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Reverse directors wages for year?

I have just taken over a new client, seems previous advisors have allowed the 2 directors (who are also shareholders) to continue paying themselves normal hourly wages with no obvious reason (dirs wages are at around £30k each a year, which is way in excess of standard £624 monthly amount for directors on salary & divs mix).

Assuming there will be sufficient profits when accounts are prepared - is there any reason why we could not reverse both directors wages from April '12 to date and pay them the £624 per month instead (purely from payroll perspective) - we don't think they are on RTI yet so HMRC have no knowledge of what has been paid in the year to date except the PAYE figures. PAYE has been paid up to date, with around £20k of it relating to the directors! - so therefore if we could reverse the wages to date they would get the £20k refunded.

Is this possible? Has anyone else done this before?

My only reservation is that it will raise suspicion with HMRC regarding the potential £20k refund - is this likely?

Thanks in advance for any replies.

(PS am only interested in this from a PAYE/payroll perspective - i realise that there will be other considerations when we come to prepare the annual accounts)


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04th Feb 2013 13:58

HMRC will take some convincing.

From their point of view payments have been made to the directors and as these were not dividends then presumably PAYE was deducted correctly. What are you proposing .. that you tell them you have changed your mind and that they were actually dividends all along? What about the paperwork?

I did do something similar once but I had rather convincing evidence that the director had been deducting PAYE from the repayments of his own directors loan account. It still took HMRC some time to agree a refund.

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04th Feb 2013 14:39

Once a payment has been made it can't be redesignated

see EIM 42260

Unless you have documentation in existance that the payments were dividends you will not be able to argue that payments already made were not salary. HMRC may not have seen the P35 yet but if they came looking it would not take much to work out PAYE had been operated on the amounts paid.

The best way forward would be to minute board meeting cutting directors salary from now onward then document dividend payments going forward.

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