their £1.50 by the end of the year may be taxed on that as a surplus at year end. This would be concerning as much of their money would be earmarked for future expenditure.

‘We’re waiting for further clarity from HMRC and this needs to come at a very early date because if there isn’t clarity by 31 March then that tax will come as a cost against that surplus.’

Mr Gransby said that high earning GPs may have to pay 62% on surplus funding in the most extreme cases. This is because the ‘effective’ rate of tax for people earning between £100,000 and £125,000 is 60% – due to the annual allowance being removed for anyone earning more than this. 

He said: ‘For example, for a GP earning between £100,000 and £125,000 there’s an effective 60% rate of tax (plus 2% national insurance contribution) that they must pay out. If the surplus for the practice was, say £10,000, it could be 62% of that so £6,200 on that number.

‘The PCN itself isn’t an entity in its own right, it’s a collection of practices working together, so HMRC can’t tax it except for via the practices themselves. Anytime there is unspent income then HMRC always wants to tax that surplus/profit. PCN will have to take that surplus, divide it amongst the constituent practices and record it through their own accounts as profit, and that’s when the tax will rise.’

Lizzy Lloyd, board member of AISMA who spoke at the conference, said the current UK accounting rules ‘make it difficult to see how any surplus PCN funding at the year end would not be taxed’.

She told Pulse: ‘Unspent funds will be taxed, but when rolled over and spent in the following year then tax relief will be applied and the tax position should even itself out.

‘In most cases PCNs haven’t formed separate entities and therefore funding needs to somehow be accounted for within the accounts of the member practices. A complicating factor is that practices within a network may have different year ends.

‘These timing differences, and the possibility of partners joining or leaving member practices from year to year, could make equitable calculations for tax and pensions between member practices and individual partners difficult.’

Mr Gransby said that HMRC is also considering whether the clinical director role should be considered an employee role so that it can deduct income tax from their salaries. 

He said: ‘HMRC also said that the clinical director role may be deemed to be an officer role and have to have Pay as You Earn (PAYE) deducted from the payments because it’s considered an officer position. Payments under PAYE would also incur 13.8% employer’s national insurance and so if the PCN reserves for a creditor for the additional 13.8% it hasn’t paid out then that would go some way to reducing the surplus.’

AISMA is advising practices to start drawing up their PCN annual accounts and seek advice on their tax and pension position.

An HMRC spokesperson said: ‘GP practices’ profits are taxable, and as PCNs are formed by GP practices any profits arising will be taxable similarly.

‘This does mean that if income recognised for accounting purposes exceeds allowable expenses incurred, any resultant profit will be taxable. This is the same as the treatment of GP practices’ income and expenditure generally.’

Pulse understands that the BMA is liaising with HMRC and specialist accountants to try to resolve the issue.