Financial Structure of the NHS - the impact of the likely changes

1. Financial Structure of the NHS- the impact of the likely changes Bob Senior, FCA Partner of Medical Services, RSM Tenon Chairman AISMA

2. Finance and your Practice Bob Senior, FCA Kate Olive, ATT Catriona Moon, ACA

3. Likely changes to practice finances • The impact of commissioning • Changes to GMS and PMS Contracts • Premises

4. Commissioning - the story so far • White paper issued, focus on GP Commissioning • Transition date to be 1/4/2013 when PCTs closed down • Concern over conflicts of interest regarding commissioning and providing • Potential for broader conflicts of interest in relation to the Quality Premium

5. Current expectations • From 1/4/2013 – or when CCG are ready after that!: • CCG will be Statutory Authorities • They will be subject to Audit • Few GPs have any idea what an audit will involve • It is not simply about getting the accounts checked!

6. Current expectations • Funding flows under CCG’s • The government’s intention is that the NHS Commissioning Board will allocate the funding previously received by PCTs directly to CCGs. This will be in the form of a budget that is a total of individual practice-level budgets based on a weighted capitation model. • The Carr-Hill formula was a weighted capitation model!

7. Current expectations Weighted capitation for CCGs • As with the current weighted capitation formula used to allocate resources to PCTs, the key factor affecting the budget each CCG receives will be the number of patients registered with each constituent practice. • Applying the weighted capitation formula is intended to give a target amount or fair share for each CCG – the amount of money that would enable all CCGs to commission the same level of healthcare for their population regardless of its makeup.

8. Current expectations • Under the current approach a PCT’s target allocation is not necessarily the same as the money it actually receives. Moving under-target PCTs to target would imply reducing over-target PCTs’ allocation. Instead the goal has been to move all PCTs towards their target share over time, using a differential growth policy that gives all PCTs some growth but gives more growth to under-target PCTs.

9. Current expectations • The speed with which this has taken place has depended on the Department’s pace of change policy. This in turn depends on the size of the growth funds available. CCGs may face a similar pace of change policy, moving them gradually towards a fair share allocation.

10. Quality Premium Intention was to make a payment to the CCG if it achieves financial targets. • A conflict of interest? • A stick or a carrot? Funding for the Quality Premium was intended to be taken from existing GP funding resources. • Could have been said to be held hostage subject to satisfactory financial performance

11. Changes to enhanced services With the demise of PCTs the control of local enhanced services will pass to the CCG • Apart from the “public health” aspects which will pass to the Local Authority

12. CCG controlled enhanced services • The National Commissioning Board has issued guidance to CCGs recommending that they take the first six months reviewing the local enhanced services before setting out to make any significant changes • Many may well take rather longer than 6 months so we may well see some changes in the second half of 2013/14 – however it is quite possible that we might not see major changes until April 2014

13. CCG controlled enhanced services • CCG’s will undoubtedly want to ensure fairness between practices, improvements in services delivered and where possible cost savings • Those practices with strange funding streams, the origins of which are lost in the mists of time, will probably see them go. • E.g. £19,555 funding towards a Nurse Practitioner for a GMS practice • Some practices in an area receiving funding towards Phlebotomy services while others don’t

14. CCG controlled enhanced services • CCG’s are likely to question whether the current model of all practices being best placed to provide all enhanced services to their own patients is really the case • This could be either a threat or an opportunity for practices! • Individual practices may not be able to compete when tendering for services – but maybe groups of practices could

15. Local Authority controlled enhanced services Local Authorities have the commissioning of enhanced services in relation to public heath passed to them from April 2013 • This includes a lot of the enhanced services in relation to contraception • They are not under the same direction from the National Commissioning Board to take six months to make their plans. Some are already planning changes from April 2013 • Many are sceptical about Local Authorities abilities and wonder whether this could all go badly wrong

16. Changes to GMS and PMS Contracts The White Paper said that the government wanted to move to a single, unified, GP contract • It appears that they had in mind all practices moving to an APMS type contract, i.e. five year fixed term contracts They had gone rather quiet on that and it was thought that they were focusing on making CCG Commissioning work and not planning on any changes to the GP Contract until after the next election • The recent DOH contract proposals clearly show that is not the case

