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Working tax credit and directors

Working tax credit and directors

Can a diector get WTC if paid less than NMW? 

I know there has been some debate about this over the years. What is the up to date thinking?

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30th Apr 2012 17:19

An initial comment

I am not aware of any exclusion applying to directors so on the basis a person is working - employed or self-employed - it is my understanding their eligibility for WTC is based upon their income. 

The reason I have commented is that NMW only tells us the rate of pay rather than the actual income, which depends on the number of hours worked.  Assuming this is more than the minimum hours required to qualify - income from other sources such as rental income, pensions etc also needs to be considered.

tladirect

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By DMGbus
01st May 2012 09:00

Tax Credits Team (AVN) say no problem

"The Tax Credits Team" (part of AVN) published a booklet on the subject of tax credits about 2 years ago.

It specifically covered this point and effectively said "NO PROBLEM" with low salary (less than NMW).

It went onto say that where there's a big credit balance on directors loan account (DLA) then stop taking dividends and instead take repayment of DLA so as to maximise Tax Credits entitlement, an example given suggested this strategy could benefit a director and his family to the tune of over £9,000 a year in tax credits.

I don't recall any comment being made on the subject of deprivation of income (Tax Credits anti-avoidance provisions) in The Tax Credits Team booklet.

 

 

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01st May 2012 11:40

Problem

The issue is specific to directors in that the NMW rules only apply to a person with a contract of employment. H M Revenue & Customs accepts that a person who is an officer of a company (director or company secretary) can work for his company without a contract and so is not bound by the NMW rules.

However, if a person wishes to claim working tax credits, a change in the regulations with effect from 6 April 2003 [para 3(3) of Working Tax Credit (Entitlement and Maximum Rate) (Amendment) Regulations 2003] means that technically a person without a contract of employment is not eligible to make a claim. Thus, to make a claim a contract is required and hence a minimum salary equal to the NMW is also required.

HMRC seems to be inconsistent whether this is applied but one suspects only through ignorance.

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taxbakbristol
01st May 2012 15:09

As I thought

gbuckell wrote:

The issue is specific to directors in that the NMW rules only apply to a person with a contract of employment. H M Revenue & Customs accepts that a person who is an officer of a company (director or company secretary) can work for his company without a contract and so is not bound by the NMW rules.

However, if a person wishes to claim working tax credits, a change in the regulations with effect from 6 April 2003 [para 3(3) of Working Tax Credit (Entitlement and Maximum Rate) (Amendment) Regulations 2003] means that technically a person without a contract of employment is not eligible to make a claim. Thus, to make a claim a contract is required and hence a minimum salary equal to the NMW is also required.

HMRC seems to be inconsistent whether this is applied but one suspects only through ignorance.

 

This was the argument I was referring to, but so many people seem to quote the same stuff as the AVN report referred too by the previous poster.

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01st May 2012 17:37

AVN

Quote from the Tax Credits Team website

After many years of ambiguity, the Tax Credits Team have received a response from HMRC Department for Benefits and Credits, Customer Strategy, Policy and Change. This confirms that the legislation as it stands is interpreted by the Tax Credits Office to be that the National Minimum wage does not apply to company directors unless they have contracts which make them workers as defined in section 54(3) of the National Minimum Wage act 1998; or that for Working Tax Credit purposes, directors as office holders do not have to be engaged under a contract of service.

End quote

It would be interesting to see what the letter actually says. The first part of the paragraph above is clearly correct. It is the second part that is less clear in the light of the change in 2003.

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