In our previous private practice post we set out some points for you to consider as the lockdown eases and there is some return to normality. This is available on our website.
Independent Practitioner Today has also kindly published our pointers here.
Towards the end of the article we highlighted some tax planning opportunities and advice that will be set out below and for which further detailed guidance can be provided on a personal basis.
The tax planning will be split between those who practice as individual practitioners or in partnership say with their spouse or partner and those of you that have limited companies.
Sole Practitioner/Partnership
If you have a 31 March or 5 April financial year end then for the year 2020/21 the first part of the year will have seen little or no private practice activity.
The Revenue will allow the 31 July 2020 tax payment (your second payment on account for the tax year 2019/20) to be deferred until 31 January 2021.
In January 2021, you are normally required to make your first interim payment for the 2020/21 tax year and the second payment for 2020/21 is due by 31 July 2021. Due to the reduction in private practice these payments will be set too high by HMRC so it is important that your 2019/20 tax return is prepared as soon as possible to allow a review to be carried out for the 2020/21 payments on account.
A claim to reduce payments on account can be made on your 2019/20 tax return or separately online. It is important for these payments to be reduced to reflect the more accurate level of earnings for 2020/21.
Serious consideration must be given to this course of action.
We can assist you.
For practitioners with a non 31 March or 5 April year end the same course of action is open to you but depending on when your financial year end falls the full effect of the ‘claim to reduce’ may have to be spread over two tax years.
If you were a sole practitioner on or before 1996/97 then you may consider changing your year end to 31 March and take advantage of a little known relief, that in some cases can be substantial, known as ‘transitional overlap relief’. The benefit of this is normally taken upon retirement but can be brought forward.
For those of you in practice after 1996/97 with a non 31 March or 5 April year end a similar type of relief may be available although normally slightly less beneficial known as ‘overlap relief’.
Taking advantage of these reliefs allow the tax payments in January 2021 and July 2021 to be reduced to reflect more accurately earnings in 2020/21.
It also allows you to consider setting up a company that can allow income to be taken in the year to 5 April 2021 from the company but treated as being taken in the tax year ended 5 April 2022 leaving any tax payable until January 2023. In some cases pushing tax to 2024!
By that time hopefully private practice will have risen and the pandemic over.
Limited Company
For those of you with limited companies similar tax planning can be undertaken whereby personal tax payments can be deferred until a later date.
The corporation tax will always fall due 9 months after the financial year end. But it is the tax on dividends that based on current legislation when combined with loans allows flexibility in delaying when the personal tax is due for payment.
The use of the company can be further fine-tuned with what is known as alphabet shares. This allows more flexibility as dividends can be paid on different classes of shares. If you own one class of share and your spouse or partner the other class, then different dividends can be paid to each of you. This can allow your spouse or partner to extract their full entitlement of the profits with you retaining some or all of your profit share within the company. This can be advantageous when your spouse or partner pays tax at a lower rate than you.
If not already done so then consideration should be given to this type of structure.
PAYE schemes
Many of you operate PAYE schemes to employ secretaries or family members who work for you. We have also seen an increase in PAYE schemes for those trading as a limited company who have purchased electric company cars which remain a good opportunity at present.
With many universities and colleges for next term and beyond teaching remotely it may be that there is scope to pay not only your spouse a salary but also one or more children a salary provided they provide some service to your private practice.
For those of you with limited companies, a PAYE Scheme should be considered for you and fellow directors (normally spouse). This may be particularly important for those who normally pay out their profits but may not have sufficient profits in the short term to pay out dividends. As salaries are an expense of the company rather than distribution of profit, they provide additional flexibility for the extraction of income particularly for those using schemes such as the bounce back loan.
A second wave of the pandemic may see the return of the furlough scheme and salaries established and paid now may be eligible for future grants or financial support from the government if further downturns are experienced.
Certainly, a substantial number of you will use your spouse or partner at least within your private practice but my make little or no salary payment. If you are in this position you should reconsider the level of salary paid and whether a PAYE scheme should be established.
It is worth considering whether your children, whether grown up or minors are in a position where they can receive a salary from your private practice. There are rules around employee minors but older children and spouses can benefit from national insurance credits which count towards state pension entitlement as well as providing them with a regular income. It is important that any salary paid is commensurate with the duties performed.
For further details of changing year ends, incorporation and alphabet shares plus PAYE payroll schemes please get in touch.