17. Changes to GMS and PMS Contracts • The proposals suggest a new Allocation Formula be introduced from 2014 • Lots of phrases involving words like “fair” and “equitable” were bandied about! • They propose that the Minimum Practice Income Guarantee be phased out over up to 7 years • Apparently the government wanted it to go in 1 year, the DOH wanted 3 but they put forward 7 as a compromise • The proposals suggest that PMS contracts will be looked at again, so not only GMS will be affected

18. Minimum Practice Income Guarantee - MPIG • Introduced because the Allocation Formula introduced on 1 April 2004 would have seen most practices income dropping significantly • A calculation was done looking at historic core NHS income and comparing it with the funding that would be generated under the allocation formula. If there was a shortfall then a “Correction Factor” was to be paid until such time as the allocation formula was revised.

19. Impact of removing the Correction Factor • 76% of a typical non dispensing practices income comes from the Global Sum, Enhanced Services and QOF (interestingly down from 79% in 2007) • None of these have any flexibility to reflect the diseconomies of scale, particularly for: • Small practices • Split sites

20. Impact of removing the Correction Factor Small practices and split sites will become financially disadvantaged compared to larger practices operating from a single site Taking a Federated approach can help to an extent, but will not totally overcome the problem It is likely therefore that the movement towards merging practices will increase

21. GP Premises funding • Given the movement towards what is going to be predominantly a capitation funded system, many are asking whether the current premises reimbursement process will continue under a unified contract? • How might lenders who have regarded Notional Rent as a guaranteed income stream react?

22. Financial Structure of the NHS- the impact of the likely changes • Significant changes to the financial structure of the NHS are undoubtedly on their way • Practices need to keep closely in touch with the CCG and Local Authority plans to ensure that they are not caught unawares • Very small practices need to consider carefully whether they will be able to continue as they are, or should they look at federating or merging

23. Financial Structure of the NHS- the impact of the likely changes Or maybe they could simply ignore the changes and simply try to carry on as before? Probably not!

24. Tax Saving Opportunities Kate Olive Senior Medical Tax Manager

25. Contents • Current Tax Issues • Use of Ltd Cos/LLPs • Salary Enhancement • Capital Allowances • Entrepreneurial Relief

26. Current Tax Issues • Re-classification of locum status • Increases in NIC – salary enhancements may offer savings • Child Benefit – higher income charge • Capital allowances – changes to AIA limits

27. Locums • Self employed or employed? • Various indicators re classification of status – nature of work, control over hours/terms, pattern of sessions worked, number of ‘clients’ • Locum paying own tax/NIC not an indicator • Consider each locum individually • General definition = where a locum is taking the place of regular doctor temporarily/on an ad hoc basis • HMRC website’s Employment status indicator: http://www.hmrc.gov.uk/employment-status/index.htm • PCTs are introducing limits on how long they will fund the Ers Superannuation for a ‘long term’locum – 3 month limit.

28. Doctors’ tax liabilities are increasing • Withdrawal of personal allowance where taxable income over £100,000 • 50% rate tax band where net income over £150,000 (dropping to 45% from April 2013) • Changes to child benefit mean an additional charge on the Tax Return • Restriction of tax relief on pensions where deemed contribution exceeds £50,000 pa – mainly affecting GPs paying added years or into private pension schemes. • This may affect some of your GPs they need to seek advice from an IFA experienced in this area

29. Why consider using a Limited Company? A company pays Corporation Tax on profits – probably 21%. No additional tax is payable until the profits are drawn from the company. If a shareholder receiving a dividend is a non or basic rate taxpayer then no further tax is payable

30. Operating through a Limited Company • A Company limited by shares allows shareholders to take profits by dividend • This allows you control over the timing of when you take the dividends – one tax year may be better than another • HOWEVER… if a higher rate tax payer simply takes all the profit out of a company by immediately taking a dividend then the only “saving” is 2% National Insurance! The tax will effectively end up the same.

31. Operating through a Limited Company • A Company limited by shares puts the business at arms length from the practice • It allows non partners to be involved • It can provide limited liability • It could develop a separate brand or identity which could in time be sold • It puts income outside the realms of superannuation • Any losses incurred can only be carried forward and set off against future profits – you cannot set them off against other partnership income.

