Reform of Class 2
National Insurance
Contributions (cont)
Enforcement
Practicalities & issues
Healthcare
News
Tax Tips, News
and Much More...
Issue 4: February 2015
Class 2 NIC, collectable via the self
assessment regime from April 2015
onwards, will be subject to the same
interest and penalty regime which
currently applies to any income tax and
Class 4 NIC arising on profits.
The final Class 2 direct debits that HM Revenue & Customs will collect under
the current rules will be on 10 April 2015 (for those who currently pay monthly)
and on 31 July 2015 (for those who pay six monthly). No further payments
should be taken after these dates. Ensure you check your bank statements
to verify that this is the case and notify HM Revenue & Customs if the
direct debits continue.
There will no longer be a requirement to
contact the Contributions Agency when
a new self employment commences,
in order to notify the requirement to
pay Class 2 NIC. That, in effect, will be
done via the self assessment tax return.
The obligation to notify HM Revenue
& Customs of the commencement of
a new self employment will remain
however (with late notification penalties
still applying if that failure exceeds 90
days from the new self employment
commencing).
These changes may mean that Class 2 NIC is taken much later (31 January
2017 for 2015/16 Class 2 NIC). Taxpayers with low incomes may want to
ensure that they are setting funds aside to meet any Class 2 liability in
order to meet that deferred liability when it falls due.
HM Revenue & Customs are known to be sensitive to the position of low
earners and have indicated that they may introduce some form of regular
payment facility to avoid issues with finding the funds to meet any Class 2
liability. They are also sensitive to the position of unrepresented taxpayers who
may be unaware of the full implications of not paying Class 2 NIC and, in effect,
opting out of the contributory benefits.
The HSKS Greenhalgh Healthcare Team will be glad to assist anyone with
issues or concerns arising out of the changes detailed above.
For more information about any of these matters, please contact Jean Kelly.
Philip Handley
Jean Kelly
Martin Tomes
Des Pearson
Director
Manager – Healthcare
Manager – Taxation Services
Manager – Taxation Services
e: philip.handley@hsksgreenhalgh.co.uk
e: jean.kelly@hsksgreenhalgh.co.uk
e: martin.tomes@hsksgreenhalgh.co.uk
e: des.pearson@hsksgreenhalgh.co.uk
Chartered Accountants and Business Advisors
3rd Floor, Butt Dyke House, 33 Park Row, Nottingham, NG1 6EE t: 0115 985 9517 e: nottingham@hsksgreenhalgh.co.uk
18 St Christopher’s Way, Pride Park, Derby, DE24 8JY t: 01332 200105 e: derby@hsksgreenhalgh.co.uk
Lion Buildings, 8 Market Place, Uttoxeter, Staffordshire, ST14 8HP t: 01889 567217 e: uttoxeter@hsksgreenhalgh.co.uk
21 Eastgate Business Centre, Eastern Avenue, Burton upon Trent, Staffordshire, DE13 0AT t: 01283 531711 e: burton@hsksgreenhalgh.co.uk
www.hsksgreenhalgh.co.uk
Planning for the future
Annual cashflow and profit
forecasting is a fairly standard
process for most businesses, yet
in GP practices it is still relatively
rare. Until recently this was never
too much of a problem and there
was usually sufficient cash left in
the practice to pay out year end
equalisations once the annual
accounts were finalised. However
in the last two or three years
GP practices have seen static
or decreased levels of profits,
which inevitably puts pressure
on partners’ drawings levels.
Partners have had to face increased
superannuation liabilities, following the gradual
increases in tiered contributions, and possibly
higher tax liabilities too if they are affected by
Annual Allowance tax charge issues. Their
wish to maximise/maintain the drawings they
take out of the practice is understandable,
but can leave their Practice Managers with
cashflow worries at the end of each month.
Why prepare a Forecast?
The act of preparing profit and cashflow forecasts will not actually change the practice’s
finances, so why bother? There are several good reasons to do so:
• To assist the partners with their planning
GPs who join partnerships accept the financial risks and rewards of partnership. Their
drawings are their household income and, like any household, they need to plan their
own personal expenditure based on a reliable level of income.
