DIRECTORS’ BENEFITS - 29.03.2006

Who pays for your tax return?

Personal tax return

Your company probably receives an annual bill with lots of zeros from your advisors for their professional services during the year - such as accounts, tax and consultancy. But in amongst all these, ask yourself the question - who pays for your personal tax return (just completed a couple of months ago)? Why? Because the Taxman will ask the same question!

Why taxable?

Any personal tax work paid for by the company is treated as a benefit-in-kind and so taxable.

Company. As a director, any benefit-in-kind you receive from the company has to be included on your annual return of benefits form (P11D) that the company sends to the Taxman. If you forget to put this benefit on the P11D then (if discovered), the company could be liable to a fine of up to £3,000 for filing an incomplete return. The company will also have to pay employers’ NI on the benefit omitted at 12.8% of its value.

You. As you’re viewed as receiving a benefit from the company, you have to pay income tax on the value of this at your highest rate of tax, i.e. up to 40%.

Up to six years. But the real sting in the tail is that the Taxman can go back up to six years to work out how much NI and tax is owed. With interest on top, this could mean the company ends up facing quite a bill.

All your own work?

Can’t you just tell him you did it all yourself? Well you could try this approach. But the Taxman may already have authority from you to deal with your advisor direct on your tax affairs. If he has correspondence on file showing that he has done work for you, your argument would look a little weak! What would stick out like a sore thumb would be if your advisor had used a piece of computer software to produce a return, which was not available to you. Or if filled in manually, hadn’t it better look like your own handwriting?

How much?

If the Taxman does query this, what value should be put on the completion of your tax return and other personal tax work? If it’s not specified on your advisor’s bill, the Taxman will try using estimates, either; (1) an estimated percentage of your advisor’s overall bill or; (2) an estimate of the number of hours that could have been charged by the most expensive advisor in town (plus VAT!).

Tip 1. Challenge the Taxman by putting forward lower (actual) figures. Ask your advisor to provide you with; (1) a breakdown of the chargeable hours behind his bill (which should identify the actual hours spent on your tax affairs), together with; (2) an appropriate charge-out rate for the type of work. Then re-work the Taxman’s figures using the actual data you have obtained. But also apply an appropriate discount to the charge-out rate because the advisor probably did your personal work at “cost” - as a loss leader to the main company account. This discount is designed to take out the advisor’s profit element.

Tip 2. In future, agree a reasonable cost with your advisor for personal tax services. Then obtain a separate invoice addressed to you personally for this (nominal) amount you have agreed.