Case studies

The following case studies provide our view of the audit risk presented by the arrangements described. Our audit program is described in the introduction of this guide. Those taxpayers with service arrangements that are categorised as highest risk will continue to be looked at over the next year as part of our current audit program. Other taxpayers with service arrangements will have 12 months to review their arrangements, ending on 30 April 2007. The following case studies indicate how service arrangements can be conducted to minimise the risk of audit after this review period ends.

Labour hire activities

1. A labour hire arrangement where the payments are correctly calculated and reasonably connected to the business.

An accounting firm (the firm) provides various accounting and tax advisory services to the public and one of the firm's key costs is staffing. The firm contracts with a related service provider (the provider) to provide temporary professional and clerical staff to undertake short-term placements with the firm, on a needs-only basis.

The provider advertises for and identifies potential staff to be placed with the firm, checks their background and skills, and then checks their suitability with the firm. It is up to the firm to make the final decision as to which individuals, if any, they want to hire. If the firm decides to hire an individual, the provider will engage that person as a temporary employee and on-hire them to the firm in accordance with the hiring contract.

The hiring contract describes the work to be performed and the conditions attaching to the hiring assignment, including the responsibilities of the respective parties for issues such as performance feedback, occupational health and safety and workers' compensation. The service charges are calculated as a multiple of the hours worked and an hourly rate specified in the contract. The hourly rate specified in the contract is based on the salary, wages, and superannuation of the on-hired staff, marked up by 30%.

The provider has separately identifiable premises, for which it pays rent, and it owns computers, computer software, desks and chairs. The provider's payroll and human resource staff are employed as permanent employees and their activities are supervised by a manager who reports to the provider's board. The provider also incurs a range of expenses in undertaking its labour hire activities. For example, it incurs costs associated with advertising for and interviewing temporary staff, undertaking security checks and negotiating hire and employment contracts. The provider does not seek to pass any of these fixed or operating costs back to the firm - the provider absorbs them out of the service charges it receives under the hiring contract. The provider does not receive any other economic support from the firm.

Operating costs for provider
Income
Labour hire fees	$1,950,000
Expenses
Salaries (including superannuation) of hired staff	$1,500,000
On-costs of hired staff	$100,000
Salary and on-costs of staff (non-hired)	$150,000
Depreciation	$15,000
Insurance	$15,000
Advertising	$25,000
Legal fees	$20,000
Rent	$20,000
Light and power	$10,000
Other costs	$5,000
Total costs	$1,860,000
Net income before interest and tax	$90,000
Net mark-up on costs (EBITA/total costs)	4.84%

From an analysis of information available from independent parties in the labour hire industry, it is clear that independent labour hire firms also price these types of services by marking-up salary, and a range of other expenses related to the individual placed with the client. The percentage mark-up can vary and is usually negotiated with the client, but a 30% mark-up on remuneration of the individual placed is in a range that represents a compliance risk we would not generally consider for audit.

Expenses that are met out of this mark-up on gross costs total $360,000 which represents 24% of salaries of the on-hired staff. We consider that this level of costs is indicative of an arrangement where the provider meets all the costs of providing the service. This provides additional support that the mark-up used is appropriate.

Also, on a net profit basis, an analysis of independent firms providing similar labour hire services reveals that a 4.5-5.0% mark-up on direct and indirect costs associated with the labour hire activity is typical. Based on this, the provider's net profit outcomes are not dissimilar to the profits of independent firms providing similar services.

From an operational perspective, it is clear that the arrangement gives the firm an efficient and flexible way to manage its staffing costs in an environment of changing workloads. If the firm does not have capacity to use a person then it is not required to take the placement. Equally, because the staff are employed by the provider on a temporary basis only, the provider is under no obligation to pay them when they are not on a placement.

In these circumstances, it is reasonable to conclude that the benefits delivered by the labour hire arrangement are reasonably connected to the business in the sense that they assist the firm's ability to produce income. It is also reasonable to conclude that the hire charges are not grossly excessive - both in terms of the gross mark-ups charged for the same or similar services by independent suppliers and in terms of the net profit outcomes achieved by independent suppliers.

The firm would be at low risk of a tax audit

2. A labour hire arrangement where the deductibility of payments is accepted

In an arrangement similar to case study 1, the provider instead charges fees based on a mark-up of 35% of the salary and benefits of the on-hired staff.

