I have a limited company client where the director intended to pay themselves under the tax threshold throughout 2012/3. During the year they got their sums wrong/lost track of the cumulative position etc. Anyway, by my calculations there were payments made that should have been grossed up creating a modest PAYE and NI liability.
The client has asserted that because from the outset there was no intention to create the tax liability, any excess salary payments could not have been salary but should be debited to the director's account.
Would you buy this one, or stand your ground?
Replies (33)
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I would have thought that debiting the excess to the DLA would close the matter. What is your concern?
P35 Position
What was the P35 position? Have these payments already been declared albeit with no tax liability?
I agree that if all the payments in question have already been reported as salary in P35 figures the option of debiting the excess over the tax threshold to the DLA is no longer available.
DLA
Just take the excess to DLA and have done. It is reasonable that he didn't intend to pay salary over the threshold and remarkably likely that it was a simple [***]-up because its a fact of life that most clients are stupid and either don't ask first or ask and don't listen! Be content with warning him that if he does it again you'll slap him round the face with a wet haddock until he realises that he needs to pay you to do everything for him. I don't count it as a favour - just as accepting that he's erred.
P35
I don't count it as a favour - just as accepting that he's erred.
Also, Flash, there would be no incentive for him to hand over running the payroll to me if there are no consequences for getting it wrong. Your way, there are no consequences if I am creating a precedent that I can fudge it for him.
Other than the fact that he has already cost himself £100 for not filing the P35 on time....
When you say booked as salary do you mean credit bank / debit salary in their ledger? If so it would have been a mistake according to the client and should have been credit bank debit DLA for part of the sum. I do not see a big issue in correcting the book keeping.
Yes but
He intended to pay himself the threshold salary - unfortunately he got the amount of the threshold wrong or added up what he'd already paid himself wrongly. That's an error, not a change of intent.
Look at it another way - if he'd paid a supplier £100 too much would you insist that the supplier raise an additional invoice for the £100 on the grounds that he'd obviously intended to receive more goods from the supplier? Or would you accept that he'd got the numbers wrong and overpaid?
There's an incentive if you word it right! You just need to mention hell and eternal damnation, investigations and fines, and anything else overly dramatic that you can manage :)
RTI
There's an incentive if you word it right! You just need to mention hell and eternal damnation, investigations and fines, and anything else overly dramatic that you can manage :)
More commonly known as RTI....
Yes probably :)
The point of mentioning those things to him is to persuade him that he needs to get it right in future so you don't have this dilemma again. If you think that saying 'please don't do that again' will work then fabulous, you can go with that instead.
For me, yes its intent that counts.
Short Cut
Is what is being proposed not really just a bit of a short-cut/simplification of:-
1. Company writes to director to say it has come to our attention that you have been overpaid in the year 2013, please confirm your agreement and pay the excess back. It is the company who made the mistake in setting the level of pay for the director.
2. Director writes to company and confirms the overpayment and he will repay immediately.
3. Correction to payroll is made and submitted to HMRC
So rather than have a potential schizophrenic write letters to himself then complicate matters with HMRC then same result is achieved.
And if this seems ridiculous, how many of us are still getting sole directors to minute meetings they had with themselves in order to agree to pay themselves a dividend?
Well then
Get the client to provide you with written confirmation that he made a mistake!
His payment was deliberate but made under a mistaken belief that he still had tax-free salary left to draw.
But if you really feel strongly then tell him he can't correct mistakes and that it's salary with tax to pay. I feel rather sorry for him....
Where/how was it recorded as salary in the records?
If it was an excel cashbook or VT entry, maybe it was an "autofill" from a previous entry that he didn't correct. If it's shown on the bank statements as salary, some banks have a "fixed" payment reference for a particular payee and it's too much hassle to change the descriptor once set up.
Either way, it's inconsequential in my opinion if he was aware of the salary/threshold and his intent was to pay within this.
