A locum doctor was forced to pay over £0.5 million in tax and penalties because he operated as a self-employed individual rather than through his own PSC.
The recent First Tier Tax Tribunal case of Dr Maqbool Baloch v HMRC concerned the correct tax treatment of income generated by Dr Baloch’s activities as a locum GP during the six tax years ended 5th April 2014.
Between April 2006 – March 2008 Dr Baloch worked for an agency, Harmoni which was subsequently taken over by Care UK, as a self-employed individual. From April 2008 however, Dr Baloch contended that he conducted his professional practice through his limited company, KSM Medics Ltd.
On 1st April 2006, Dr Baloch commenced work as a full-time, self-employed locum with Harmoni and on 18th June of that same year signed a document titled, ‘GP Appointment Form’. The form requested certain personal and bank account details and also had boxes showing options for different employed statuses or self-employed status, so the latter was ticked. Dr Baloch stated that this was the only document that he ever signed and had never signed a contract between him and the agency.
At the outset, the agency did not require invoices from its self-employed doctors but would issue time sheets showing the hours worked. These named Dr Baloch personally and showed his status as ‘self-employed GP’.
During the course of their enquiries HMRC contacted the agency, Care UK, who confirmed that Dr Baloch worked under a self-employed contract and although the original contract could not be located, two pro-forma contracts, one for Harmoni and the other for Care UK, were provided to HMRC.
Dr Baloch’s position was that he had never signed a contract and there was no agreement between him and the agency. He had been appointed by the GP appointment form on a self-employed basis and, after that, each shift was a one-off arrangement, arranged online and confirmed by e-mail.
The tribunal did not find the doctor’s position credible as it was clear that the agency required their doctors to enter into a contract and it was assumed that Dr Baloch was no different, even though the original could not be located.
Following advice from his accountant, Dr Baloch incorporated his business on 31st March 2008 and formed KSM Medics Ltd and from that point onwards accounts were prepared and, both company and personal tax returns submitted on the basis that the company was providing the services to the agency.
Unfortunately, neither Dr Baloch’s nor his company’s tax compliance was good. Personal tax returns for the three years ended 5th April 2011 were filed significantly late, as were the company’s first three returns.
The company also failed to submit Annual Returns to Companies House and was dissolved via compulsory strike-off in July 2011, only to be reinstated in November 2012.
HMRC opened an enquiry into the company’s returns in October 2013 and discovered discrepancies between the company’s returns and records and Dr Baloch’s. The records appeared unreliable and to have been prepared some time after the event and HMRC had concerns which led them to look more closely at the activities of the company.
For the first two years of its existence, the company did not have a bank account and payments from the agency were made into Dr Baloch’s personal account. Expenses such as indemnity insurance, course fees and BMA membership were addressed to the doctor personally and also paid out of his personal account.
A company bank account was finally opened on 1st April 2010 but the only credit to that account was £500 from Dr Baloch’s personal account and the only debits were bank charges. According to Dr Baloch, there were administrative problems with the agency paying money into the company’s account but in reality the agency did not know about the company or its bank account despite the doctor claiming that he had telephoned Care UK at some time in 2008 to inform them that he was now operating through his own PSC.
The company bank account was closed in September 2011 when the company was struck off and after KSM Medics Ltd was reinstated it proved impossible for Dr Baloch to open a new corporate account with the same or another bank.
Care UK confirmed to HMRC that Dr Baloch was engaged on a self-employed contract and that payments were made to him personally.
The agency told HMRC that they were not aware of Dr Baloch varying the original self-employed contract to indicate that he was operating through his own PSC and that in order for them to pay a company they would need a request in writing from the GP and a new contract would be issued, but this did not happen.
Not surprisingly, the tribunal concluded that Dr Baloch himself, rather than his company, provided his services to the agency as a self-employed GP and dismissed this part of the appeal.
HMRC concluded that KSM Medics Ltd had never traded and that Dr Baloch had continued throughout to operate his business as a self-employed individual. Consequently, they recalculated the doctor’s tax and NIC liabilities on the basis of what they considered to be the true position and issued assessments and penalty notices totalling £576,048 for the six years ended 5th April 2014.
The penalty element amounted to £135,540 and was so high due to the fact that HMRC considered Dr Baloch’s actions to be “deliberate”, an opinion which the tribunal were sympathetic to. The judge found that the doctor submitted Self-Assessment tax returns to HMRC, knowing that they were inaccurate in that they did not include the profits he had earned as a self-employed GP. He therefore intended that HMRC should accept both his personal and his company’s returns as correctly declaring that the company had received the income and paid him only a salary and dividends.
This part of the appeal was therefore also dismissed and HMRC’s decisions upheld.
The tribunal judge highlighted the fact that Dr Baloch used a telling expression in evidence saying that he intended that “all income should be declared through the company”. Whilst that may well have been his intention, it was not the same as carrying on the business in the company. If the tax advantages of operating a company are to be obtained, then reality must follow the intention.