Running a pharmacy in the UK is an incredible responsibility, where you balance the essential task of providing healthcare services with the intricacies of healthcare management. Beyond dispensing medication and offering valuable advice, you also face the challenge of understanding the complexities of UK tax laws. It is necessary to be aware of common tax pitfalls to steer clear of penalties and keep your financial matters in good shape. In this blog, we’ll explore some of the most frequent tax mistakes made by pharmacists and share helpful tips on how to avoid them.
Tax mistakes pharmacists should avoid
Here’s a helpful list of common tax mistakes that pharmacists often make. By understanding these pitfalls, you can make informed decisions and maximise your tax deductions and credits while staying compliant with HMRC regulations.
1. Misclassification of income
Pharmacists have many avenues to earn income, such as dispensing fees, sales of over-the-counter medications, and offering clinical services. To simplify tax planning, it is essential to categorise your income correctly. Remember, HMRC has clear guidelines for different income streams, and getting those classifications right can help you avoid any penalties.
For example, income from dispensing NHS prescriptions is typically considered trading income, while earnings from private consultations are usually regarded as professional income. In this scenario, a pharmacy accountant can help you make sure you’re classifying your income correctly.
2. Not staying on top of changes in tax legislation
Tax laws and regulations are subject to change frequently. Pharmacists need to stay updated on these changes so they don’t miss out on potential tax benefits or make mistakes based on incorrect information.
Staying updated on the latest tax changes can be a tedious task. But having a knowledgeable pharmacy accountant by your side can make things much more manageable. They’ll help you stay informed about tax law updates and ensure you comply with necessary HMRC regulations, giving you peace of mind.
3. Missing eligible deductions and credit
As a pharmacy owner, you need to be aware of your tax reliefs and deductions. Many valid business expenses can be deducted from your taxable income, helping to reduce your overall tax bill. However, it’s too easy for pharmacists to miss out on these potential deductions because of a lack of recordkeeping or simply not knowing about them.
Here are some typical tax-deductible expenses for pharmacists:
- Rent and utility costs for your pharmacy location
- Employee salaries and benefits
- Fees for professional development
- Marketing and advertising expenditure
- Insurance costs
- Office supplies and equipment
- Vehicle expenses (if your car is used for business purposes)
- Telephone and internet expenses
In addition to deductions, you could also be eligible for a range of tax credits from HMRC that can help lighten your tax load even more. Working with a skilled pharmacy accountant can help you discover all the deductions and credits available, ensuring you maximise your benefits.
4. Not keeping adequate records
Maintaining thorough records is vital to running any business, particularly for pharmacists. As you navigate your journey, tracking your income, expenses, business assets, and tax payments is beneficial and essential. This practice simplifies your tax filing and provides solid support for your claims, just in case HMRC decides to conduct an audit.
Here’s a list of crucial documents to keep organised:
- Receipts for all business-related expenditures
- Bank statements
- Cheque stubs
- Sales invoices
- Pharmacy inventory logs
- Vehicle mileage records (if your car is used for business)
- Documentation of capital assets, including purchase receipts and depreciation schedules.
5. Ignoring VAT
Pharmacies usually need to register for Value Added Tax (VAT) if their yearly revenue exceeds the threshold set by HMRC. If they delay this registration, they might face some penalties.
When errors occur in VAT calculations, such as making incorrect claims for input tax or misjudging output tax assessments, they can cause financial troubles and even trigger audits.
6. Late filing of Self-Assessment tax returns
A typical tax challenge pharmacists face in the UK is the late submission of Self-Assessment tax returns. If you’re handling your own filing, the deadline is 31 October if you are filing a paper return or 31 January following the previous tax year end. Payment of any tax owed is also required by 31 January, so the earlier you file your return, the better prepared you can be to make the outstanding payment.
HMRC applies a fixed penalty for late submissions, and this penalty can increase if you keep filing after the deadline. In addition to the penalty, you might also face interest on any unpaid tax. Remember, delaying your submissions could make it more likely for HMRC to conduct a tax investigation.
7. Failure to report additional income
Pharmacists in the UK are responsible for sharing all of their earnings, even those extra bits that might not come directly from their main pharmacy work. It’s essential to keep everything transparent.
Not reporting extra income can lead to severe consequences, like owing more taxes than expected, facing interest charges, dealing with tax evasion issues, going through tax investigations, and potentially harming your reputation.
Remember, the impact of not reporting extra income can vary based on your situation and how much was left out. If you’re a pharmacist and think you might have missed reporting some additional income on your tax returns, taking action immediately is crucial. You can voluntarily disclose that missed income to HMRC, which could help you avoid or reduce potential penalties. Taking this step can make a difference.
8. Calculating medicine inventories incorrectly
Keeping track of your drug inventory records is essential for managing your taxes and finances. Mistakes in calculating your inventory can cause you to either overpay or underpay your taxes, which can be pretty stressful.
HMRC provides essential guidelines for valuing inventory, and pharmacists should be well-acquainted with these requirements. Working alongside a pharmacy accountant can help ensure that your inventory is valued correctly in line with HMRC regulations so you can focus on what you do best.
Conclusion
Understanding and complying with tax regulations is crucial for pharmacists in the UK. By avoiding the common mistakes outlined in this blog and seeking professional advice when necessary, you can minimise your tax liability and ensure that your pharmacy business operates smoothly.
Remember to maintain accurate records, claim all eligible expenses, report all additional income, and stay updated with the latest tax legislation. At 3E’S, we understand the unique needs of pharmacists and offer tailored solutions to optimise your finances. Book a free consultation with us to learn how we help pharmacists grow their business to the next level.