DIRECTORS’ PAY & BENEFITS - 05.01.2010

Is it really salary?

Dangers and benefits

If you’ve been subscribing with us for a long time, you’re bound to have read about the tax dangers for directors of borrowing from their company within the benefit-in-kind rules; although, there can be some benefits too. But despite our frequent coverage of this subject, we were surprised when we heard of the Taxman’s recent attempt to squeeze more money out of an unlucky director and his company. What was his line of attack?

Back to basics

The Taxman had decided to go back to basics. He was claiming that, even though the director owed money to his company, there was no loan involved. On the face of it that sounds like good news. After all, if there’s no loan, there can’t be any related benefit-in-kind on which tax is chargeable. But the Taxman’s alternative suggestion was that the money owing was simply extra salary and so subject to PAYE and NI. What difference would that make to the tax bill?

Example

Let’s say in 2008 you had some building work done at home and it cost more than you budgeted for. So you got the company to write a cheque for the extra £8,000. When the annual accounts were prepared it was suggested that rather than pay a dividend or a bonus to cover the “borrowing”, it should be treated as a loan. A pretty sensible idea, as it would mean a maximum annual tax charge of approximately £152, and NI of around £49 for the company (see The next step). You would, of course, have to repay the £8,000 to the company at some point, but a loan would be a cheap stop-gap.

Taxman’s preference

If you had received the £8,000 net as extra salary or a bonus it would have cost you, as a 40% taxpayer, income tax and NI of £5,560. Not only that but the company would also have to foot an NI bill of £1,735. You can now see why the Taxman preferred his suggestion to yours. But is he right?

Valid logic

As much as we hate to admit it, the Taxman may have a valid point. The Income Tax (Employment and Pensions) Act 2003 says anything you receive by way of “money or money’s worth” is treated as salary. For example, if your company paid a personal bill for you of, say, £100, that’s saved you from having to find £100 cash from your own resources, so it’s “money’s worth”. In our example, the £8,000 was therefore money’s worth. As soon as the company wrote the cheque it triggered PAYE tax and NI, so there’s no way to retrospectively claim it as a loan. Fortunately, with some simple planning, the PAYE and NI problem can be avoided in the first place.

Tip 1. If you need to use the company’s money to pay a personal bill, don’t just get it to write a cheque to cover it. Instead, have it pay the cash to you, which you use to pay the bill, but first...

Tip 2. Have the arrangement approved as a loan by your fellow directors and record it as a minute in the company records. If you’re the only director, still make a minute so that you can show the Taxman that the money was always intended to be a loan.

For the full calculations behind the example above, visit http://companydirector.indicator.co.uk (CD 11.07.03).