Taxation Update for Federations
21.09.2018 , BY Laurence Slavin
21.09.2018 , BY Laurence Slavin
A number of Federations have adopted their own methods of dealing with the income tax due on the directors’ fees, some based on the tax law prevailing at the time, and others have adopted what they think is right, but tax is not something you can assume is based on any reason – it is what it is! So, what is the correct position for directors pay from federations?
In strictness, any fees received by directors whether they are partners in medical practices or not are assessable to employment income under PAYE.
Up to 5 April 2018 there was an Extra Statutory Concession (ESC A37) which permitted in certain circumstances the directors fees to be paid as professional fees of the partnership in which the director is a partner with the income taxed as earnings of the partnership.
From 6 April 2018 this concession was enacted into tax law, and if the conditions are met, income paid for the benefit of a director is treated as a receipt of the partnership.
The conditions to be met are as follows:
The process will involve the application being dealt with by the tax inspector responsible for the partnership accounts. The inspector will instruct the PAYE office to issue an NY (No Tax) coding
Following this procedure where appropriate should help with simplifying the administration of the payroll for board members for are also GPs in partnership and to ensure compliance with the tax obligations and regulations
VAT – Cost Sharing Groups
By Caroline Heath
GP practices generally suffer a VAT cost on goods and services they buy in to support their activities. There is however a VAT provision that in certain circumstances could enable them to reduce their irrecoverable VAT costs on bought-in services.
The VAT cost sharing exemption exists to mitigate VAT costs where a small or medium-sized organisation which undertakes VAT exempt activities in the public interest buys in services that a larger organisation would typically carry out in-house, such as administrative services, accounting, IT services and specialist advice.
The idea is that smaller organisations club together to form a cost sharing group (CSG) to buy in or provide these services to its members. The CSG then shares the cost of the services amongst its members without having to charge VAT on these recharges. In doing so smaller organisations can benefit from the same economies of scale naturally enjoyed by larger businesses and organisations.
GP practices that “club together” in the form of a GP federation should consider whether they can benefit from the cost sharing exemption.
What is the legal basis for the cost sharing exemption?
Legislation for the cost sharing exemption can be found in Group 16 of Schedule 9 to the VAT Act 1994.
The only businesses or organisations that can use the exemption are those that engage in exempt activities that fall within the following public interest Exemption Groups under Schedule 9 of the VAT Act 1994, and meet the relevant criteria/conditions:
GP federations would qualify under Group 7 of Schedule 9.
What is a CSG?
A CSG is an independent group of persons who work together with a common purpose. The CSG is however legally separate from its members and is therefore able to make supplies for VAT purposes to its members. It is established, owned and operated by the members for their cooperative benefit and is independent of any ownership, control or influence outside of the membership. It can be a group of equals or if all the members agree one or more members can have effective control and/or majority ownership of the group. In either case all members must have a legal interest in the CSG.
The CSG must take a legal form that is capable of being a taxable person that can be registered for VAT if it were making taxable supplies, that is, it is capable of meeting the VAT registration criteria or would be if it were not wholly engaged in making exempt supplies.
Who qualifies as a member of a CSG?
A member of a CSG is a business or organisation that:
What are the conditions of the exemption?
There are five conditions attached to the exemption.
1. There must be an ‘independent group of persons’ (a CSG) supplying services to persons who are its ‘members’.
2. All the members must carry on an activity that is exempt from VAT or one which is not a business activity for VAT purposes.
3. The services supplied by the CSG, to which the exemption applies, must be ‘directly necessary’ for a member’s exempt and/or non-business activity.
4. The CSG only recovers from its members exact reimbursement of their share of the joint expenses
5. The application of the exemption to the supplies made by the CSG to its members is not likely to cause a ‘distortion of competition’.
All these conditions must be satisfied for a supply to qualify for the exemption. If any of the conditions are not met the supplies will be taxable.
It should be noted that the exemption is mandatory, so all supplies that meet the relevant conditions will be subject to the exemption.
What is meant by 'exact reimbursement’ of expenses'?
For the exemption to apply the charge made by the CSG to its members has to be an ‘exact reimbursement’ of the members’ share of the joint expenses. This includes start-up costs, any general overheads incurred by the CSG in providing services to its members as well as any discounts received or input tax recovered by the CSG.
There should therefore be no profit element in the charges made by the group to its members, that is, no margin or mark-up must be factored into the cost of providing the services. If, for example, the CSG receives discounts from its suppliers they have to on be passed to on to members by incorporating them into the CSG’s charges to its members. If supplies to members of the CSG by the CSG do include a profit element the exemption will NOT apply and those supplies will be subject to the normal VAT rules.
How the costs are calculated and charged is a matter for the CSG members to agree. However, HMRC expect CSGs to have a clear audit trail that can be checked if necessary.
Does the exemption apply to outsourced services?
In short, no. The exemption only applies to the recharges, at cost, of services supplied by a CSG to its group members. The exemption does not apply to commercial outsourced services or arrangements that amount to the provision of commercial outsourced services. Such services are generally made by specialist providers to unconnected third parties for profit and would not meet the conditions of the exemption.
What circumstances generate the best savings for members?
Supplies to a CSG (whether made by a member or a third party) are subject to the normal VAT rules. Since this is an exemption and not a zero-rate, any input VAT incurred by the CSG would not be recoverable since the costs relate to VAT exempt recharges to the members. This means the best savings will arise in situations where the CSG provides the service from pooled resources, or adds value to bought-in services.
Also, the more members of a CSG there are the greater the potential savings and lower the costs per member of operating the relevant CSG. The ability to club together in this way could also result in further cost savings through increased purchasing power.
The VAT cost sharing exemption is designed to benefit organisations that carry out VAT exempt activities that are in the public interest on a co-operative basis. GP practices that have formed a GP federation would seem to fit this model. It is therefore recommended that GP federations consider whether any shared services they provide to their member practices could benefit from the VAT savings associated with the cost saving exemption. It will be essential though to ensure that all the relevant conditions for operating the exemption are strictly complied with.