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Does a directorship with no income need to be included on self-assessment tax return?

A client is in full time employment (elsewhere) but is also a director.shareholder of a small company that has not made any profits yet, and from which there was absolutely no intention of taking a salary, and no other employees, a PAYE scheme has not been registered.
HMR&C are now insisting on a tax return being filed, and saying that we were wrong not to include the directorship on the previous return with nil income.
My understanding is that an employment without a PAYE reference number cannot be returned under self-assessment, and in any case where does it say that you have to return zero income (no doubt I will be proved wrong and it does say so somewhere!)?
If we follow the logic being put forward, everyone who is an officer of a charity should be declaring there zero income on a tax return, and if they don't have a tax return for any other reason they have to request one.
Could someone clarify the situation please? Thanks.
David Evans

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20th Aug 2007 11:52

Office Holder
The feebleness of the guidance notes, and the danger of reading them as gospel, are shown by the note above the one on directorships on Tax Return Guide: Page 6. There is no restriction on the obligation to complete emplyment pages for office holders of any kind of body, ie no mention of income being a necessity!

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By newmoon
21st Aug 2007 08:50

Interesting
Thank you for all the comments on this matter.
I think Simon Hall's advice is probably the one I shall follow in future.
The particular situation involved us having completed a 2005 tax return for the client (who has in employment separate from the company, was not previously required to prepare tax returns, but was asked to prepare a tax return as a result of being a director of the company). We didn't put any reference to the directorship on this return.
For 2006 the HMR&C computer sent out a letter saying that no tax return was required.
For 2007 the HMR&C computer said that a 2007 return was required.
We completed the 2005 and 2007 returns, and unbeknown to anyone the HMR&C computer must have changed 'it's mind' about the 2006 return on 5th April 2007, as a £100 penalty notice was issued three months later!
When our client phoned up HMR&C she was told by one HMR&C officer that her accountant should have completed and submitted a form saying that there was a directorship but no income. DOES ANYONE HAVE ANY KNOWLEDGE OF WHAT THIS FORM IS? Thanks.

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22nd Aug 2007 10:18

Directors v HMRC
There is no legal requirement to file employment pages for nil income directors but being a director of a UK company does, in itself, require a return to be filed. I just find that it keeps life simple to file nil employment pages as it prevents the kind of problems that you have seem. The HMRC systems don't seem to be able to cope with this scenario. Virtually no-one reads the notes unless an enquiry is initiated because they aren't input on to the SA system and they aren't always looked at then.

The company only needs a PAYE scheme if there is either payroll to process or if a P11D should be submitted for re-imbursed expenses etc. A company can always have a PAYE scheme set up on the possibility that it will be needed and then have it made dormant-it's a bit of messing about but at least you will then still be able to file electronic returns. This isn't ideal but does at least work in with the HMRC systems...

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20th Aug 2007 11:43

Is a scheme really necessary?
If a scheme is a necessity if a company exists why do HMRC not set one up automatically? I have, on a number of occasions, been asked by HMRC PAYE year-end office if they can close down a scheme where there are no P35/P14 or P11D amounts to be returned.


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20th Aug 2007 11:48

Dividends = Employment Pages?
Neil disagrees with Susan, what do other people think?

I have certainly never consdidered dividends from a company of which a client is a director, close or otherwise, necessitated completion of employment pages.


Taken together or separately this and my previous posting are a real issue in practical terms as online filing is not possible unless employment pages include a PAYE scheme number.

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21st Aug 2007 11:05

forms
David, the only possible form must be the Self Asseesment return SA100. I suppose that HMRC took the view that both client and you must have known that a return wa srequired for 2006. The notes attached to the letter saying that returns were no longer required clearly state that a UK diectorship is reason to have to submit returns on an annual basis. A bit of a pain and nothing really gained , but there you are...