All other planning aspects (tax planning, investment and pension planning) flow from
their level of profits from the practice. All too often GPs have no idea at all of what
those profit levels are likely to be, thus making any planning difficult.
• To deal with incoming/outgoing partners
The GP population seems to be more transient than ever at the moment and most
practices seem to have joiners/leavers every year. Budgeting affordable, reasonable
drawings levels for incoming/outgoing partners will help to avoid overdrawn or
significant balances being owed when a partner leaves the practice. Neither situation
is ideal, so anything that can be done to determine a reasonable drawings level,
appropriate to the profit level of an incoming/outgoing partner will help. Annual
equalisation of partners’ current accounts is also recommended, in order to avoid
significant balances being built up.
In theory, the gradual movement of funds out
of QuOF and into Global Sum/PMS baseline
funding should make practices less reliant on
the end of year QuOF achievement “bonus”,
but many of the locally negotiated or directed
enhanced services still have an element of the
funding which is target based. These funds,
like QuOF, will not be paid out to practices
until after the end of the NHS year, once the
achievement against target is assessed. As
with any business, the service/product has
to be delivered first and the funding follows
much later on.
www.hsksgreenhalgh.co.uk
Planning for
the future (cont)
Reform of Class 2 National
Insurance Contributions
• To plan capital outlay
Any capital expenditure will not affect
profitability or drawings levels, but will
impact on cashflow, particularly if the
outlay is significant. A monthly cashflow
forecast will identify times of the year
when there is surplus cash available and
may assist the practice in deciding when
to incur capital expenditure.
Many healthcare professionals will
derive income from self employment
(either as a GP in partnership with
others, or as a sole trader locum).
• To aid general practice planning
Like every business, GP practices need
to be able to make sound financial
decisions about their business expenses
and a detailed understanding of the
practice’s profits and cashflow will inform
these decisions.
• To complete the annual
superannuable profits forecast
At the start of each NHS year, every
practice has to complete and submit a
forecast of each GP’s superannuable
profits for the year (additional forms are
required at each change of personnel
within the year too). The purpose of this
forecast is twofold: firstly it determines
which earnings tier applies to each
GP, thereby ensuring that employee
superannuation contributions are
collected at the correct rate, and
secondly it ensures that contributions
are collected on a reasonable estimate
of profits in order to avoid large
superannuation surpluses or shortfalls.
Avoiding large shortfalls in particular aids
cashflow and also helps to maximise the
tax relief claimable by each GP.
• To assist with bank borrowing
Practices may need to borrow from time
to time to fund capital improvements,
refurbishments and extensions or to
allow incoming partners to buy into an
existing property. Although the borrowing
will be secured against the assets, the
bank will often look at practice/individual
GPs’ profit levels in order to ensure that
their income is sufficient to service the
loan. Practice accounts assist with this,
but show historic performance which is
not necessarily a good indicator of the
future. A detailed practice profit and
cashflow forecast and balance sheet
provides assurance to the bank that the
practice has a sound understanding of its
finances and makes its decisions based
on reliable financial information.
Ongoing monitoring
Preparing a budget is all well and good and demonstrates sound financial management of
the practice, but unless it is used as a “living” document, it will serve little or no purpose.
Setting the initial budget is a good first step but measuring actual performance against it is
just as important. Real life will always get in the way of the best financial planning and every
practice will incur some unexpected expenditure from time to time, but monitoring actual
expenditure against budget will help identify where other problems might occur, or might
even identify a solution.
Monitoring against budget does not have to be hugely sophisticated. Some practices use
software packages which make it easy, but in the absence of such a package a spreadsheet
will suffice. The key is updating it each month and ensuring it is kept accurately.
So, where do I start?
A good starting point is the latest
available set of accounts. They will at
least give some guidance regarding
the income and expenditure headings
required in the forecast.
