A pet hate of medical accountants is being handed a carrier bag full of haphazard paperwork and loose receipts. Alec James shows how to keep the documentation simple.
Every taxpayer needs to keep records to support the entries made on their tax return. How those records are kept and how long you need to retain the records for is dependent on your tax affairs.
In the event of a HM Revenue and Customs’ (HMRC) inquiry, you can be charged penalties if you do not keep accurate, complete and readable records.
Accurate record-keeping ensures you are compliant with your tax office and that you pay the right amount of tax.
Records can either be kept physically or electronically and many book-keeping software providers now allow you to store electronic versions of records within their program.
If you keep your records electronically, you do not need to keep a physical copy, but you should ensure the data is backed up and kept secure.
Here is a review of the financial records you need to retain and the minimum time you need to keep them.
Personal tax return records
Many doctors will need to complete a tax return due to their taxable earnings being in excess of £100,000, even if they do not have any untaxed income such as self-employment, dividend or rental income.
You should retain records to support all the entries on your return. This would include P60s, P45s, P11ds and evidence of expense claims such as professional subscriptions.
These records should be held for a minimum of 22 months after the end of the tax year. As the 2022-23 tax year ends on the 5 April 2023, those records will need to be retained until at least 31 January 2025.
Many Independent Practitioner Today readers will have additional sources of income, whether it is private practice, medico-legal or speaker fees. It may be that you receive this income as a sole trader, a partnership or via a separate legal entity such as a limited company or limited liability partnership (LLP).
Whatever your trading status, HMRC deems these sources of income to be a business and the records you need to keep and the retention policies are different to those for your personal tax return.
You should ensure your business records are kept separate from your personal account records. There are lots of different types of records you will need to keep as a business.
Businesses need to be able to maintain the following records:
Summaries of income;
Summaries of business expenditure and purchases;
Money extracted from the business account;
Generally speaking, these records need to be held for a minimum of six years from the end of the financial year-end.
A limited company, LLP or partnership would usually hold their own bank accounts because the funds belong to the business until they are paid to you. Depending on the business structure, amounts paid to you could be a taxable income stream.
If you are trading on a self-employed basis, while the income is your own, it is best practice to have a separate bank account for these earnings. This will assist you both in terms of being compliant with HMRC, but also to allow you to ensure you are receiving all the monies you are due.
Whatever your business structure, all business income should be paid into the business account. Business expenditure can be paid from your business bank account. These would be the directly attributable costs that you need to spend to manage your business.
Whether you are self-employed or trade via a limited company, it may be beneficial to open a separate savings account to save for tax, whether this is personal or corporation tax. The amount to save should be discussed with an accountant.
Income and expenditure
Your business needs to keep a record of invoices raised and amounts received. Depending on the level of income you receive, this could be a simple spreadsheet or cashbook detailing the invoice number, amount and the date of the invoice.
You should then record the amount received and the date the monies are received. You should also keep copies of all the invoices you have raised within a financial year.
This will allow you or your secretary to ensure all invoices are paid. A similar record of expenditure should also be maintained. Again, evidence to support all the costs incurred should be held with the exception of those that are of a trivial amount.
As your business grows, you may find that a spreadsheet or cashbook is no longer sufficient for your needs and you may look at other solutions.
Primarily, there are three options:
Using practice management software;
Using a billing company;
Using book-keeping software.
There are practice management software providers which are specific to doctors. These are designed to store your patient records, including notes, letters and photographs as well as offering a solution for billing your patients or their insurer.
Having these detailed records all in one place will operate your practice efficiently and will allow you or your secretary to easily identify and subsequently chase any outstanding fees.
As these products are not accountancy based, while there is quite often an option for making entries in relation to costs incurred by your business, the system won’t be as detailed as book-keeping software.
Billing companies will often use their own software to maintain the invoices and provide you with regular reports. The advantage here is that this takes away the administrative burden from you in respect of billing and chasing outstanding debts.
A billing company would be more expensive than maintaining the records yourself – but it often means that, as a business, you recover more of your fees.
Book-keeping software is generally not specific to the medical professional and so the invoicing function may not be as detailed as many doctors require.
These types of solutions will give a full accounting product which includes a reconciliation of your business bank accounts and will allow you to record all your costs, ensuring you get the maximum tax relief available.
There are advantages and disadvantages with any of the solutions and sometimes, depending on the size of your business, a combination of using practice management software/billing company together with book-keeping software will give the most optimum results.
Many of the practice management software providers will have links between book-keeping software providers to allow importing of data, therefore reducing duplications of work.
There are certain requirements that your invoices must follow, particularly if you trade as a limited company. Discussions with an accountant regarding the invoicing process can prove very beneficial.
Wherever possible, you should pay for expenses from your business account, but there may be occasions when you incur a cost on behalf of your business. If you do, you should ensure the costs are recorded.
Many doctors’ businesses won’t need to register for VAT due to the healthcare exemption. However if you are VAT-registered, any of this tax reclaimed would need to be evidenced with supporting documentation.
Many consultants will use their personal vehicles for business purposes. To obtain tax relief on business use of a vehicle, a detailed mileage log should be kept of any business journeys.
Generally speaking, journeys between home and a single place of work are not an allowable expense.
If you operate a PAYE scheme, you will need to retain the employee financial records for three years after the end of the tax year. This would include details of what you have paid your employees and the reports submitted to HMRC.
From a HR perspective, there may be non-financial records you need to hold – but do ensure you remain compliant with data protection regulations.
Making Tax Digital
For those who are registered for VAT, Making Tax Digital (MTD) has been in place since April 2019. For all other businesses, most information regarding a taxpayer’s affairs is submitted annually to HMRC via a self-assessment tax return.
MTD will move this to more regular reporting. The new measures effectively mean all businesses will need to use a digital accounting system with a direct link to submit the information to HMRC.
The plans were to introduce this reporting from April 2023; however, this has once again been delayed. HMRC now plans to start rolling out MTD from April 2026.
MTD may have been delayed, but many doctors have seen the benefits that digital accounting systems have in relation helping maintain records. If you are not currently using a digital system, it may be worth considering reviewing the systems you have to ensure the records you keep are sufficient.
A conversation with a medical specialist accountant can be extremely beneficial in finding the right solution for you.
Alec James (right) is a partner at Sandison Easson & Co, specialist medical accountants