Operating costs for provider
Income
Labour hire fees	$2,025,000
Expenses
Salaries (including superannuation) of hired staff	$1,500,000
On-costs of hired staff	$100,000
Salary and on-costs of staff (non-hired)	$150,000
Depreciation	$15,000
Insurance	$15,000
Advertising	$25,000
Legal fees	$20,000
Rent	$20,000
Light and power	$10,000
Other costs	$5,000
Total costs	$1,860,000
Net income before interest and tax	$165,000
Net mark-up on costs (EBITA/total costs)	8.87%

While the gross mark-up rate exceeds what we generally consider acceptable, a tolerable level of tax compliance risk is associated with arrangements that result in mark-up of up to 10% of all costs involved in providing the labour-hire service. Below this level, we consider that it would generally not be appropriate to conduct an audit to establish whether the payments made under the arrangement are grossly excessive in the particular case.

The firm would be at low risk of a tax audit.

3. A labour hire arrangement where the deductibility of payments is not accepted

An arrangement is similar to case study 1, but the firm provides its own staff and equipment to the provider to conduct its activities and also meets some of the operating costs of the provider.

Operating costs for provider
Income
Labour hire fees	$1,950,000
Expenses
Salaries (including superannuation) of hired staff	$1,500,000
On-costs of hired staff	$100,000
Salary and on-costs of staff (non-hired)	-
Depreciation	-
Insurance	-
Advertising	$25,000
Legal fees	$20,000
Rent	-
Light and power	-
Other costs	-
Total costs	$1,645,000
Net income before interest and tax	$305,000
Net mark-up on costs (EBITA/total costs)	18.54%

While the gross mark-up rate is within the range of what we generally consider acceptable, the provider does not meet all of the costs of conducting its activities. The costs met by the provider out of the gross mark-up reflect only 9.67% of the salaries and benefits of the on-hired staff and the arrangement results in a net mark-up on costs of 18.54%. We do not consider the claim under this arrangement to have been correctly calculated. It has features and produces results that we consider to exceed a tolerable level of compliance risk.

The firm would be at high risk of a tax audit.

4. A labour hire arrangement where the payments are not correctly calculated and may not be reasonably connected to the business

A professional firm (the firm) provides various accounting and tax advisory services to the general public and one of the firm's key costs is staffing. Assume a related service provider (the provider) undertakes a contract to provide the firm's entire professional and clerical staff on permanent placements.

The provider advertises for and identifies potential staff to be placed with the firm, checks their background and skills, and then checks their suitability with the firm. If the firm decides to hire an individual, the provider engages that person as a permanent employee and on-hires them to the firm in accordance with the hiring contract.

The hiring contract does not contain a description of the work to be performed nor the conditions attaching to the placement. For all practical purposes the firm controls and directs the day-to-day activities of the on-hired staff and all performance management issues are handled by the firm. The hiring charge is calculated by the provider marking-up the total employment costs of all its staff by 30% (including the staff on-costs). The provider supports the hire charge by reference to an old survey which documents the mark-ups on salaries charged by labour hire firms for short-term placements.

The provider has separately identifiable premises, for which it pays rent, and it owns computers, computer software, desks and chairs. It is not clear whether the provider's payroll and human resources (HR) staff have been on-hired to the firm. The hiring contract does not refer to the HR staff specifically but their activities are supervised by the firm's partners (free of charge). The provider also incurs a range of expenses in undertaking its labour hire activities. For example, it incurs costs associated with advertising for and interviewing staff, undertaking security checks and negotiating hire and employment contracts.

Operating costs for provider
Income
Labour hire fees	$2,275,000
Expenses
Salaries (including superannuation) of hired staff	$1,500,000
On-costs of hired staff	$100,000
Salary and on-costs of staff (non-hired)	$150,000
Depreciation	$15,000
Insurance	$15,000
Advertising	$25,000
Legal fees	$20,000
Rent	$20,000
Light and power	$10,000
Other costs	$5,000
Total costs	$1,860,000
Net income before interest and tax	$415,000
Net mark-up on costs (EBITA/total costs)	22.31%

From an analysis of information available from independent parties in the labour hire industry, it appears that the gross mark-ups being applied and the type of costs to which those mark-ups are applied are not consistent with how independent labour hire firms would set prices for a labour hire activity of this nature. In particular, a service provider would ordinarily be expected to absorb its own staffing costs out of the service fees and charges. In addition, gross labour hire mark-ups for short term labour hire arrangements are not generally considered a sound basis for pricing permanent staff hire arrangements (at least not without some adjustments).