Then you need to think about any
changes there have been in the
practice since that set of accounts;
new income sources, personnel
changes etc and consider how these
will fit into your forecast.
Plan out the income you expect to
derive and expenditure you expect
to incur on a month by month basis.
Firms who specialise in GP finances,
such as ourselves, are likely to have
standard spreadsheet templates which
you can use to pull all the figures
together into a profit and cashflow
budget.
Once you have a draft version
available, review it and discuss it
with your partners to ensure that it
is reasonable and that you are all in
agreement with the figures. If your
accountants have not been involved
in the preparation of the budget, seek
their advice or at least make them
aware that the budget exists so they
can use it in other planning exercises.
If you would like further advice or
assistance with financial forecasting
matters, we have a wealth of
experience in the Healthcare team
and would be happy to assist.
Taxpayers who are self employed
should be familiar with Class 2
National Insurance Contributions.
Payment of Class 2 NIC provides
the self employed taxpayer access
to the contributory benefits system,
the most important elements of
which are the state pension and
maternity allowance. Only the self
employed are liable to such NIC,
along with Class 4 NIC. Healthcare
professionals may also be
employed at the same time and be
subject to Class 1 NIC. This article,
however, only considers aspects of
Class 2 NIC, which will be changing
in April 2015.
Current Regime
Liability to Class 4 NIC is determined
by reference to the taxpayer’s profit
and is collected via the self assessment
tax regime. Class 2 NIC is currently
administered very differently. The
contributions are a flat rate amount
determined by reference to how many
weeks in a tax year the taxpayer is a
self employed earner (currently at the
rate of £2.75 per week). Class 2 NIC
is collected via direct debit at monthly
or six monthly intervals. Whilst the
six monthly collection dates are 31
January and 31 July, their collection is
administered entirely independently of
income tax and Class 4 NIC. In certain
circumstances, Class 2 NIC will be
collected by the issuing of a demand
for payment where liability to pay has
been notified late to the Contributions
Agency, or profits have exceeded the
Small Earnings Exception (“SEE”).
Where a taxpayer’s self employment
profits are regularly below the NIC lower
profits limit (£7,956 in 2014/15) they may
apply for SEE. Conversely, taxpayers
may make voluntary contributions of
Class 2 NIC if they are below the lower
profits limit, to continue to benefit from
contributory benefits.
Changes with effect from April 2015
The 2014 Budget announced changes to the existing Class 2 NIC regime which will
take effect in April 2015. These announcements comprise
1.Changes to the way Class 2 NIC is structured,
2.Changes to the way Class 2 NIC is collected, and
3.Changes to the way Class 2 compliance is enforced.
Structure
From April 2015, liability to Class 2 NIC will cease to arise on a weekly basis. Liability
will be determined after the end of the tax year and will be assessed by reference to
the taxpayer’s profits as calculated for Class 4 NIC purposes.
The `lower profits limit’ is to be replaced by a `small profits threshold’. This will be set
at £5,965 for 2015/16. Where profits fall below the small profits threshold, it will no
longer be necessary to apply in advance for exception from payment of Class 2 NIC.
From that date, the taxpayer will have an option to voluntarily pay Class 2 NIC, or not,
at the end of the tax year.
Collection
Whilst liability to Class 2 NIC will no longer arise on a weekly basis, the actual amount
of Class 2 NIC due will continue to be calculated based upon the number of weeks of
self employment in the year. The amount due for a tax year will be determined via the
taxpayer’s self assessment tax return and paid alongside any income tax and Class 4
NIC on taxable profits on the 31 January following the end of the tax year. Taxpayers
who are within the payments on account regime will, in effect, pay part or all of the
liability before that time (payments on account being due on the 31 January within the
tax year and the following 31 July).
Presumably, the self assessment return will, from 2015/16 onwards, incorporate a box
for taxpayers to tick, to indicate whether they want to opt out of paying Class 2 NIC,
or make voluntary payments of Class 2 NIC, where profits fall below the small profits
threshold (to preserve their access to contributory benefits).