Can a director pay for their childs tuition through the company

Can a director pay for their childs tuition...

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Hi

I had a call today from an existing client. He and his wife run their ltd company, they have two children between 5-9.  He asked if there was a way in which he could put his children's tuition through their company in order to reduce tax, he advised that someone who he knows just puts it through as training!  I advised that this sounds very wrong but I would look into it.

He asked if it could be set up as a bursery or a scholarship, his friend is also thinking (if possible) to do something similar and it may be something that they can do together if this is a more effective way of doing it.

I only want to know legal ways if any of doing this (obviously).  I am not going to put my practice at risk and need to be certain about what i advise.

I have came across the follow areas that I need to read through but thought I would try my luck here in the meantime, and then base my conclusions on all information!!!!

EIM06235 
SP4/86
S419 duties
 ITEPA 2003 ss 211to 215
 EIM 30000et seq.
At this moment in time I am thinking NO.  Please bear in mind I haven't read through anything as yet, so no need for any sarcasm on my ignorance on this subject. All help and advice would be greatly appreciated.

Replies (17)

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By Michael Harle
20th Aug 2014 12:34

I would say Yes you can pay for it through the company but:

 

1. No CT relief would be given

 

2. You would subject to a personal benefit in kind on the cost.

 

I can't see any way you can call this training.

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By duncanedwards
20th Aug 2014 12:38

Have a read of the links you posted
then you'll have a better idea if the issues.

"Please bear in mind I haven't read through anything as yet, so no need for any sarcasm on my ignorance on this subject."

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By Vaughan Blake1
20th Aug 2014 12:55

Disagree

Best way is to get the company to contract with the tuition provider.  The payment is then a BIK so it will be deductible for CT, but taxable as a BIK on the employee (plus class 1A NIC of course by the company). A small tax saving arises as he pays tax on the fee and not on an amount of income which net of tax/NIC pays the fee.

If the company just pays the fees without contracting with the provider, then it should go through PAYE system, but would still be deductible for CT.

It is not 'training' in the CT sense and it sounds like the bloke in the pub strikes again!  No doubt pubman has done this and 'got away with it', doesn't mean it's right though!  

If there are a number of children involved, your client could team up with his friend and seek some sort of group discount.

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By AlphaZeta
20th Aug 2014 14:03

S Kutcha v HMRC - Scholarships to sons of company director

This may be relevant :

S Kutcha v HMRC (and related appeal)

http://www.financeandtaxtribunals.gov.uk/judgmentfiles/j7288/TC02769.pdf

 

In S Kutcha v HMRC (and related appeal) (TC02769 – 5 July), a company made payments to two sons of one of its directors (K) while they were at university. HMRC issued assessments on K, charging tax on the basis that the payments were taxable benefits. The First-tier Tribunal dismissed K’s appeal, holding that the payments were taxable by virtue of ITEPA 2003 s 212. (The tribunal also upheld determinations charging NIC.)

 

Conclusion : ITEPA 2003 s 212 provides that ‘a scholarship which is provided for a member of an employee’s family or household is to be regarded ... as provided by reason of the employment’ and as a taxable benefit. The FTT upheld HMRC’s view that the effect of this provision was that the payments made to the director’s sons were taxable benefits. 

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By A E Scott
20th Aug 2014 15:33

Thanks for the info.

The children go to different schools so not sure if this would be a problem.

On another note if the BiK it is classed as a small saving for putting it through the company, where is the saving on this hyperthetical scenario below, i must have missed something! as it doesn't make sense. (The actual amount of which is paid out due to the BiK)

 

BiK for school fees is £12,000 cash value (1 child)

Employee wages £10,000

Dividends £20,000 net (Grossed up) £22,222

total £44,222 less PA of £9440.

 

The tax for the BiK ONLY is at 20% which is £2,400, 

The company would also pay 13.8% on the £12,000 for class 1A which is £1,656

Amount allowable for CT is the £12,000 + £1656 = £13,656 X 20% = £2,731.20

So the difference in tax saving is £2,731.20 less £2,400 = £331.20 but the company (which is husband and wife family business) is paying the £1656 to put it through the company, which means paying £1,324.80 more by putting it through the company. (1656-331.20)

Please tell me what I have missed out because I have been racking my brains! Thansk again for the precise responses.

