The government has set out plans for a ‘simplification of the income tax system’, ahead of broader plans to shift to a more digital process.
Under the proposals, all businesses including GP partnerships would in future ‘simply be taxed on profits arising in a tax year’. The current system under which around one in three businesses have year-ends for accounting purposes at dates other than 31 March or 5 April would cease from 2023/24.
To implement the changes, the 2022/23 financial year would become a ‘transition year’ – a year in which the government has warned that businesses could ‘experience higher than normal profits’ and as a result, increased tax liabilities.
GP tax bill
Accountants have warned that individual GPs could face significant extra tax bills in the transition year – as well as potentially facing annual allowance charges as unexpectedly high pensionable income drives up their pension contributions.
Laurence Slavin, a partner at specialist medical accountants Ramsay Brown, said the significant impact of the changes during the transition year could force GPs to consider measures such as opting out of the NHS pension scheme, or forming a limited company to take over their practice contract.
He explained that the impact will be greatest for practices whose current financial year-end comes soon after the standard 31 March/5 April end of a tax year.
A GP partner with taxable profits of £178,240 – the average amount for a partner represented by Ramsay Brown – could see this figure rise to £266,092 in the transition year if their practice’s current year end was in June, he said.
This would push the GP over the annual allowance threshold of £200,000, and leave them facing a substantial additional pension tax bill on top of the increase in income tax – although the income tax element could be spread over five years.
The sharp rise comes because as the government consultation document makes clear, ‘the move to the tax year basis would potentially bring forward tax liabilities’.
A GP whose current financial year end is in June would pay tax in the transition year on the full 12 months of their normal accounting year, plus the remaining nine months of the tax year up to the end of March 2023. This figure would then be reduced to account for any ‘overlap profits’ carried forward from the point when they first joined a partnership.
This overlap profit is normally carried forward until retirement, the closure of a business, or until a business changes its accounting year, or ‘basis period’ – but now will be brought forward to 2022/23 for anyone with overlap relief to claim.
Commenting on the overall changes, Mr Slavin said: ‘This proposal will have a catastrophic effect on GPs’ cashflow for 2022/23 and will accelerate a pension annual allowance charge at a time when the profession is recovering from penal tax charges on their pension.
‘It is critical that GPs get good and early advice to mitigate the effect of the tax charges caused by the change in tax basis periods.’