Budget analysis and tips for private doctors

Independent Practitioner Today Budget Special:

Vanessa Sanders

Specialist medical accountant Vanessa Sanders provides a detailed round-up of the changes and what you can do now.

Chancellor Rishi Sunak’s 2020 Budget – the first of the new Government marking a shift in economic policy away from austerity – will have a dramatic effect on public spending. 

But without tax rises, presumably the funding will be borrowed because of the current low interest rates.

The gross spending increase was in excess of £200bn, reduced by tax receipts of approximately £27bn. The split between current and capital increased spending is around 60:40, so we should expect to see some of this cash flood into public spending on infrastructure,and particularly levelling up the differences between the North and South. 

Realistically, by the time the Government has discussed in detail where improvements need to be made, taken it down to local levels and then argued with people whose homes may need to be moved and whose community wildlife reserves may be affected (climate change targets abound), such measures may take some time to filter down.

On the tax front, this Budget was less forthright, understandably as we head into the unknown with Brexit fall-out and the health of the nation being of more concern, but there were a few nuggets affecting consultant doctors.

Of the extra tax receipts, most of the savings come from limited sources:

  • The reduction in the UK’s contribution to the EU Budget; 
  • A reversal of the decision to reduce the corporation tax rate from 19% to 17% with effect from 1 April 2020;
  • The reduction to entrepreneurs’ relief from £10m to £1m; 
  • Increased investment into HM Revenue and Customs (HMRC) to improve compliance;
  • The continuation of the IR35 changes set to take a chunk from the private sector as the onus of reporting swaps from the individual to the contractor. 

Personal tax

Not much has happened, understandably, with the uncertainty around a post-Brexit economy and the global effects of COVID-19. 

The current National Insurance Contributions threshold will be increased from £8,632 to £9,500 from 6 April 2020, so those doctors who follow these thresholds for the purposes of paying employees may consider increasing pay levels for the new 2021 fiscal year. 

Please bear in mind the threshold for auto-enrolment into a workplace pension remains at £10,000.

Pensions

Although consultants and GPs were hoping for the pensions tax charge legislation to be reversed, it has instead been softened. Many will have felt the bite of the restriction on pension savings’ growth in their last tax bill due to the fact that nearly all will have used up their unused relief from earlier years and been faced with a liability arising.

This resulted in many doctors deciding reluctantly to reduce their efforts within the NHS and a crisis arose leading NHS England to take the decision to commit to reimbursing those who suffered a pension reduction upon retirement for this one year. 

This move means that many will be electing to have their pension excess for 2020 paid for by their pension schemes. 

After consultation, the Government has announced the pensions annual allowance thresholds will be increased by £90,000 each. So, the threshold income will now be £200,000 rather than £110,000 and the adjusted income will rise from £150,000 to £240,000. 

This will assist all of those who work only within the NHS, but will remain a concern for those in private practice, because adjusted income includes taxable income from all sources plus the pension growth – or contributions in a private scheme – added to any salary-related pension scheme.

The sting in the tail, however, is that the minimum tapered annual allowance will be decreased from £10,000 to £4,000 from 6 April 2020.

Making Tax Digital (MTD)

Currently, VAT-registered businesses have been enrolled in the Government’s initiative to digitalise tax, so there is a discrepancy with those not registered, which is most doctors in private practice because their businesses are exempt. 

It is therefore welcome that the Government will publish an evaluation of the introduction of MTD for VAT before introducing all others to the system. It has, however, also pledged increased funding for HMRC to improve compliance and this is unlikely to be held off indefinitely because of the current disparity between businesses.

Entrepreneurs’ Relief

Entrepreneurs’ relief (ER) is a lower rate of capital gains tax (CGT) charged when an individual, a partner or shareholders in a limited company sell a material stake in their business. 

The rules basically state you must have held least 5% of the voting and distribution rights for the previous two years; and be entitled to receive at least 5% of the proceeds if the whole of the share capital were to be sold. 

Following significant lobbying, the Government has decided ER has primarily benefited a small number of affluent taxpayers and does little to generate and to support genuine risk-taking and creativity where it is proven to be effective. 

It has taken the step to reduce the lifetime limit on gains from £10m to £1m. This will apply to all disposals made on or after 11 March 2020 to avoid a sudden rush to the liquidators. This measure is anticipated to raise over £6.3bn for the Exchequer by 2025 and, according to analysis, only affects 20% of business owners with the remaining 80% being able to benefit in full at the reduced cap.

The Chancellor has also included some provisions to counter certain arrangements which seek to ‘lock-in’ the previous £10m lifetime allowance. In some cases, parties to the disposal will be required to demonstrate the transaction was entered into for commercial purposes not to obtain a capital gains tax advantage. 

This measure is likely to affect consultants offering their services through limited companies and effectively ‘saving up’ their profits and using their corporate structure as a tax shelter, by restricting dividend distributions to shareholders. 

It has long been a bone of contention with HMRC that returns to shareholders of profits should be distributed based on commercial factors rather than the individual position of the owner/director.

The move towards formal liquidation of companies with more than £25,000 of assets allows HMRC a window into such actions, as it is allowed to raise questions as to why large reserves have been built up rather than being paid to shareholders. 

This may be a good time to review dividend policies to ensure the commercial test for actions is met and the anti-avoidance rules finger cannot be pointed.

Three new tax breaks

Recognising the need for innovation and enterprise to sustain prosperity in the economy, the Chancellor confirmed savings obtained from ER reform will be directed straight back to fund three other significant tax breaks for businesses:

  1. An increase in the research and development expenditure credit (RDEC) from 12% to 13% from 1 April 2020
    This measure will enable many companies to claim a larger corporation tax deduction for relevant research and development spend. This may be relevant to some doctors who are at the forefront of innovation in their field.
  1. Increase in the maximum employment allowance by £1,000 to £4,000 from April 2020
    This measure supports businesses by providing relief of up to £4,000 on their employer’s secondary Class 1 National Insurance contributions (NIC) liabilities. This measure may allow doctors to consider paying employees higher rates of pay. There are restrictions where the employees are household staff included on a payroll.
  1. Increase in structures and buildings allowance (SBA) from 2% to 3%
    From 1 April 2020 (or 6 April 2020 for unincorporated entities), businesses will be able to claim a 3% deduction on qualifying expenditure. This increased rate will apply to both existing qualifying structures brought into use on or after 29 October 2018 and any new additions.

Capital allowances for business cars 

For all of those dreaming of a Tesla, from April 2021 the first-year allowance on zero-emission vehicles will be extended, meaning if you buy an electric vehicle, you will receive 100% of the cost as a deduction to your profits. There is a reduced benefit-in-kind charge of 0% on list price for 2021.

VAT

A zero rate of VAT will apply to e-publications from 1 December 2020; including e-books, e-newspapers, e-magazines and academic e-journals.

VAT on women’s sanitary products will be abolished from 1 Jan 2021.

There will be further announcements in the Autumn with another Budget statement.

Vanessa Sanders is a partner with accountancy, finance and tax advisory medical specialist Stanbridge Associates Limited