Get financially fit for the months ahead

There is no question about the extent of demand for private medical treatment, but juggling the needs of the NHS and private sector will be a significant challenge for some time. 

Most private practices have been significantly affected by the impact of Covid-19, so it is important that when the capacity to carry out private work restores, you are financially well placed to adapt to a new environment. Ian Tongue looks at some of the areas you should be considering in order to be financially fit for the year to come

Look at your trading structure

This is often the decision that yields the greatest tax savings, but also provides a great deal of financial flexibility. 

There was a significant shift in recent years to using limited companies for private practices to help mitigate pension annual allowance charges and provide other strategies if you don’t require all of the money generated by the private practice.

For those trading as self-employed or in partnership with a financial year-end that is coterminous with the tax year end – that is to say, 5 April/31 March – there are usually few barriers to switching trading structure. 

If you have a financial year-end for your private practice that is not coterminous with the financial year-end, an acceleration of tax liabilities can occur with the switch and this can be a barrier, depending on your financial circumstances.

For those who have considered switching to a company but ruled this out on the basis of accelerated tax liabilities, now is the time to reconsider matters, as the tax effect of changing structure is likely to be less due to the impact of Covid on private practices.  

Consider your defence cover

It has been surprising to hear during the pandemic how many clients renewed their indemnity insurance prior to the first lockdown and how some operators were not prepared to revise the premiums during the year. 

As this is usually the most significant expense of the practice, it has understandably been a significant financial issue.  

Some may miss out on a refund of premiums, but it is expected that many will be able to contact the provider when the actual earnings are known and request a refund. It is therefore important that you get your information to your accountant as soon as possible to ensure that this is addressed at the earliest opportunity.

For those renewing soon, it will be difficult to assess the next 12 months, so it may be tempting to go on the lower side of things to avoid the situation experienced last year. 

Be realistic and, most importantly, contact the provider if you can see that your income figures will be higher than disclosed at the renewal. It is clearly a false economy to be under-covered, as you may not be protected against a claim. 

Income tax payments

Given the downturn in most private practices, reducing income tax payments on account for the 2020-21 tax year has been common to reflect current levels of activity.

With the everchanging situation of the virus and private hospital capacity, it may be that these payments can be reduced further depending on actual earnings.

Send your tax and accounting information for 2020-21 to your accountant as soon as possible after the year-end and, if you have overpaid in January 2021, they can adjust the July 2021 payment or seek a refund.  

Likewise, if the payment reductions were too high, you will know at the earliest opportunity of any additional amounts payable that may be attracting interest.

With any temporary downturn in a business’s profits, it is important to plan for the tax effect due to the delay in paying tax.  

For those in a company, it is highly unlikely that you will be paying tax on account and therefore you will settle your tax on the basis of the actual amount due approximately nine months after the company’s financial year-end. 

For those paying under self-assessment – the self-employed and partnerships – you are required to pay ‘on account’ within the same tax year and soon after the tax year in question. 

These payments are crudely set at 50% of the liability for the year before rather than assessing your actual position.

The effect of this is that a reduction in your income tax liability for 2020-21 will affect the payments on account for 2021-22 payable in January 2022 and July 2022. 

This will result in January 2023 being a time when any shortfall is paid – because the payments on account were lower – together with payments on account for 2022-23 being based on a higher liability. January 2023 will definitely be a date to hate, but, with planning, can be easily managed.   

For those with companies, you can plan the timing of taking dividends or loans to smooth out the tax position but this is always considered on a case-by-case basis. 

Consider your staffing arrangements

The Coronavirus Job Retention Scheme, or furlough scheme as many refer to it, has been a welcome support to businesses during the pandemic. At the time of writing, the scheme is set to end at the end of April 2021, having been extended. 

Depending on how long the scheme runs for, you may be able to use it to assist you with retaining key employees if sufficient work is not available to restore their position to normal hours. 

Over time, the scheme has become more flexible and therefore you can pay for the hours that are being worked and claim the majority of the costs for the hours that are not worked.  

Consider new opportunities 

There are likely to be many opportunities that present themselves as the NHS and private hospitals start to return to some level of normality. 

These opportunities may be available individually or perhaps for those working together, so it is important to understand what is happening with the private medical sector. 

You may need to look to other private hospitals for your private practice, depending on their longer-term policies.

Within the private medical sector, there have clearly been certain specialties more affected by the reduced capacity within the private hospitals. Plastic surgery has been particularly hard hit. 

To prevent this situation arising again in the future, many specialists are considering their own facilities to trade from. 

This is clearly a significant undertaking, but it does present a significant opportunity and, with the right set-up, you can access a profitable new income stream that the private hospitals would have previously earned. 

It also provides you with an asset that can be sold in the future rather than reaching retirement and simply ceasing your private work. 

Often, these arrangements are with colleagues to diversify the risk both financially and clinically. If you are considering this, it is important to have the right team around you, with specialist accountants and advisers essential.    

When the current difficult Covid situation is overcome, there will be a new environment of private work and it is important that you consider your position in advance to adapt to the challenges ahead. 

Engaging a specialist medical accountant during the times of significant change will ensure that you are in a strong position when life starts to go back to some level of normality. 

Ian Tongue (right) is a partner with Sandison Easson & Co