DIRECTORS’ BENEFITS - 16.01.2008

Company pays for hobby

New hobby

The Taxman doesn’t mind you having hobbies - he’s probably got some of his own. Counting his children’s savings perhaps. It’s only when you try and get him to pay for them that he objects. He doesn’t directly allow hobby costs or losses to be offset against your other taxable income.

Significant cost. For example, the going rate for flying lessons might be £150 per hour and you need many hours of flying under your belt before you’re allowed to take the test for a pilot’s licence. Then there’s the fee for the test itself. So in total you are looking at a spend of at least £6,500 + VAT.

Company pays. You could use your company’s cheque book to settle the bill with the flying instructor, without declaring anything to the Taxman. You aim to get away without paying any tax on payments and get a tax deduction for your company. However, if discovered (and let’s face it £6,500 is a lot to hide) the Taxman will hit the company with a bill for the tax and NI on the payment as if it were net salary. This means an income tax and NI bill of £4,517 (£6,500 x 41/59) and employers’ NI of £1,410 for the company. Add penalties of, say, 30% and the total tax cost of trying to get away with it is £7,705. This is more than the cost of the flying itself.

Benefit-in-kind option

Company contracts. However, as a legitimate benefit-in-kind, your company can contract and pay for flying lessons. To save tax all you have to do is make sure that this is part of your remuneration package with the company.

Tip 1. Board minute. Getting a formal board minute drawn up demonstrates to the Taxman that the benefit was agreed on by the company as a way of rewarding you for your services to the company. There is no need for any special wording.

Tip 2. Contract of employment. Because this is a variation to your remuneration package you will need to incorporate it into your contract of employment by way of an addendum.

Tip 3. Contract with the instructor. Getting the instructor to invoice the company will make it absolutely clear that the liability for payment belongs to the company and not you.

Tip 4. Accounts. Although there are no special disclosure requirements, if you include the charge for the lessons to remuneration costs, it reinforces your position that it’s part of your pay package.

Tax bill. Your personal tax bill will be £2,600 (£6,500 x 40%) and your company’s employers’ NI bill £832 (£6,500 x 12.8%). Your company also gets a Corporation Tax (CT) deduction for the total cost of £7,332 (£6,500 + £832). At a CT rate of 20% this gives a tax saving of £1,467. Total tax bill £1,965 (£2,600 + £832 - £1,467).

Opting for an extra dividend

Cheapest of all is to take an extra dividend of £6,500 to pay for the cost of learning to fly.

Tax bill. Your personal tax bill as a 40% taxpayer is now £1,625 (£6,500 x 25%) and your company has no employers’ NI to pay. However, remember that you must have sufficient after tax (that’s CT) profits in the company when you pay the dividend. So make sure you’ve got profits before tax of £8,125 (£6,500 /80 x 100) when you pay the dividend.