The year to 31st March 2021 saw greater funding going into PCN ‘s and this will continue to increase going forward. As accountants it is vital that we advise our clients as to the importance of correct accounting in relation to the finances of their PCN. The key issues that we are currently seeing are as follows:

• The PCN should have separate accounting records and its own bank account through which all PCN transactions should be reflected. At minimum the accounting records must be a separate branch within the Lead Practice / (the practice operating the financial records) accounting system, ideally the PCN should have its own completely separate nominal ledger on a relevant accounting software package. In our experience accounting records and separation remain poor in many instances and improvement is needed.
• The above point becomes even more pertinent when considering PCNs’ that are run by a Federation. The Federation is often running multiple contracts, several PCNs’ finance records and often COVID hub finance records as well. Clients need to understand that the PCN is not the Federation itself and the finances are merely held on trust for the PCN. Non separation is causing huge risk in accurate reporting of PCN and COVID HUB surpluses and is in my opinion putting the Federation Directors at risk of non- compliance with their Fiduciary Duties under the Companies Act . We need to explain clearly to our clients that the membership of the Federation is not likely to be identical to the PCN and therefore if transactions are not isolated and clearly shown separately it is impossible to be comfortable that accounting profits for either entity are correctly reported.
• VAT – remains an issue and this is not an article on VAT however, if transactions are not correctly recorded the VAT position will also not be either correctly understood for registration and declaration purposes and clients will not be complying with HMRC VAT legislation which could lead to enormous financial risk in the future.
• PCN accounting surpluses must be calculated under UK GAAP and taxable profits arising therefrom must be taxed in the normal way. It is not possible to simply defer all unspent monies at the year end. Any unspent element of the £1.50 per patient forms part of the taxable surplus unless there is a legal contractual commitment entered into at the year end for expenditure of that money in the accounting period. Development Fund monies and Impact and Investment Fund monies have caused much debate and it may be possible to carry forward some of these monies if the deferral is for an agreed targeted spend for example an agreement made in advance with the CCG. We are seeing clients hold on to unspent monies with the assumption there is an indefinite period they can carry forward which is not in line with UK GAAP.
• The PCN surplus MUST be reflected in the member practices accounts with due consideration to the practice year end if not 31st March. Failure to do this is non- compliance with UK income tax legislation.
• Once any surplus is correctly calculated the PCN then has a decision regarding distribution of the surplus to member practices but let us consider this further:

1. Retain 100% of the surplus in the PCN for later spend :-- partners in member practices will in this scenario see a dry tax charge , they will have their share of the surplus reflected within their profit share and hence taxable profit but no cash with which to pay the tax and NIC thereon.- This is therefore not recommended.
2. Pay out 100% of the surplus to member practices: – in this way cash funds in the practice will support the partners current account balances and any pay outs needed for tax on the PCN surplus. Furthermore, any retiring partners who will withdraw current account balances in full including share of PCN surplus will not in cash terms need to be supported by other partners to fund full pay out of this element of their current account.
3. Pay out an element of the surplus to approximate to the tax payable for partners. Whereas this may be the preferred option for many PCNs and maximises funds that are sensibly retained for PCN purposes it must be remembered that partners will be taxed at differing marginal rates and so the equity of this approach is not fool proof. The retiring partner drawing out full current account balance is also not fairly dealt with and disputes may be looming.

• The New to Partnership incentive has been extended to the 2022/23 year. It applies to a GP that is new to partnership and has not been a GP partner before.
• The incentive is taxable but not superannuable and is based on an incentive of £20k for a full time partner and pro rata for a part time partner. An additional 20% add on to the incentive amount is payable to help fund the tax thereon.
• Application for the incentive should be made within 6 months of the partnership appointment date.
• If the new partner does not stay as a partner with the practice for a full 5 years the incentive will be subject to pro rata clawback.
• The incentive is paid into the practice bank account and the practice has 28 days to pay on to the new partner. ‘Payment’ to the new partner includes crediting such to their working capital current account balance and is the preferred course of action. This is subject to release of the tax element where the practice does not withhold tax from partners drawings. Full payment of the incentive out to the partner personally needs to be done with caution and with agreement as to how working capital balance will be built up. It is vital that the new partner understands that the incentive is taxable. Any clawback will be taken from the practice.
• Tax treatment of the incentive has been debated and HMRC have not defined. I believe it is reasonable if the monies are withheld for working capital that the monies are released as taxable income gradually over the 5 year period on the basis clawback will occur if the partner leaves the practice within this period.
• We have seen quite steeply rising profits in 20/21 and likely in 21/22 for many practices. As such new partners are joining in a period of rising profits and careful consideration as to a sensibly forewarned tax estimate is really important. Basis periods and dates that tax will be payable by new partners must be explained.
• Rises to parity have returned somewhat over the last couple of years, this may be sensible for very high earning practices but for more average earning practices may turn prospective new partners away.
• High achieving practice managers may in some instances be offered partnership and this can work very well. In advising partnerships on parity percentage share recognise the management and financial skills that are a valuable driver in a successful partnership. We now see large complex businesses and a great practice manager’s skills are every bit as important as the clinical skills of the GP partners. This can be a tricky message to get across.

• The new Social Care Levy comes into force for 2022/23 tax year. The increase of 1.25% NIC will effect both employee take home pay and the Employers NIC cost.
• There may be funding in the 22/23 GMS/PMS contract changes to partly alleviate the Employer cost but at this stage there is no guarantee.
• There are changes to the Employee NHS superannuation contribution rates also coming in at the same time. Those employees earning less than £47,845 will see an increase in contribution rates and hence a further reduction in take home pay. It is important that we encourage our clients to explain this carefully to employees as for some these changes may be very difficult.
• Approximate calculations indicate that to counteract the above reductions in take home pay for such employees their gross pay would need to increase by 3%.
• Practices should consider their position carefully in terms of both the staff cost rise but also the need to retain staff.
• GP partners will need to be advised that the actual cost of a pay rise to staff needs to be considered based on the net cost to them after the relevant tax relief, this can change attitudes to decisions when clarified.
• In addition to the above, practices are faced with the further rise to National Living Wage from April 2022. For the over 23 age group this means a rise from £8.91 per hour to £9.50 per hour or a full time salary rising from £17,420 - £18,576. This is a 6.6% increase in salary cost with commensurate increases in employers NIC and employers superannuation so a significant rise. My conversations with practices have highlighted the knock on effect to this rise not only to those employees on National Living wage but also on other staff in order to keep pay rates for different grades of staff equitable.
• All in all then practices and employees need to be aware of these changes and accurate staff budgets must form part of the financial planning of the business.

The above points are not exhaustive but some of the key areas of discussion with practices that it is useful to be having at this point.