Primary Care Networks – dealing with the tax issues

Specialist medical account Chris Clark offers advice on the latest tax issues that Primary Care Networks face

Taxing the ‘surplus’

As we move into the second year of PCNs, it remains vital that member practices understand all of the tax implications of the funding they receive.

The total amount of network funding is significant and clearly this will be taxed somewhere – but how? A network is not a legal entity in its own right (unless it specifically decides to become one; more on that later), and therefore does not, in itself, have an obligation to report any income for tax purposes. Instead, its member practices are obliged to do so.

For most of the funding streams, the position is clear: the participation funding is paid to the individual practices and taxed accordingly, and the extended hours and clinical director funding is generally paid over to the relevant practices and taxed as profits within their own accounts.

For amounts reimbursed under the Additional Roles Reimbursement Scheme (ARRS), this is usually to offset a specific cost, and as such has minimal effect for tax purposes.

This is not necessarily the case with the £1.50 per patient core funding, and any additional set-up or development funds that may be paid on a discretionary basis to the network; we have seen several such payments running into the tens of thousands.

Some networks have simply paid out all of the core and development funding, but many have stayed true to the implied purpose of the networks by retaining funds within it for use on future projects and services.

This is where tax issues can arise. If there is a surplus of funds at the year end, then this is taxable on the individual practices, unless there has been a constructive or legal obligation to commit to expenditure at the year end. This cannot simply be a vague commitment to spend the surplus funds at some point in the future.

This can leave practices in the position where they may be taxed on income that they have not seen, and networks may therefore wish to pay out any un-committed surplus to member practices at the year end so practices will at least have the physical cash that they will be taxed on.

PCN accounts

We would always expect to see a set of PCN accounts drawn up at the year end. In the first year, this is not an onerous or expensive process as funding streams are small. However, this still needs to be done now and, as the networks grow, it will become increasingly important for this to take place.

Such accounts give practices comfort that they can see at a glance exactly how much income is attributable to them for the period, and provides practice accountants with guidance as to how much to include in their individual accounts.

Where practices have different year ends within a network, careful consideration needs to be given to exactly how much needs to be apportioned for the practice accounting period.

Clinical director payments

There has been some discussion in recent months over the status of the clinical director (CD) payments, and whether this should be treated as an ‘officer’ post with tax deducted at source, and with employer’s National Insurance (NI) becoming payable on the payment. HMRC has indicated that this is likely to be their preferred treatment. The NI contribution would be payable by the employing practice but with this cost likely passed on to the PCN itself.

This may be the case; but it is important to note that at this time there is no clear guidance from HMRC, or any clear regulations, about how this income will be treated, and as such at this time we continue to recommend that payments are paid out to practices and taxed within the partnership accounts accordingly. The practice that receives the CD funding will be taxed on it; if the work is carried out in the CD’s own time it is likely to be allocated as a prior share of profit and if it is in practice time it will be pooled income. If this changes, we will of course update this advice.

The recent guidance from NHS England during the COVID-19 crisis that CDs could delegate their roles to a suitable individual appears to contradict the idea of this being treated as an ‘officer’ role, and instead points to the payment being designed for backfill of time as was assumed from the outset.

A further complication would arise that a GP partner who is a CD cannot be on the payroll in their own practice (this is not the case for salaried GPs), therefore requiring them to go onto the payroll of a fellow member practice (not possible in the case of one-practice networks) or the payroll of the network itself, which gives its own issues with employing authority status.

It is important to remember that networks were set up in haste last year and without due consideration being given to many of these issues. As a result, there is currently a distinct lack of precedent and case law regarding this.

PCNs as an entity

Several PCNs have already set themselves up as a separate entity such as a Limited Company or LLP (Limited Liability Partnership), or are looking at doing so, in order to prepare themselves for a future in which the networks will have much more of a role in delivering primary care services, and bidding for and fulfilling other contracts whilst working with partners.

Those that have done so will need to report and pay tax on their profits, with subsequent distributions then being made to member practices based on their shareholding or profit share ratio.  

There is potential for this to counteract VAT issues of the supply of certain staff to the network (where they are non-clinical staff), but conversely there remains an issue with networks gaining access to employing authority status, notwithstanding the option of applying for temporary status. In short, there is as ever no one size fits all approach and tailored advice to your network’s needs is required. 

This is a fairly major undertaking and appropriate advice should be sought first to ensure that the structure works for all member practices. We are currently in discussion with a number of PCNs regarding this and would welcome conversations with any PCN for whom this is of interest.

Chris Clark FCA is associate director of Moore Scarrott Healthcare, nationwide specialist medical accountants