How to explain remuneration to client

How to explain remuneration to client

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Client is a smalll (profitable) husband and wife company.  Remuneration is minimum salary plus dividends to cover cash drawn.

Client wants remuneration to be smaller because the current amount means they will lose entitlement to child tax credits.

I have explained that remuneration is the bare minimum to cover cash drawn, and if they take the money out and it exceeds the limit for child tax credits then they don't qualify.

Also that this is most tax effective structure for them.

Client is adamant they don't want to lose child tax credits.

I think this is likely to be a regular problem every time I prepare accounts.

Does any one have any other arguments which have been successful with other clients?

Thank you for all comments.

Replies (12)

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By BJ
08th Jun 2012 10:01

An upfront fee?

I think it's a case of laying out the facts to your client as best as possible and then enacting whatever they want.

I think the key is starting with how much money they take out of the company and then show them the directors' loan accounts accumulating over two or three years. Calculate the benefits in kind and s 455 tax (ex s 419), and it racks up pretty quickly.

Then show them the effect of having to pay dividends to clear their loan accounts in a single year. Presumably they'll be out of their basic rate bands and paying excessive tax compared to your current strategy.

Hopefully, you can show that over a few years they end up with significant liabilities as a result of what is probably an insignificant amount of tax credits.

On the other hand, it might not be too bad and they might think it's a bit of a wheeze to claim tax credits when they don't need to. At the end of the day it's up to them.

If you've shown them the outcome of their actions, I don't think there's anything more you can do, or should do, in all honesty.

The real problem is how you get any value from the work you put in. Maybe suggesting a fee upfront will put them off anyway....

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By The Black Knight
08th Jun 2012 10:35

Amazing

So they don't want to pay tax but want some back as well.

I think they may be making an incorrect CTC claim and may be prosecuted for such an act.......you may also have a duty to report.

cannot cite the case but I am sure there has been one similar.

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Replying to Gok12345:
By aiwalters
08th Jun 2012 11:42

Amazing?

The Black Knight wrote:

I think they may be making an incorrect CTC claim and may be prosecuted for such an act.......you may also have a duty to report.

Where on earth did you see that in the OP's question? The OP didn't say that the client was making an incorrect claim, only that he requested planning advise in order to maximise CTC, which boils down to whether it's better to pay a dividend and clear of the DLA, or not, and suffer the s.455 tax and BIK (or pay interest and avoid BIK).

There is no indication that the client would pay the dividend, and then make a fraudulent TC declaration; indeed the implication was that the client didn't want to declare the dividend, in order to be able to (honestly) claim a lower income for TC purposes.

Of course, you may be referring to Notional Income, but that is a far cry from fraud ("may be prosecuted for such an act"), and is almost impossible for HMRC to claim Notional Income for T/C so they never (rarely) bother. Doesn't make it right, but there are many reasons for not declaring a dividend.

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By sparkler
08th Jun 2012 12:04

I would stress to the client the importance of not taking cash out of the company as and when needed due to the directors loan implication.  It sounds as though the client is just drawing out money when they feel like it rather than setting up a regular monthly salary from the company and declaring dividends (monthly if required), with proper documentation, in advance of the dividend being paid.

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By RobHam
08th Jun 2012 17:20

The clients are honest and would not make a fraudulent claim.

It is more that  1) they want to keep the child tax credits (legitimately) and don't understand why they can't show lower remuneration in order to do this  and/or  2) They don't understand the other tax consequences of an overdrawn director's current account etc.

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By dbowleracca
08th Jun 2012 22:41

What is their annual profit and remuneration?
This is easy to resolve, if approached correctly. If they make more than £200k in profit you could look at some of the strategies available on the Market, such as EBTs, if they are happy with the risks involved.

It's important to explain to the client that they shouldn't draw money out in an unstructured way - so it should all be planned. I hope that they are asking you to prepare the correct paperwork prior to any dividend being paid to make it official, or you are declaring interest benefit on p11d/charging interest and avoiding benefit!

With proper remuneration planning in place, it is possible they could maintain their level of income and also continue ti receive tax credits. Do you advise on this area? There are a few specialists who can help you if not.

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By petersaxton
09th Jun 2012 18:43

Salary, dividends and directors loan

Explain to them that salary and dividends should be what they take out of the company. Tell them they can't take whatever they like out of the company and state what they want as salary and dividends without paying s455 tax.

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By Mark Lee
10th Jun 2012 12:10

Maybe SHOW them how it works with examples

Explaining these things to clients and telling them about the rules works for us as we're accountants.

Many clients process information in different ways.

I suspect you have tried explaining things simply. ie: When the company generates profits there are 3 ways you can get your hands on the company's money. The tax rules apply differently in each case. And of course we need to factor in the impact of tax credits as the rules for these work differently too. 

Salaries (remuneration)Dividends - piad out of the profits left after the company pays CT on its profitsLoans - this is effectively what happens when you draw money out before it's been designated as salary or dividends.

I suggest using one of the commercially available software programmes (eg: tax tips and tools) to SHOW them worked examples.

Your role as their accountant is to advise them as to how they can end up in the best position taking account of both tax and tax credits. They can then make an informed decision.

Mark

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By Bob Long
12th Jun 2012 11:48

I would ask them to let you know how much cash they need in a year to support themselves, their children and their lifestyle. When they come up with a ridiculously low amount (to justify their lower remuneration expectations and potential claim for CTC) show them an analysis of exactly how much they have actually drawn out of the bank etc in order to live for the past 2 or 3 years, and do a direct comparison for them.

If, as I suspect, the actual drawn exceeds what they estimate they need, ask them why, and where they might possibly think they can trim their outgoings.

I'd then set up a standing order for minimum salaries and the dividends that have been agreed to and tell them that they cannot take anything else out without prejudicing their CTC claims. 

Also calculate for them the consequences of taking more out and the overdrawn DLA and the fact that as an overdrawn loan account is "deemed" to be distributions it might well cause a problem with the CTC anyway!

 

 

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7om
By Tom 7000
12th Jun 2012 11:51

Why lose sleep

Either they declare salary and divs or overdraw theire directors loan accounts. Explain the difference and let them decide. If they want massive o/d dlas thats up to them, as long as you have explained, stops u from being sued.

Work out tax saving on salaries of £650 a month each against the tax credits they will lose and the maths gives you the answer.

 

 

 

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By Roland195
12th Jun 2012 12:24

No/low earnings

Personally, I would always point of the other, non-tax considerations of allegedly having no or a very low income.

They should think about the ability to obtain credit especially mortgages, car loans etc, pension payments, various insurances (a loss of earnings claim will be particularly interesting).

 

  

 

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