National Minimum Wage and director's tax credits

National Minimum Wage and director's tax credits

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My client, a sole director of a very small one man band company, has recently received a letter from the NMW compliance unit. It transpires that the visit was as a result of the tax credit department passing on info relating to his salary and the hours worked as per his tax credit claim. Whilst I am more than happy defending the fact that as a director he is not bound by the NMW rules I am more concerned that by doing so we could bring on a far worse scenario. To the type of mind that sometimes operates at the Inland Revenue, this could mean that he had not worked for the minimum hours and thus his tax credit claim is invalid. This could have serious consequences for him as his tax credits are quite high ( he has five children). We are not talking about someone who takes a small salary/divs just to boost his tax credits, but someone whose business can barely cover the meagre salary he pays himself.

From my conversation with the compliance people I smell deliberate collusion between them and the tax credit department to trap the small company director. Am I worrying too much? Has anyone come across this before?

Martin Hayward

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By martinfoley07
21st Jun 2006 23:28

...well,....
not to be too controversial (oh, what the heck), but
(i) I am certainly sympathetic to your specific case, i.e. the director's business is struggling and his low income arises from this, rather than him ordering his remuneration affairs tax efficiently. I therefore hope that his tax credits are not get caught by this.
(ii)it is clear he is fine re minimum hourly wage.
(iii) Not sure about working hours point and if there is any trap for tax credits, witting or otherwise. Again, I hope not in the context of this particular case.
(iv) but fascinated by use of the word "collusion". Should we not want the Govt 's ridiculously uncommunicative bits to "collude" with each other!!?? Don't we actually want "joined up" Govt?
(v) we know HMRC hates the minimum wage plus dividends structure, so it may well be they seek ways and means to attack it. May seem underhand given that dividends will count towards means tested tax credits presumably, but an interesting line of attack if such issues arise in tax credit context. Ironically, they will of course not be catching the well-to-do by this, since they would presumably not qualify for means tested tax credits. I can't say I'm aware of any of my director clients with tax credit issues, but I'll quickly check now!! They are certainly all on divis!! Amazing the number of new clients you take on who are not.
(v) wait till IR and C&E ever do integrate, then some folk ARE going to get a shock. Might be a long wait, but you never know.

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By User deleted
21st Jun 2006 15:18

You need to look at ICAEW tax report 07/00
http://www.icaew.co.uk/index.cfm?route=133425

This gives the full text of the director/worker angle as agreed with the DTI. I thoroughly recommend that you read it.

Maybe the Tax credits lot are not up to speed with this guidance? It would be as well to examine the tax credit legislation to see if there is anything which says that hours worked as a director should not count in repect of calculations for hours worked for Tax credit purposes. Think that would be highly unlikley.
Interesting in a horrid sort of way to see this line of attack though.

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By aiwalters
30th Dec 2009 00:07

5 children makes no difference

He'd get the CTC even if he doesn't work. It's the WTC that he stands to lose.

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By nogammonsinanundoubledgame
30th Dec 2009 08:39

We predicted this attack many moons ago

There are articles in AccountingWeb if you can get the search engine to find them (I have given up on that, but you may have more luck).

The link provided by the original responder is not of much use to the OP, I fear.  It refers to a document that predates the introduction of Working Tax Credits, for one thing.

All that this link does is confirm that if a director has no contract of employment then he is not subject to the NMW legislation.

By contrast, if he does have a contract of employment then he is indeed subject to the NMW legislation.  Furthermore, work undertaken by a director without a contract of employment does not count toward the required qualifying hours for WTC.

There may be a bit of soulsearching required as regards which is the more expensive point on which to concede.  Don't forget that the NMW penalties went up last year.

martinfoley07 argues that we should be pleased with the government's joined-up approach, but I think that this misses the point.  The purpose of the NMW was never intended to protect owner-directors of their own companies and it was certainly never intended as a crutch to prop up deficient tax credit legislation.  This government has no qualms about using legislation intended for one purpose to shore up crumbling bureaucracy in other areas, and that practice I find objectionable.  Truth be told, the opening scenario is repeated in thousands of cases up and down the country, and if (as it seems to me) the practice breaches the tax credit legislation the government should have done more to advertise its intent to crack down on it rather than wait 5 years and then start cherrypicking cases to victimise.

With kind regards

Clint Westwood

[EDIT] - I have only just noticed that the original post was dated in June 2006.  Would be interested to know the outcome of the case - or any others on similar lines. Presumably someone was searching on this subject to have dredged up a 2006 post to which to respond?

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