In terms of a net profit analysis, even if it is assumed that the provider is providing services which are similar to those typically provided by independent labour hire firms, a 22.31% net mark-up on direct and indirect costs associated with the labour hire activity is grossly excessive. The net profit outcome achieved in this example is far higher than the net profit outcomes achieved by independent operators.

From an operational perspective, it is not clear that the arrangement relieves the firm of the substantive risks associated with the engagement of staff nor does it provide the firm with any additional flexibility in managing its staffing costs. By agreeing to a hire charge based on the provider applying a mark-up to all of its staffing costs, the firm is effectively liable for all of the on-hired staff's non-productive hours and for all staff recruitment, payroll and personnel costs.

In these circumstances, the labour hire charge appears to be grossly excessive when compared to the commercial benefits passing to the firm under the labour arrangement. The arrangement does not make objective commercial sense in the context of the firm's business operations (particularly if you compare the fees charged by the provider to the salary, on-costs and administrative expenses the firm would have incurred if it had employed the staff directly).

The firm would be at high risk of a tax audit.

5. A labour hire arrangement where the payments are not correctly calculated and may not be reasonably connected to the business

A small legal practice uses a related service entity to provide clerical and administrative services. The service entity employs a number of secretaries, including a spouse of one of the partners. The spouse is employed on a salary of $200,000 a year. All the other secretaries are employed on salaries of no more than $35,000 a year.

A cost mark-up comparable with independent labour providers is used in calculating the fees charged by the service entity. However, the excessive component of the spouse's salary (that is, $165,000) is included in the amount marked up. The salary paid to the spouse does not appear to be correctly calculated and may not be connected to the business.

The firm would be at high risk of a tax audit.

Recruitment arrangements

6. A recruitment arrangement where the payments are correctly calculated and are reasonably connected to the business

A professional firm (the firm) enters into an agreement with a related service provider (the provider) to find professional staff suitable for permanent employment by the firm in the firm's business.

The provider undertakes search activities to identify staff who may be suitable for the firm's business. The provider also checks the background, skills and character of the candidates and provides a short-list to the firm with a recommendation for the firm's consideration.

Under the agreement, the provider is paid a once-off fee if the firm employs someone the provider has identified. The fee is equal to six weeks of the employee's starting salary package (the package is negotiated separately). None of the provider's costs are explicitly marked up. The provider is not paid if it cannot find a suitable candidate to the satisfaction of the firm.

The provider has separately identifiable premises for which it pays rent, and it owns computers, computer software, desks and chairs. The provider employs its own permanent staff and their activities are supervised by a manager who reports to the provider's board. The provider also incurs a range of expenses in undertaking its recruitment activities. For example, it incurs costs associated with advertising for and interviewing temporary staff, undertaking security checks and negotiating employment contracts. The provider does not seek to pass any of these fixed or operating costs back to the firm - the provider absorbs them out of the recruitment fees it receives from the firm. The provider does not receive any other economic support from the firm.

The fee paid to the provider is, in effect, a success fee. The provider is not guaranteed a profit from its recruitment activities. The provider's profitability depends on the provider's ability to locate and engage suitable staff in a cost effective manner. The formula used to calculate the fee is comparable to those charged by independent firms providing substantially similar employee recruitment services.

Operating costs for provider
Income
Recruitment fees*	$445,400
Expenses
Staff salary and on-costs	$285,000
Depreciation	$15,000
Insurance	$15,000
Advertising	$25,000
Legal fees	$25,000
Rent	$45,000
Utilities	$10,000
Other costs	$5,000
Total costs	$425,000
Net income before interest and tax	$20,400
Net mark-up on costs (EBITA/total costs)	4.8%
*    Based on salary packages for the staff successfully recruited by the provider and employed by the firm totalling $3,860,133.

On a net profit basis, it seems reasonable to assume that a net mark-up of 4.8% on direct and indirect costs associated with the recruitment activity will yield the provider a net profit outcome that is consistent with the net profit outcomes achieved by independent firms providing similar services.

From an operational perspective, it is clear that the arrangement gives the firm access to specialist recruitment services. It relieves the firm of the responsibility for overseeing the recruitment activities and provides the firm with the certainty of a pre-determined cost structure for its recruitment activities.

