Close company director and shareholder funded the purchase of materials for a period his company did not have the funds.
He is making an expense claim on the company for bank charges he would not have otherwise incurred and credit card interest.
In his head the position is simple, they would not have been incurred had it not been necessary for the company's trading. I don't think it is that simple and I want to explore with him the detail of his actions and the options, but I can't seem to lay my hands on anything definitive.
Could anyone help? Thanks in advance.
Replies (21)
Please login or register to join the discussion.
Management charges
Andy, you're probably looking at it from the point of view of whether they're allowable employment expenses. They're not, but then it follows that the reimbursement also isn't being made by reason of the employment.
But look on it as him charging a fee to the company for providing temporary finance. When the company is charged such a fee, is it expenditure incurred wholly and exclusively for the purposes of the company's business? I'd say it was.
It's like charging rent for his home office, or having a parent company providing management services and making a management charge.
Viewed like that it's probably strictly taxable, but he's got actual expenditure to match. The problem would be if HMRC argued that it was miscellaneous income, so that you can't deduct the expenses.
If it's small, ignore it for the director. If it's large, treat it as a very short trade of providing short-term finance with nil profit; both the income and the expenses are VAT exempt.
Funding
If the company doesn't have enough funds then the owner should lend the company money and then the bank charges in the company bank account would be allowable.
Fair
To be honest, I'd be comfortable with claiming that - always provided that he can justify that he wouldn't have incurred the charges otherwise. He's only claiming a refund of what he's paid out, presumably. And I suspect that, if this had been paid to a run-of-the-mill employee who'd incurred a cost in some kind of minor emergency, nobody would have thought anything of it. As petersaxton says, maybe it could have been done better in a different way, but we're dealing with the facts as they are, not what they might have been.
There are four options
Andy, as I see it, there are four options:
Don't claim them in the company and the director takes it on the chin, which he won't like.Treat them as a reimbursed employment expense. HMRC can then come along and say that the expense doesn't satisfy the W, E & N in the performance of the duties criteria and disallow them, leaving the reimbursement taxable as pay. Worst possible outcome.Treat them as a fee from a temporary money-lending trade, so that you can deduct the costs as business expenses. Best possible outcome. HMRC might argue that it's not a trade and should be taxed as miscellaneous income (see BIM80225), or interest.Treat them as miscellaneous income or interest, meaning that you can't then deduct the expenses. This may have the same overall effect as 1, depending on the differential in tax rates between the company and individual.
Ss. 383-384 (relief for interest on a loan obtained for the purpose of lending money to a close company) would only be of any relevance under option 4 (or option 2 if the expense claim is disallowed). You can't make a valid claim though, because the bank charges aren't interest and relief for (overdraft and) credit card interest is specifically excluded in S. 384.
As previously, my inclination is towards 3, but you risk getting knocked back to 4, which may then be worse than 1. The client probably needs to make the final decision.
Significant bank charges on company material purchase.
The expense is necessarily, wholly and exclusively for the business. Had he not bought the material, these expenses would not have occurred. Hence, for the company, it should be an allowable expense. For the director, there is no income, he has been reimbursed on some expense which occurred due to business material purchase. I would not even mention it on his personal tax return. Obviously, if the expenses were a few £ no one will bother to claim it.
I'm not sure...
... that it needs to be squared with Ss. 383/384 Andy. They give a means by which the director might (but can't in this instance) get tax relief for the expenses incurred.
The point is though, that the company can't just get tax relief for personal expenditure incurred by the director, as has been suggested. The company can only get tax relief for expenditure that it incurs (or that the director incurs as its agent, which can't be the case with bank charges on a personal account and interest on a personal credit card).
The way to get tax relief for the company is for it to incur expenditure, by the director making some sort of charge to it.
The suggestion that when such a charge is made it is not then taxable on the director in some way is misguided, in my opinion.
Hi Andy, Sec 383 deals with mixed loan, obviously if the purpose is mixed apportionment will need to be done. s384 does restrict the interest when overdrawn position or credit card, but I am not sure if in your client's case that is the precise nature. If it was my client, I will take HMRC ruling since I do not think it is the intention of this section to disallow a genuine expense which is incurred necessarily and exclusively for the purpose of business. As to the reimbursement to the director, again there is no income in his hand simply a genuine reimbursement. However this is my personal opinion and peter saxton also have similar view as stated above.
Interest on loans taken out personally and then placed with a close company can go as an expense in the directors tax return. Overdraft interest cannot. Theres a legal case I remember where the business was funded by £1m personal overdraft and the interest was not allowed
So either the company has the o/d or loan or the director has a loan. A directors o/d gets you no where ...tough
Hi Andy, sorry if I confused you. I still think Peter's opinion is close to mine. However, Tom also seems to imply that it would not be allowable, In the circumstances, if I were in your position, I would consult the tax office and get their verbal advice in writing. I have found, in the past, HMRC being very helpful. As you have stated, the amount is significant, it should be worthwhile.
My opinion
Thanks, but why do you think Peter's opinion is close to yours?
I don't think my opinion is close to kalalmmalak.
My main concern is how you split the bank charges and interest between personal and business. It may be more acceptable if a personal bank account was used solely for business. If one personal transaction causes an overdrawn bank position and then a business transactions is made it doesn't seem right that any subsequent bank charge is a business expense.
This just shows
What a mess the tax system is. Clearly the costs were incurred on behalf of the business and it should be a simple matter to include them as such- but as the answers have pointed out (including the infamous personal overdraft case, one of the worst decisions ever), it is far from straightforward.
The company should have it's own credit card, then this isn't a problem, you should suggest that to the owner- and it makes life much easier all round.
Not had a case where the costs were significant enough to claim, but maybe a fee from the director for 'use of credit facility' would work, declare it as self employed income and 3 line account it with the costs of the facility being the interest incurred on the card so net profit is zero on him (or even a loss if you include accountancy costs..).
Interesting views
I have a client who used their credit card to finance the purchase of some assets for their venture so why should the interest incurred not be re-clamied and as they move it from 1 card to another the charges as well?
These were incurred solely for the purpose of the business?
Whose venture ?
His own ? Or his company's ? I accept what people say here about the interest as a credit card account is more overdraft than loan. But are charges blocked too ?
Hi Andy, I spoke to the tax office twice. On first call the inspector tended to agree with me that wholly and exclusively basis the interest and credit card charges for exclusive business expense (material in your case) will be allowable. I mentioned to him the sections 383/384 and the next day in the next call, he stated that these were not allowable He also stated that in his time with the tax office he never came across this question. FAIM10020 HMRC manual ref.