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Management / Service charges between companies and getting them right

Hi All,

I'm hoping you will be able to help on this... And I realise that I may be opening a can of worms.
I do want to avoid the morals on paying tax etc, because I believe that is a separate issue, and is down to each taxpayer involved to make their decision.
I consider my job is to give them options, all legal and within the rules, and then carry out their instruction. For whatever circumstance, the cheapest option may not be the best option, and I would advise in hat way.

My client has one company that owns two other companies 100% and 25% of another.
He is sole director of all 4 companies.

He would like to make a charge to each of the three companies owned by the 'holding' company, instead of taking any salary from each company.
He would then want to take a salary and dividends from the holding company when applicable.

My question is basically, is this possible. Does the holding company need to be a corporate director for this to be possible, or is it ok for the person to be director, but for a charge to be made to each company?

All companies are well within the small profits rate, and so there is no possibility of suggesting that this, or the amounts involved are to bring down the marginal rate of tax.
He says, and I see his point, that it would then show more realistic levels of profits in each company, and would be based fairly on turnover, or the business size in some way.
It does obviously reduce PAYE taxes, both tax and Ees and Eers NI, but he argues that he could theoretically do this by taking a minimal salary from one company, and only taking dividends from the others.

Any guidance or thoughts on this would be very gratefully received.

Thanks

David

Replies

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Anything wrong?

I can't see much wrong with the proposal, although there is clearly a saving in PAYE/NIC terms so what sort of problems might arise?

The principal danger is HMRC arguing that the service charges were not incurred wholly and exclusively for the purpose of the trades being carried on - so disallowing the charge in the subsidiaries.  However provided that services are genuinely provided and this is not a device for profit exctraction that should not be a problem, provided that the sums were reasonable for the services, the management activities of the director.  There should be legal agreements drawn up to ensure that it is clear that the services are being provided through the holding company, but in most large groups of companies this is how managerial services are provided.

This is supported by the fact that there are no differential tax rates.

The benefits in kind position would need to watched carefully as any benefits provided by the subsidiaries would still need to be reported through the holding company P11D.

As I see it he is simply arranging his affairs in the most efficient fashion, avoiding multiple reporting under RTI, and, as he says, any savings would be the same as he could obtain anyway by low salary and dividend extraction.

Any other opinions?

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VAT

Have you considered the VAT.

If you have a VAT group no problem.

If you do not have a VAT group issues may arise, best to consider then before they come back and bite.

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Good point

Don't forget the VAT...

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Thank you very much, all of your points are ery much appreciated.

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