In these circumstances, it is reasonable to conclude that the benefits delivered to the firm by the recruitment arrangement are reasonably connected to the business in the sense that they assist the firm's ability to produce income. It is also reasonable to conclude that the recruitment fees are correctly calculated - both in terms of the gross mark-ups charged for the same or similar services by independent suppliers and in terms of the net profit outcomes achieved by independent suppliers.

The firm would be at low risk of a tax audit.

7. A recruitment arrangement where the payments are not correctly calculated and may not be reasonably connected to the business

A professional firm (the firm) contracts with a related service provider (the provider) to find professional staff suitable for permanent employment by the firm in the firm's business.

The provider does not undertake the search activities required to identify staff who may be suitable for the firm's business. The provider contracts this function out to a third party recruitment firm (nominated by the firm). The third party recruitment firm charges a fee equal to six weeks of the new recruit's starting salary package (which is negotiated separately). The provider itself maintains a small, one room office and employs a part-time accounts clerk and a part-time secretary.

The recruitment fee charged by the provider is calculated as a 25% mark-up on all of the provider's costs associated with the recruitment activity, including but not limited to the recruitment fee charged by the third-party.

Operating costs for provider
Income
Recruitment fees	$684,250
Expenses
Third party recruitment fees*	$445,400
Staff salary and on-costs	$50,000
Depreciation	$15,000
Insurance	$15,000
Legal fees	$5,000
Rent	$12,000
Utilities	$3,000
Other costs	$2,000
Total costs	$547,400
Net income before interest and tax	$136,850
Net mark-up on costs (EBITA/total costs)	25%
*    Based on salary packages for the staff successfully recruited by the provider and employed by the firm totalling $3,860,133.

From an analysis of information obtained from independent suppliers in the recruitment industry, a recruitment fee calculated on the basis of a gross mark-up on all of the suppliers' costs does not represent a market price for this kind of service. The effect is to guarantee the provider a profit. Ordinarily, the provider would be expected to absorb some of its expenses out of the recruitment fee.

In terms of a net profit analysis, even if it were assumed that the provider is providing services that are similar to those typically provided by independent recruitment agencies, a 25% net mark-up on direct and indirect costs associated with the recruitment activity appears to be grossly excessive compared against the net profit outcomes achieved by independent recruitment agencies.

From an operational perspective, while the provider has contracted with the third party recruitment firm and, as such, bears some risk on the arrangement, from the firm's perspective it has acted as little more than the firm's paying agent. As such, an independent party providing the same services as the provider would only expect to be able to extract a small fee from the firm above and beyond its own costs and the external recruitment firm's fee.

In these circumstances, the recruitment fee appears to be grossly excessive when compared to the commercial benefits passing to the firm under the recruitment arrangement and the fees may not be reasonably connected to the business.

The firm would be at high risk of a tax audit.

Hiring arrangements

8. A hiring arrangement where the payments are correctly calculated and reasonably connected to the business

A related service provider (the provider) enters into an agreement with a law firm (the firm) to rent the firm desktop computers for all staff over a 12 month period.

The agreement, which stipulates that the firm must keep the item insured and in working order, is consistent with other rental agreements in the computer equipment hire industry. The provider employs and supervises a part-time clerk and incurs minor administrative and legal expenses.

The firm pays a rental fee consistent with what other rental companies receive under substantially similar leases involving this type of equipment. The amount of profit the provider makes from the rental is similar to the profit made on the lease of similar assets by others in the business of hiring out equipment.

The firm would be at low risk of a tax audit.

9. A hiring arrangement where the payments are not correctly calculated and may not be reasonably connected to the business

A related service provider (the provider) enters into an agreement with a law firm (the firm) to rent the firm a desktop computer for its staff over a 12 month period.

At the same time, the provider enters into a commercial agreement with an external equipment provider (the equipment owner) for the rental of a desktop computer. The agreements are the same in form and substance and, in effect, are back-to-back agreements. Because the provider has no employees, both of these agreements are, in effect, negotiated by members of the firm and no other services are provided as part of the equipment hire arrangement. The actual agreement between the provider and the equipment owner is signed by the directors of the provider. The firm guarantees the provider's obligations under its rental agreement.

The fee charged by the equipment owner is negotiated on commercial terms. The terms and conditions are those generally included in business equipment hire arrangements. The contract price between the provider and the firm is 20% more than the price between the provider and the equipment owner.