By taking a dividend do you mean writing up the documentation and minutes or just taking cash? If the former then I would not move part to DLA but if the latter then it is DLA regardless of what the client thinks he may have done.
intention...
personally as with any employment there should be a value put on the salary at the outset of the engagement.
in this case the arrangement is loose but the director considers himself from the outset to be engaged on a salary "up to the ni threshold".
i would contend therefore that anything else taken over and above that was an overpayment of that salary and is owed back to the company by the director. if he chooses to "repay" that via his DLA then thats is his prerogative.
the problem with this is the risk factor if hmrc take a look at thnings and see that the payments are identified in the business records as "wages". An overzealous Inspector would probably have a crack at that and gross up however I would simply make the client aware of the potential pitfalls and treat the excess as DLA.
I fully understand where you are coning from andy especially when comparing the similar scenario with a dividend payment and you may feel happier paying the duties on it and classing it as salary.
The main problem with situations like this is the client may get the attitude "it doesnt matter what i take or what i call it as my accountant will sort it out". thats when the real problems begin and andy's no nonsense approach will certainly nip that one in the bud.
Surely the point is that the client claims it isn't salary. It is therefore a mistake in his bookkeeping by calling it this. Ultimately you are preparing accounts based on the information provided so if the client says it isn't salary then it isn't. All you can do is advise him of the potential argument that HMRC may make against this and the implications of this to keep yourself clean. Change it and move on.
Story changing
The client claimed is was salary, reported it as such in the accounts and only now, much later after the event, says it isn't upon realising it generates a tax liability.
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This does change the story somewhat. You didn't mention in the original post that it had already been reported in the accounts. But surely if you'd done the accounts you'd have picked up that it was at a level going to trigger the tax charge and would have advised him? Then he could have said 'oops, got my numbers wrong', you could have amended the accounts to reflect his true intention and all would be good.
Would you buy this one, or stand your ground?
Andy your question was - Would you buy this one, or stand your ground? Most replies infer that it is not unreasonable to interpret the client's overall intention to pay himself up to the tax and NI free limits and to use his undrawn DLA to absorb any difference. As you state in one of your replies tax planning is usually done in advance and you would presumably have advised your client how much to treat as salary and how much to treat as drawings in advance of his efforts at bookkeeping. However maybe there is more to the story we are not aware of, which is why you seem determined to stand your ground. Opinions vary but you must be the judge on this one.
Andy Are you trolling?
Is there a genuine question here or are you just stirring up a ruck to establish your moral superiority?
No payroll processed then? What's he doing under RTI?
It sounds like he didn't actually process his payroll as he went along. Does he have payslips? Is he putting in his FPS reports under RTI? If he is presumably this will at least be a one off.
Sometimes genuine errors arise - for one of my clients with two directors one director got overpaid last year. A friend was running the payroll for them and at the end of the year it turned out that he had taken about £400 more than the net pay according to the payroll. I put this to the DLA as it was a genuine error. However if a payroll had been processed and then at the end of the year the director decided that he wanted to have taken less salary I would refuse to change it (even before the submission of the P35).
In the same way I had one director who accidently paid himself twice one month, so there were 13 salary payments in the year - it was unintentional so I put it to the DLA. He only meant to pay himself 12 times so even though the extra payment said salary payment on the details and looked like all the other salary payments I didn't treat it as such.
I think it comes down to how you see the issue. If you see it that your guy managed to accidently "pay" himself more than he intended to then I would say it's OK to put it to the DLA, but if it's the case that he intended to pay himself the amount actually paid, and now after the event once he's realised the consequences of doing that he would like to rewrite history then in my opinion it's not OK.
The most important thing is to do what you feel comfortable with, or more to the point, not to be pressurised into doing something that you are uncomfortable with.
BG
Different perspective
I see in your opening post that you talk about grossing up payments? What type of payments were these that you feel they needed this treatment, bearing in mind that Directors have an annual earnings period for both tax and NI. If you do not gross up is there still a liability at the end