EXPENSES - 26.10.2006

Cash handouts

The problem is...

Scenario. As a director, you might consider it handy to have a weekly cash draw from your company to cover out-of-pocket business expenses. Sure, you’d eventually get around to submitting business expenses claims to the extent that the money was actually used for genuine purposes.

Entertaining problem. If the reality is that the money is being spent on entertaining personal friends, or otherwise for social rather than business reasons, then your company will not receive a tax deduction and you will face a tax liability. It’s not uncommon for the Taxman to ask about the system your company has in place for authorising directors’ expenses, even if you are a one-man company.

Possible response. If asked, your company could tell the Taxman that you received a round sum allowance to cover various types of business expense. This means the employer would not be expected to disallow the cost in their Corporation Tax computations. Your company might therefore be allowed to deduct the cost but you wouldn’t be able to obtain a deduction for the expenses incurred against this additional taxable income in the form of an allowance. What’s the tax-free alternative for you?

Up front solution

Round sum allowances. The Taxman makes a distinction between taxable -a payment to an employee which is made irrespective of whether he spends it or not in a particular way; and non-taxable - a scale rate payment which is to reimburse particular expenditure. But how will he know which one you have made?

P11D. Where the payment is not a scale rate then PAYE should be applied to it so the question of putting it on the Form P11D will not arise. Where the payment is, in fact, a scale rate allowance an entry should be made on a Form P11D unless the Taxman has given a dispensation. (The entry would be made at heading O expenses payments made to, or on behalf of, the employee.)Similar principles apply as for P9D employees. Where appropriate, details of round sum allowances should be given at heading A(1) (expenses payments).

Good news. The Taxman will normally give a dispensation as long as he is satisfied that the calculation of the scale rate allowance is based on genuine expenses to be incurred.

Action

Tip 1. Ensure, wherever possible, that any round sum payments are at an agreed scale rate. When appropriate, always obtain a dispensation from the Taxman - the earlier in the tax year the better (although it’s not too late to get one agreed for this current tax year (2006/7)).

Tip 2. Have a written company policy on reimbursement of expenses which you can show the Taxman. With round sum allowances keep a record of who has them and for how much, what they are meant to cover and why they haven’t been put through the payroll.

The next step

For tips on agreeing a scale rate with the Taxman, visit http://tax.indicator.co.uk (TX 07.02.02a).

For a company policy on round sum allowances, visit http://tax.indicator.co.uk (TX 07.02.02b).