The next step

http www bis gov uk files file40139 pdf

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Why it’s worth paying directors’ fees

Is salary a business expense?

The Taxman keeps a close eye on companies using income shifting and is ready to attack if the opportunity arises. According to his internal instruction manuals he should look out for companies which pay a salary to a director’s spouse, or other family members, just to make use of their lower tax rates. He considers this unfair tax avoidance. The Taxman doesn’t have a problem where your spouse etc. provides a service and your company pays the going rate. But excessively high salary payments won’t qualify for a tax deduction. What’s more, the Taxman can treat the salary paid to your spouse etc. as if it was paid to you. You might also face a penalty for trying to evade tax.

A value-for-money job

You could create a job in your company for your spouse. Let’s face it, there’s never enough hours in the day to do everything that you want or need to do. The job can be something they could do at home. We’ve previously suggested activities like making sales calls, credit control and market research. But if they don’t have much time to spare, the amount you can legitimately pay them will be minimal. What you need is a role that doesn’t take up much time but which justifies a decent income.

Join the board

You can invite them to join the board of directors in a non-working (non-executive) capacity. And for their trouble you can pay them “director’s fees”. This doesn’t mean they can do nothing and get paid, but in practice their active role will be limited to attending board meetings and occasionally signing a document or two. In fact, they needn’t even leave the house to join a board meeting. Using phone or web conferencing would be sufficient, and attendance at every board meeting isn’t essential anyway.

Tip. Divide directors’ remuneration between fees and salary. Have a consistent approach for all directors so the Taxman can’t argue that the arrangement to pay your spouse is a sham just to avoid tax. How much you pay is up to you and the board, but somewhere between £500 and £1,000 a month seems reasonable.

Justifying the fee

It’s not easy for the Taxman to attack the level of directors’ fees, like he can the rate of pay for a regular job. With the latter he can check the going rate with employment agencies to see if you’re paying over the odds. But there’s no such benchmark for directors’ fees because they aren’t linked to the amount of work carried out, there are other factors to consider.

A final word of caution

Being a company director isn’t a soft touch as it carries duties under the Companies Act 2006 (see The next step). While in many small to medium-sized companies these might not be obvious or ever called upon, but if the business runs into trouble, all directors are in the line of fire. Fees are intended to compensate directors for this burden as well as for managing the company.

For more information on directors’ duties, visit http://tax.indicator.co.uk (TX 12.04.05).