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Doctors and Partnership Expenses incurred privately

In the latest article in his medical accounting series, Philip Redhead discusses how personal income and expenditure of GPs should be dealt with in the light of recent changes by HMRC.

HMRC’s changes to its internal manual BIM82080 were introduced following a tax case, namely P Vaines v HMRC. In this case, the taxpayer argued that he was entitled to adjust his tax return to show an expense he had incurred personally for his partnership. The judge said that to qualify as a partnership expense the expenditure has to be accepted by the partnership as an expense of the partnership, wholly and exclusively for the benefit of the trade and incurred by the trade and deducted in arriving at the commercial profits.

This implies that individual partners could no longer adjust for their personal expenditure by adjusting their partnership income on their individual returns; instead, the expenditure must be included in the partnership accounts and partnership return.

In practice this can be achieved by introducing the private income and expenditure at the foot of the partnership income statement and treating this as a prior share of expenditure (or income) in the profit splits. The double entry for the amounts shown in income statement should be to the partners’ capital account.

This treatment will ensure the private income or expenditure is included in the profit share in the partnership return without altering the capital accounts.

I would normally give a breakdown of the personal items in the notes; however, in practice many GP are reluctant to disclose these details to their partners.

• Philip Redhead is MD at Accounts Action (S.E.), based in Kent. He can be contacted on 01883 732203/732204, or philip@accountsaction.co.uk.

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