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21st Aug 2007 16:55

Left hand right hand
The way the system works is that if the 2005 return itself did not show any entries suggesting that a 2006 return was required then the letter would be issued saying that future returns aren't required. However someone somewhere else in the system did know about the directorship, hence the change of mind. I have met this before, partly it's because they often don't actually know when someone ceases to be a director, especially if the PAYE scheme is dormant or non existant and the information on the return is accepted at face value by someone who probably doesn't know the full story.

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By newmoon
21st Aug 2007 12:02

They did know!
Susan. Thanks fro you response. My belief is that HMR&C did know about the directorship (from the CT41G) and that is why the 2005 return was issued. They then chose not to issue a 2006 return and advised the client of their decision (...we have reviewed ... and decided that you don't need to do a tax return etc). Subsequently they changed their mind and blamed us for not telling them!

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By hallsi
17th Aug 2007 15:42

Close Company
The key is whether the company is a 'close company'. If so, then the following note in the white space is advisable:

"This is a Company Director who has received no income or benefits for the directorship of XYZ Ltd. In this respect and in accordance with the "Working Together Issue 6" document, no Employment page(s) are necessary".

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16th Aug 2007 16:56

Neil
I appreciate that but, in an owner managed company, the director is in control of the amount of dividends being paid. Regardless of this dividends are still income from the company and therefore an employment page is required when dividends are paid to the director, even if it shows nil PAYE income. The situation where employment pages are not required is where there is no income from the company, HMRC does not restrict this to no PAYE income. I don't see what the problem is in submitting a return showing nil employment pages for a directorship: HMRC will presumably already be aware of the directorship and being a company director is in itself a reason to submit SA returns on an annual basis.

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By neileg
17th Aug 2007 09:50

Thanks, Susan
I would disagree with HMRC if they advanced the argument that you have outlined. If they want to treat dividends, earned income and benefits as all part of the remuneration of a director, then they will have to change the law ( and I think we may well be heading for that).

I do agree, however, that the minimal effort of completing a an employment page with no income returned may well be a pragmatic way of avoiding time wasting and pointless argument.

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By neileg
15th Aug 2007 16:43

No
The Guidance on completing the SATR includes the following:
Fill in the Employment Pages if you were:
• a director, unless you received no payments - including deemed employment payment - lump sums, benefits, or income of any kind from your directorship. If so, tick 'Yes' to Question 1 on page 2 of your Tax Return and explain in the Additional information box, box 23.9, on page 10 why you have not completed the Employment Pages,
So providing you follow this procedure, it would appear that HMRC have this covered.

An office holder, including a director, is automatically treated as an employee. So the company is required to have PAYE scheme even if no payments are made because it has at least one employee.

Edit: Beaten to it!

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By neileg
16th Aug 2007 10:42

Susan
Dividends are paid to shareholders. Of course, in owner managed companies, the directors and shareholders are the same people, but dividends still don't arise from the directorship.

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By Anonymous
15th Aug 2007 16:30

See tax return notes
It is necessary to tick the "Yes" box at Q1 on page 2 of the return but there is no need to complete the employment pages for this employment. It is necessary to explain in the white space why you have ticked Yes to question 1 but have not completed the employment pages. This is explained under the heading "If you were a director" on page EN2 of the"Notes on Employment". Similar comments apply to office holders. Obviously, if there is another paid employment you will have ticked box 1 anyway but the implication is that you would still make a white space note.

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15th Aug 2007 17:07

income
Yes but bear in mind for future returns that dividends do constitute income from the company even though outside of the scope of PAYE.

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21st Aug 2007 12:00

No Emp Page ==> they assume no directorship
Now the penny drops.

Company formed, CT41G completed, (though we still have to tell HMRC local office again about the directorship to make them issue an SA reference), then next year HMRC issue the "no need to do tax returns" letter. Their system is deducing from the fact there are no employment pages that there is no longer a directorship. This is a repetitious problem.

One suspects that notes in the white space will not prevent this happening.

The two questions remain:
- Are employment pages legally required for a nil-income directorship?
- Is a PAYE scheme a legal requirement for all companies with directors, (ie all companies)?

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