32. Use of Ltd Cos and/or LLPs - Practice • GMS contract can only be held by an individual, partnership of individuals or a company • PMS contract – as above but a company can be a partner • LLPs cannot hold a contract at present - but this may be for the future • Splitting of income between partners harder to achieve in a company • Accounts have to be submitted and open to public • Issues re superannuation therefore really only an option for practices with substantial non NHS income as an additional structure alongside the partnership.

33. Use of Ltd Co – Individual GPs • Partners with extensive work outside the practice may be interested eg OOH • May bring in spouses and adult children as share holders and therefore income then potentially taxed at a lower rate • If not all money needed can be retained in the company perhaps until tax rates drop/retire • Compliance/Admin burden and costs may outweigh savings • Any partners interested need to take advice and calculations carried out

34. Points to consider re operating a Limited Company? • Don’t fall foul of VAT • Make sure that you don’t put a structure in place that could give rise to a VAT liability, e.g. Setting up a Service Company that charges the practice for services provided. • If the services could give rise to a VAT liability then keep the company’s turnover below the VAT registration limit • Joint Ventures • If one practice does admin for another = VATable • If company in middle can avoid VAT but what about superannuation?

35. Points to consider re operating a Limited Company? The challenge is identifying income that can be earned by the company rather than the partnership • Not easy with NHS sources of income • Non NHS income is probably the best option • Dispensing practices could consider the company obtaining a Wholesale Licence and then acting as an intermediary between the practice and the outside world • The cost of obtaining a wholesale licence is not insignificant

36. Points to consider re operating a Limited Company? • You have to file accounts within a prescribed timescale – you cannot leave everything until the last minute! • There are costs involved in running a company, maybe up to £2,000 to £2,500 a year, so the savings have to be enough to make it worthwhile

37. Operating through a Limited Company • At the moment dividends do not commonly have any liability to National Insurance • As you might imagine HM Revenue and Customs are not exactly thrilled about this! • It would perhaps be unwise to assume that this happy state of affairs will continue indefinitely

38. What about a Limited Liability Partnership? • An LLP has its uses – sheltering income from HMRC is not one of them! • For tax purposes an LLP works in exactly the same way as an ordinary partnership – you are taxed based on what you earn, not when you actually get your hands on it

39. NIC Increases Currently: • Employees • 12% up to approx £40,000 • 2% on earnings above that • Employers • 13.8%

40. Tax free Benefits • Interest free loans up to £5,000 • Free parking at or near workplace • Medical check up • Eye tests & VDU user corrective glasses • Childcare Vouchers

41. Long Service Awards • Not taxable benefit if: • 20 years+ service • Worth less than £50 pa • No other award in previous 10 years • Remember if cash then always taxable as earnings

42. Gifts • Cash Gifts/Bonuses – subject to PAYE • Gift Vouchers – treated as earnings • Seasonal Gifts • Specific event allowable • Business gift below £50

43. Salary Enhancement • Can save both Employer’s and Employee’s NIC • May be able to use to avoid higher income charge re child benefit • May help boost morale/staff retention • Especially if pay rises low

44. Salary Enhancement Cont/d • Tax/NI free • Mobile Phones • Car Parking • Extra Annual Leave • Life Cover • Childcare Vouchers • Cycle to work • Professional Subscriptions

45. Childcare Vouchers • Up to £243 per month – per parent • Employees save tax & Employees NIC • Practice saves Employers NIC • Schemes set up Pre April 2011: • Basic Rate – up to £904 pa • Higher Rate - up to £1,196 pa • Schemes set up Post April 2011: • No higher rate relief

46. Childcare Vouchers cont/d • Beware interaction with tax credits • Not generally available to partners but … • Doctors with hospital appointments? • We can help set up schemes

47. Capital Allowances • Valuable tax allowance • To maximise tax relief need to consider: • Timing of expenditure • Nature of goods purchased

48. Plant & Machinery • No definition – refer to case law • Expenditure pooled • Standard Writing Down Allowance (WDA): • 20% up to 05.04.12 • 18% wef 06.04.12 • A hybrid rate will apply to the whole of an accounting period straddling 06.04.12

49. Integral Features • Integral features, including: • Electrical/lighting • Cold Water Systems • Ventilation • Solar Panels • Lifts • Rate: • 10% up to 05.04.12 • 8% wef 06.04.12

50. Enhanced Capital Allowances • 100% FYA • Energy saving plant & machinery • Environmentally beneficial plant or machinery • Consult HMRC website: www.eca.gov.uk