The rate negotiated between the equipment owner and the provider is an independent commercial transaction, and represents a market price for the provision of this type of equipment over a 12 month period. While the firm may wish to rent the computer through the provider, there is no obvious commercial reason for the firm to pay an amount over and above that which it could have negotiated directly with the equipment owner. The fee may not be reasonably connected to the business.

The firm would be at high risk of a tax audit.

Rental arrangements

10. A rental arrangement where the payments are correctly calculated and reasonably connected to the business

A related service provider (the provider) enters into a lease of commercial premises from an unrelated third party. The provider then subleases half of the space to third parties and half of it to a chemist related to the provider (the business).

The provider's head lease from the head lessor is negotiated on normal commercial terms. Because of the volume of space being leased by the provider, the provider was able to negotiate a lower cost per square metre of floor area than would have been commercially possible if it had only leased the space needed for the sublease to the business.

The sublease from the provider to the business is on ordinary commercial terms for space of that nature and the rental is consistent with the market rent charged by unrelated parties for leases of office space of the same or similar volume. The business is not required to provide any guarantees and/or undertakings to the head lessor for the provider's obligations under the head lease.

The business would be at low risk of a tax audit.

11. A rental arrangement where the payments are not correctly calculated and may not be reasonably connected to the business

A related service provider (the provider) enters into a lease of new office space from an unrelated third party (the head lessor). The provider then subleases the office space to an associated firm (the firm).

The provider's head lease from the head lessor is negotiated on normal commercial terms. The sublease from the provider to the firm is on the same terms and conditions as the head lease although the provider charges a rent equal to the rent it pays the head lessor, plus 20%. The firm is also required to provide the head lessor with guarantees and/or undertakings in relation to the provider's obligations under the head lease.

While the firm may wish to rent the premises through the provider, there is no obvious commercial explanation for it agreeing to pay an amount over and above that which it could have negotiated directly with the head lessor. The fee may not be reasonably connected to the business.

The firm would be at high risk of a tax audit.

Expense payment arrangements

12. An expense payment arrangement where the payments are correctly calculated and reasonably connected to the business

A related service provider (the provider) pays utility and other expenses to third parties on behalf of the professional firm.

The benefit to the firm of this arrangement is the administrative function the service entity assumes, relieving the firm of the staffing and administrative costs associated with the physical payment of the expenses (for example, writing a cheque or arranging a direct debit to pay the bill).

The service entity is paid a fee calculated by reference to the time spent by service entity staff in carrying out this function. The staff costs are calculated at a rate which is correct for clerical staff and results in an acceptable net mark-up on all costs of providing this service.

The firm would be at low risk of a tax audit.

13. An expense payment arrangement where the payments are not correctly calculated and may not be reasonably connected to the business

A related service provider (the provider) pays utility and other expenses to third parties on behalf of the professional firm.

As in the previous example, the benefit to the firm of this arrangement is the administrative function the service entity assumes.

The service entity is paid a fee calculated by reference to the time spent by service entity staff in carrying out this function. The staff costs are calculated at a rate which is correct for clerical staff.

However, the service entity does not employ any staff. The payments are in fact carried out by a family member under the direction of one of the partners of the firm. There will be no commercial benefit to the firm from the arrangement if the service entity cannot demonstrate that it has clerical staff or, if it does have staff, if it cannot demonstrate that the staff has completed work for the firm. The fees may not be reasonably connected to the business.

The firm would be at high risk of a tax audit.

14. An expense payment arrangement where the payments are not correctly calculated and may not be reasonably connected to the business

A related service provider (the provider) pays utility and other expenses to third parties on behalf of the professional firm. The provider maintains a bank account and a staff member to make the payments under the arrangement. The firm transfers the required funds into the provider's account as and when payments are required. The service entity is paid a fee calculated at a 15% mark-up of the value of the expenses paid.

As in the previous example, the benefit to the firm of this arrangement is the administrative function the service entity assumes. The benefit is not the provision of the underlying services - the service entity is not in the business of delivering electricity, travel services and office space. Those services are provided by the electricity company and other third party suppliers.

In these circumstances, the service fee does not appear to be correctly calculated and may not be reasonably connected to the business.

The firm would be at high risk of a tax audit.

