Dental Tribune United Kingdom Edition

David Paul discusses the Annual Reconciliation Report for pensions April 9-15, 2012United Kingdom EditionMoney Matters24 I n early April, every prac- tice in England and Wales with a GDS contract or a PDS agreement receives its Annual Reconciliation Report (ARR). It is a statutory duty of the contract holder to submit a completed ARR to the PCT/ LHB by 31 May. The ARR is the corner- stone in the process of iden- tifying the pensionable pay of the dentists at the practice. It is this pensionable pay that will eventually determine the amount of the NHS pension for each dentist. It is therefore essential that the ARR is accu- rate in apportioning the pen- sionable pay available at the practice amongst its dentists who are members of the NHS Pension Scheme (NHSPS). The ARR requirements were introduced in 2006. The new dental contract trans- ferred the responsibility for pensionable pay from the Business Services at East- bourne to the individual practice. It is fair to say that both the pension regulations and the guidance given by Business Services in relation to the ARR were not fit for purpose. As a result the den- tal profession endeavoured to complete the ARR as best it could. No unified approach was adopted and many di- verse, mainly incorrect, com- pletions occurred. The Pensions Agency, Busi- ness Services at Eastbourne, the BDA and NASDAL (Na- tional Association of Specialist Dental Accountants and Law- yers) became aware of the es- calating problems arising with the ARR. Over many months, discussions have taken place between the organisations, which have resulted in clearer Guidance Notes to accompany the 2011/12 ARR. The main issues and prob- lem areas that were identified related to • The adoption of a common procedure of ARR completion • The correct allocation of the practice’s pensionable pay amongst the dentists at the practice • What constituted an associ- ate’s pensionable pay • In the case of a practice that had incorporated what con- stituted the pensionable pay of the director/shareholders, particularly in a limited com- pany with mixed (NHS and private) income As a result of the discus- sions, the Guidance Notes to the 2011/12 ARR now give much more comprehensive guidance as to the correct completion of this year’s ARR. The correct procedure for completing the ARR and the allocation of pensionable pay is now as follows Step 1 Calculate 43.9 per cent of the achieved GDS/PDS con- tract value. This identifies the maximum pensionable pay available to the practice and is a ceiling that cannot be ex- ceeded when the pensionable pay is distributed amongst the dentists at the practice who are members of the NHSPS. Step 2 Identify any dentists at the practice who are not members of the NHSPS such as • Dentists already in receipt of their NHS pension • Dentists who have opted out of the NHSPS • Associates who are incorpo- rated and who cannot pension their income with effect from 7 November 2011 Step 3 Sole practitioner or partner- ship The pensionable income allocation to the dentists at the practice is as follows: • Following Step 1 calculate 43.9 per cent of the achieved GDS/PDS contract value. This is the pensionable earnings ceiling • Declare the pensionable pay of the associates. This is the actual net amount paid for GDS/PDS work undertaken in the pension year ending at 31 March • The declared pensionable pay of the associates is de- ducted from the pensionable pay ceiling. If the practice has any dentists identified in Step 2 their earnings are also de- ducted from the ceiling • In the case of a sole practi- tioner the balance remaining represents the pensionable pay of that sole practitioner • In the case of a partnership the balance remaining can be allocated between the partners in any proportions provided by the partnership agreement The total pensionable pay allocated to the dentists work- ing at the practice cannot ex- ceed the pensionable pay ceil- ing identified in Step 1. If there is working at the practice a non-pensionable dentist iden- tified in Step 2 then the de- clared pensionable pay on the ARR will fall short of the ceil- ing by the amount earned by the non-pensionable dentist. It is unlawful for this shortfall to be allocated to other pension- able dentists at the practice. If the practice employs a dentist then the amount of that dentist’s basic NHS salary constitutes their NHS pension- able pay and must be deducted from the pensionable earnings ceiling to arrive at the balance available to the sole practi- tioner or partners. Limited company Where a practice has incor- porated and the limited com- pany holds the GDS contract or PDS agreement, the limited company is required to com- plete an ARR as the provider. The process involved for the company is exactly the same as occurs for a sole practi- tioner or partnership up to the point that the balance of the pensionable earnings ceil- ing has been determined. At this point the pensionable pay of the director/shareholders who are active NHSPS mem- bers is the amount of salary and dividends paid to those director/shareholders in the year to 31 March, the NHS pension year. It is often the case that where a practice has incor- porated the limited company receives mixed dental income (ie NHS and private). In these circumstances there is no need to apportion salary/dividends between NHS and private in- come for NHSPS purposes. All salary/dividends paid to den- tists who are active NHSPS members, up to the ceiling, are available for allocation as NHS pensionable income. It is important to ensure that where dividends are paid in a limited company that all the company law and tax rules are followed when a divi- dend is paid. Failure to meet the necessary requirements may result in a void dividend with unwelcomed tax conse- quences. Where salary and dividends paid to director/ shareholders falls short of the pensionable pay ceiling the unused balance cannot be car- ried forward to future pension years and it is unlawful to al- locate the shortfall to any oth- er pensionable dentist at the practice. The Pension Agency had identified that one of the main problem areas with earlier ARRs was the understatement of the pensionable pay of some 3,000 associates. The Guid- ance Notes with the 2011/12 ARR now clarifies the position in that any associate’s pension- able pay is the amount paid to the associate for GDS/PDS work undertaken. It there- fore does not matter about the terms of the individual associ- ate agreement. All that does matter, for pensionable pay purposes, is the amount that is eventually paid under that agreement to the associate for GDS/PDS work. In November 2011 new legislation was enacted. As a result of this legislation, it is likely that there will be ma- jor changes in the 2012/13 ARR which will further safe- guard the pensionable pay position of associates. In the meantime, the 2011/12 ARR and its guidance notes are a considerable improvement upon earlier versions and should ensure a more accu- rate pensionable pay alloca- tion to dentists involved. DT Safeguarding pensionable pay and the ARR Failure to meet necessary requirements may result in a void dividend with unwelcome tax consequences About the author David Paul is a Chartered Account- ant and a member of the National Association of Specialist Dental Ac- countants and Lawyers. He is on NASDAL’s superannuation committee and has played a key role in resolving issues associated with the ARR. He can be contacted on 01656 679800, or d.paul@grahampaul.com. Or to find a NASDAL member in your area, go to www.nasdal.org.uk ‘It is fair to say that both the pension regulations and the guidance given by Business Services at Eastbourne in relation to the ARR were not fit for purpose’