 

 

 

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Replying to Maslins:
The triggle is a distant cousin of the squonk (pictured)
By Triggle
20th Aug 2014 16:13

CT saved?

A E Scott wrote:

Please tell me what I have missed out because I have been racking my brains! Thansk again for the precise responses.

The company would pay £2,731.20 less CT? Is that what you've missed?

What about reducing the salary to just above the LEL? Salary sacrifice?

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By Steve Kesby
20th Aug 2014 15:36

Not adding anything...

... but if there are two children between 5 and 9, is it fair to assume that they are not between 6 and 8? :)

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By A E Scott
20th Aug 2014 15:50

yes one child per director, I just wanted to make it less complicated as a whole, so each director would have the same calculation on their self assessment. They are both at school, i didnt want to give the impression that they could have been at uni and working for the company during holidays and that they were not employees of the company.

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By Steve Kesby
20th Aug 2014 16:19

@ Triggle

Are you saying that director's remuneration in the form of a BIK isn't CT-deductible?

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Replying to Tom 7000:
The triggle is a distant cousin of the squonk (pictured)
By Triggle
20th Aug 2014 17:07

Steve

Steve Kesby wrote:

Are you saying that director's remuneration in the form of a BIK isn't CT-deductible?

Hi Steve

No I'm not - a BIK is an employee's salary by any other name.

I don't have time to do the number crunching at the moment but the idea was to reduce the salary to the least amount to secure the director a contribution year towards the State Retirement Pension then fill up the rest of his PA with the BIK.

He would, therefore, pay less personal tax on the BIK (some of it being covered by the PA). Of course, the Class 1A would be the same but the CT saving would be less and may get eveything back to square one.

I'm not too sure A E Scott's revised comp. above is accurate from first reading. But then again...

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By A E Scott
20th Aug 2014 16:23

No the saving in CT would be £2,731.20 but to do this there would an SA tax liability of £2400, so the difference is the £331.20 (saving) however to get this saving the client would have to pay over the £1,656 for NI class 1A which really means that he would have to pay  and extra £1324.80 (the ni of £1,656 less the saving of £331.20)

Lowering the salary to the LEL would save a further (10,000 to 7956) = £2,044 X 20% = £408.80

which would then mean that the company as a whole would still pay to do it this £916.00 (original payment of £1324.80 less the reduction in salary tax saving of £408.80)

Are there any other reasons why this would be viable or why people would do it this way, and are there other ways to look into?

 

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By Justin Bryant
20th Aug 2014 16:31

See

This link:

https://www.accountingweb.co.uk/anyanswers/question/school-fee-planning 

Although no CT deduction is available, there should be no BIK etc. issues.

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By Sheepy306
20th Aug 2014 21:02

Grandparents
I'm sure that the man down the pub wasn't referring to this but.....have you considered the use of grandparents and trusts? Can suit certain circumstances.

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By A E Scott
22nd Aug 2014 10:27

If the comp or revised comp are not accurate, why is this and what have I missed off?  People seam to be paying for tuition this way, but i cannot see the overall saving and I have taken into account the personal tax side also, if we were just looking at the CT saving then yes, it would save a small amount of CT, however this is not the big picture.

Using Grandparents and trusts is a possibility, I am presuming this would help with IHT if over the limit and obviously 7 year rule etc.

If someone would like to provide a calculation where the saving on putting the tuition through the company is more beneficial i would be pleased to see it

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Replying to TessaW:
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By andy.partridge
22nd Aug 2014 10:43

Me too

A E Scott wrote:

If someone would like to provide a calculation where the saving on putting the tuition through the company is more beneficial i would be pleased to see it

Lots of sparring but no clean punches
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Replying to User deleted:
Red Leader
By Red Leader
22nd Aug 2014 11:21

clients perception

Sometimes these things go through the accounts and are dealt with correctly by the accountant, resulting in no tax gain.

However, the clients perception is that something clever is being done and is quite happy. I don't advocate this, just sayin' like.

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By A E Scott
22nd Aug 2014 12:04

Ok to to conclude with the above I have come to realise that a director is allowed to put the school tuition of his children through his company, it would however have to be put through as a BiK and he would be taxed more (small owner based company) on his self assessment as a result of this, and therefore not recommendable! not forgetting the man hours on my part to administer the whole thing.  Thank you everyone for your comments on this one.

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