Medical practice arrangements

15. A practice management arrangement where the payments are correctly calculated and reasonably connected to the business

Three general practitioners (GPs) form a service entity to render a comprehensive suite of services to conduct a medical practice. The GPs provide their medical services through the practice. The service entity employs a practice manager, reception staff, clerical support staff and a nurse. It conducts the entire business of the medical practice, including premises, equipment, medical and office systems and supplies, patient records, general administration, marketing, legal and regulatory obligations (excluding the professional obligations personal to the practitioners) and incurs all of the expenses involved in running the practice. The medical practitioners focus solely on providing professional services to patients. Each practitioner pays a service fee that results in the service entity earning 40% of each practitioner's gross fees from patient consultations and procedures and this is paid on the same basis by each of the doctors out of their separate fees. Arm's length practice management arrangements used in the medical profession are broadly similar to this arrangement.

In these circumstances it is reasonable to conclude that the benefits provided by the practice management company to the doctors is reasonably connected to the business carried on by each doctor, as it clearly supports the doctors' ability to provide medical services to patients and to earn income from clinical activities. Similar commercial arrangements providing a comprehensive suite of services to GPs exist in the medical profession by practice management companies.

Our examination of independent practice management arrangements shows that service fees of up to 40% of gross practice fees are likely to be appropriate regardless of the context and circumstances of a particular arrangement. As the fees in this arrangement are set at 40% we consider that the risk that the fees claimed are not deductible is low and any further examination of the fee level is not appropriate.

The practice would be at low risk of a tax audit.

As discussed in step 2, when using this comparable market prices approach it is important to consider any relevant differences between your service arrangement and those between independent enterprises. It is important to compare like with like. For the purposes of considering the commerciality of the service fees paid to the service entity, the nature of the relationship between the practitioners is not considered material (for example, whether they practice as partners or associates).

The service arrangements in the medical profession, which provide a complete suite of services for conducting the medical practice, are significantly different to conventional service arrangements where particular services are provided to a professional practice.

A service arrangement where a fee split of this kind is comparable involves the service entity effectively conducting the business of the medical practice. The service entity takes responsibility for all the expenses of the practice while the doctor is responsible for meeting the costs of indemnity, personal work related transport, and costs incurred in meeting their personal professional obligations. These include training and education, medical registration and membership of professional bodies. The arm's length practice management arrangements involve the practice company conducting the business of the medical practice. While these arrangements involve a different business model, we consider that they are broadly comparable to those types of arrangements in the medical profession where a complete suite of services is provided for the purpose of considering the commerciality of the fees charged and the level of costs involved in running a medical practice.

We have observed that fees generally vary between 35% and 50% of gross practice fees depending on factors such as the location of the practice, cost structures and the relative bargaining position of the parties. Fees of up to 40% of gross practice fees will not generally be considered sufficient to warrant further examination. However, for fees over 40% you will be expected to be able to explain the reasons for the higher fee. The risk of being audited will increase according to the degree of divergence above 40%.

For rural and sole medical practitioners, costs can represent a higher percentage of revenues and in these situations we would consider that service fees of up to 45% of gross practice fees would not warrant further examination.

16. A practice management arrangement where the payments are not correctly calculated and may not be reasonably connected to the business

A related service entity rents premises for a GP and employs a receptionist on-hired to the GP. Annual rental is $65,000 and the receptionist's salary is $38,000. The GP's gross fees from the practice for the year total $300,000, out of which the GP meets all other clinical, regulatory and practice and personal professional expenses which come to about $80,000. The service entity charges a service fee of 40% of gross fees earned.

As the service entity only provides limited services (the premises and receptionist), the GP continues to meet the general costs of the practice. This contrasts with the arrangement in the previous example (where the service entity effectively conducted the business of the medical practice by taking responsibility for all the expenses of the practice other than each of the GP's indemnity insurance and personal work related transport costs).

Unless there is evidence of a comparable arm's length arrangement, a share of gross consultation fees is not considered to be a correct basis of charging for these limited services. Charges for these services should be in line with the approach in this guide for conventional service arrangements providing staff and premises.

The non-commercial nature of this arrangement is reinforced by the high percentage of gross consultation fee used in this case. Both this method and the rate used bear no discernible commercial relationship to the nature or value of the services provided. The income left in the hands of the GP is also considered to be substantially less than the income earned by other GPs, and the relative incomes of the GP and the service entity is not considered commensurate with the contribution to the profit of the medical practice.

The firm would be at high risk of a tax audit.