Following recent revenue guidance crackdown upon and given amnesty to medical practices who have not been paying payroll tax on contractors, there have been several proposals for a change of practice models in order to not pay payroll tax on the receipts of doctors and medicos. There is an important technical point concerning how payments are made.

Payments for Services are Taxable

As set out here the cases Thomas Naaz and Optical Superstore are considered by revenue authorities to stand for the proposition that where a medical practice is making payments to the doctor in consideration for their services then those payments will be subject to payroll tax. This means that where a medical practice has contracted a number of doctors and instead of engaging them as employees engages them as independent contractors in an attempt to circumvent payroll tax upon employees, the payments made to the doctors will still be subject to payroll tax. The doctors are providing a service to clients, but also are providing a service to the medical practice in discharging obligations to the clients in the medical practice premises. Because there is a non-zero amount of service provided from the doctor to the medical practice then there is a service that can be the basis for imposing payroll tax in relation to the payments. Therefore it is critical that payments are not made from the medical practice to the doctors but from the doctors to the medical practice.

Reverse Direction

One method of remedying this is to reverse the direction of the payments. That is to say, the doctors receive all of the monies from the clients and then remit an amount to the medical practice for administrative services, say 30%. This can work, but there is some fine detail in the nature of payment that needs to be considered. Each doctor is going to need to have their own bank account. That is to say, an account that is in their personal name (or the name of the entity that they trade for it). If the bank account is in the name of the medical practice, in whole or in part, then the doctor will not be making a payment from themselves to the medical practice. This might mean that there must be one payment terminal per doctor on the front counter of the reception desk. This might be quite cumbersome, but it is necessary. There might be other methods of clients producing payments that can be more efficient, however it is going to need to go into an account held by the doctor.

Administrative Difficulties

The doctor is going to need to make payment to the medical practice for the proportion of fees that they have agreed. There is going to be an administrative burden upon this. The medical practice will want these payments to be made regularly. Doctors get busy and may be disinclined to prioritise administrative matters, these inclinations are one of the many reasons why doctors will work in medical practices – in order to relieve themselves of administrative burdens. There will be a temptation for medical practices to take over the making of payments from the doctor to the medical practice. This must be resisted. If the medical practice can make the payment from the doctor’s bank account to the medical practice, then there is not the doctor who is making the payment! For example, if the medical practice was given delegated access to the doctor’s bank account such that it could authorise payments, then it would not be the doctor who is making the payment. It will be the medical practice who is making the payment, as the doctor has delegated authorisation to the medical practice to make such payment. Then quickly fall into the same trap that we have sought to avoid: the medical practice making payments!

Limited Authorisation

What should be done instead is any authorisation or ability of the medical practice be limited to setting out the calculating the amount of the payments to be made, but not actually making them. For example, the medical practice might provide to the doctor fortnightly calculations of payments to be made. With this, the medical practice might provide a banking file, say in a *.ABA format or similar file that the doctor can upload into his bank account in order to make payments. The doctor then authorizes the making of payments in accordance with that file. Depending on the administration software used by the medical practice and the software used by the bank, the medical practice might be able to upload these instructions directly into the doctor’s banking platform for the doctor to approve. These directions for payment are set out for the approval of the doctors, and require that positive action in order to take effect. If they can happen without the approval of the doctor, then the doctor will not be making the payment. The doctor presses a button to state that they accept the proposed directions which then effectuates it then the payment will be made by the doctor. Given the payment we made to the doctor to the medical practice in consideration for the services of provision of rooms and administration services and so on, then those payments will not be subject to payroll tax.

Dangerous Proposals

I have seen a number of proposals for some kind of trust to receive the payments from clients to be allocated between doctors and medical practices. The idea is that a trustee will receive a payment for clients and then hold those monies absolutely for the intended doctor and medical practice in agreed proportions, for example 70% to the doctor and 30% to the medical practice. The trustee will then effect payments to the medical practice and the doctor, but will be simply returning to them the money that is held on their behalf and therefore not making fresh payments to the doctor that could provide a trigger for payroll tax. This approaches problematic for a number of reasons:

• • The concept behind this is that there are stacks of cash, been a chattel property that is capable of differentiation (say by serialised bank notes, or physical separation). If there were large piles of physical money, such might excite Scrooge McDuck or a mafia boss (the kind who deals in illegal drugs, rather than the legal drugs that the doctors deals in) then a trust can properly be declared over that identified property, being stacks of cash;

• • In the more likely scenario of using electronic payments, the first problem is the creation of distinct trusts for the doctor and medical practice. The one item of property will be the chose in action that is the contract between banker and customer held by the trustee. The entire bank account is property that is capable of being the subject of trust. However, there will be but one trust over that property. There cannot be separate trusts for the medical practice and the doctor because there are simply not separately identifiable items of property;

• • In order to create separate items of property there could be separate bank accounts for each of the medical practice and the doctor. However, that brings us to my original position that the doctor needs to have a separate bank account.

It could be the case that there is a separate administration body that collects money on behalf of doctors and makes payments to the medical practice. This administration body will be no more than a payment provider and collector. However, this would have to be carefully set up to ensure that is not becoming an entity that is making payments on behalf of the medical practice.

Quistclose Trusts

I have seen some practitioners discuss trusts for the collection and distribution of payments as being a Quistclose Trust, presumably inspired by the trusts imposed by the Court in the case Barclays Bank Ltd v Quitsclose Investments UKHL 4. There are a number of problems with this characterisation:

1. The primary issue is that Quistclose trusts are an equitable remedy for some kind of wrongdoing. (There is academic debate as to whether there are resulting trusts or constructive trusts, but that is beside the point here). What matters is that a Quistclose trust is imposed where there has been some unconscionable conduct or the creation of an equitable interest in money where funds are not used for the contracted purpose. They are not some special form of trust that one can establish (like a unit trust or discretionary trust);

2. The second problem, which is a problem which is overlooked in much commentary in Quistclose trusts, is that money in the bank is a debt under the contract between banker and customer, and hence is simply not property. I have set this out above, but this analysis is often missing in commentary that considers Quistclose trusts (and indeed in the case itself).

In my view, such trust would fail to be established, and would in any event fail to achieve its intended purposes.

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