Understanding Practice Accounts – Prior Allocation of Profit

As part of the accounts preparation process we have to consider whether any part of the partnership profit needs to be prior allocated. Essentially this is any profits that are solely attributable to the partners specified and not to be shared among all partners.

One of the most common examples of prior allocated income is seniority, however this will soon become a thing of the past, as the seniority scheme will end in March 2020.

Another common occurrence is when there are partners who own a share of the property. Notional rent income and mortgage interest costs are allocated to these partners but may also include one-off costs relating to any improvement works such as legal fees and architect costs.

These examples are fairly self-explanatory but one area that sometimes causes confusion is dealing with additional sessions worked. These are sometimes referred to as internal locums but they are effectively the same. The simplest method for dealing with these is to keep a record of extra sessions worked and then prior allocate them accordingly.

It is quite common for GPs to draw this money and while this is a useful method of keeping track of the amounts involved, it is worth remembering that while it is treated as a drawing it has not been deducted from the profits. The partner gets “paid” by taking the additional profit through the prior allocation. If the payment out was treated as a locum cost to the practice instead, then this would not be prior allocated, but the GP would need to add this to their income on their tax return. The end result is essentially the same but this runs the risk of income not being claimed correctly particularly if they claim other similar income on their tax return.

Income from external roles such as Clinical Lead roles and university student teaching are often paid into the practice because of particular administrative issues. Again we will often see this money being drawn from the practice and then included in the information given for the tax return. These are often more significant amounts so are unlikely to be duplicated or omitted. However we sometimes see examples where the amounts drawn do not match the amount of income received, and then the incorrect figure is claimed.

In the two situations described above it can be seen that the simplest method of dealing with these is to include the figures within the practice profits and prior allocate accordingly. As any income transactions can be traced to the practice bank account, this helps with transparency to help ensure the correct figures are used.

Should you require more detailed advice concerning prior allocations, our accounts team are always here to help.