Replies to Queries -- 1 - Diagnosis required

Replies to Queries – 1

Diagnosis required
With respect to doctors in general practice, readers' views would be welcomed on the points raised below:

* Are cash legacies received from deceased patients taxable as income? In a partnership situation, does it make a difference if a legacy is received and banked personally by an individual partner or if it is banked in the partnership account?
* If patients raise funds to purchase equipment for the surgery, will this be a taxable receipt for the doctor? If so, can the tax be avoided by rearranging the way the money is raised?
* With the accruals basis for preparing accounts now applicable for all accounting year-ends in 1999-2000, can the spreading provisions be used? For instance, this could apply if full debtors are now provided instead of partial provision before, and drug stocks are brought into account for the first time.
(Query T15,760) – Bodkin Adams.

No response can cover the tax treatment of legacies in all situations. Judicial comments confirm that the particular facts of each case determine the position. In Murray v Goodhews [1978] STC 207 Mr Justice Buckley commented on the tax status of voluntary payments 'every case of a voluntary payment must be considered on its own facts' and 'it is the nature of the receipt in the hands of the recipient that is significant'. However, the wording of the legacy may assist in cases of doubt. If the legacy is to a particular doctor, then it is more likely to be income tax free. By contrast if the legacy is to 'the partners for the time being of the “Bodkin Adams” partnership', then it may be taxable. In the later instance, if there are no restrictions as to the use of the money, then it may be taxable when received because it could be used to subsidise running costs. Alternatively if the will suggests the legacy should be used for capital expenditure, then the receipt may be regarded as a grant and deducted from the expenditure when incurred. Thus if spent on assets eligible for capital allowances only, the net cost will be eligible for relief; but if spent on assets not eligible for capital allowances, then the receipt may not be taxable. The banking arrangements are of no assistance in determining the tax status of the receipt.
A similar concept applies to cash raised by a Practice Friends Committee to purchase equipment. If the cash is simply donated, then it will be treated as a grant with only the net cost eligible for capital allowances, but the receipt will not be directly taxable. If, however, the Practice Friends purchase the equipment and donate it to the practice, there exists the possibility of obtaining tax relief on the value of the equipment. Under section 81, Capital Allowances Act 1990 (as modified by section 75(3), Finance Act 2000) the practice can claim initial and writing down allowances in respect of the donated equipment on the lower of cost, no matter by whom incurred, or market value when brought into use.
The accruals basis applies not only to debtors and stock but also to creditors and it is the net of these elements that is eligible for the spreading provisions. As 'Bodkin Adams' will know, many different bases were previously accepted by the Inland Revenue, ranging from true cash basis to the conventional basis with a range of hybrids in the middle. In most cases adoption of the full earnings basis will result in extra profit that is subject to the spreading provisions. The current partners will also receive a credit to their capital accounts. The next issue to be addressed is to ensure that a partner leaving the practice does not avoid the future tax charge on the credit. Each partnership must devise its own solution but perhaps a form of deferred tax provision is appropriate in some cases. All the capital accounts are debited with a full tax provision at the same time as the increase in debtors, etc. is credited, with tax being credited back as the spreading charge is assessed. – Flipper.

In broad terms, the legacy will not be taxable in the hands of the recipient. Consequently, a bequest to a professional adviser, such as a doctor, solicitor or accountant, will not be considered to be taxable income in the professional's hands even if that person is self employed. In most cases the bequest comes as a surprise and, even if the professional was told in advance of the bequest, there is the possibility that a further will or codicil could be drawn up to amend or even delete the bequest.
On the other matter of where the money was banked, it would be sensible to keep the money outside the partnership bank account if possible. If this cannot be avoided, it should be shown in the partner's current account as capital introduced and not shown in the profit and loss account.
In this writer's experience of dealing with professional partnerships, there has never been any inference by the Inland Revenue that the legacy should be considered as taxable trading income and if any such claims are made they should be strenuously contested. – Roundhead.

There is a VAT point hidden here, which probably fits with the direct tax considerations! There is a zero rating available for relevant goods bought for donation to an eligible body or supplied direct to such a body, where the money comes from a charity or from voluntary contributions (items 4 and 5 of Group 15 of Schedule 8 to the Value Added Tax Act 1994). Note (3) includes a wide range of equipment within the definition of relevant goods so there is a good chance that anything which the doctors would not normally have and for which patients would wish to donate would be covered.
The entire cost must be met from donations or charitable funds but, if the money is channelled through the local Primary Care or NHS Trust (both of which are eligible bodies), the latter might be able to make up any deficiency using its own charitable trust funds. It would seem appropriate for the trust to own the equipment and this would presumably remove any direct tax problems. Moreover, this would also qualify any ongoing repair and maintenance costs for zero rating under item 6. – A St J Price FCA.

Editorial note. 'Roundhead's' reply would appear to mirror the experience of the majority of practitioners.