Changing remuneration structure from year to year

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The benefits of the low salary/dividends profit extraction method have been largely eroded but there are still some benefits.  If the saving changed from year to year and the remuneration structure of the Directors/shareholders changed, for example to much higher salary one year, then does anyone have any experience of HMRC challenging the variable methods?

There are various factors here including R&D and residence. 

Thanks
 

 

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By rmillaree
13th May 2024 20:01

the main danger here could be if the spouse doing simple admin duties was taking high salary that is not deemed to be commercial for duties done then that would perhaps be be an issue whereas as founding business owner shareholder not so much an issue ref similarly high divis. So there can be some risks ref higher salary - probably ok if its can be justified. hmmmm how much do mp's pay per hour for family members they employ?

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By Matrix
13th May 2024 20:08

OK thanks, but what if the total remuneration is commensurate to the work done, the (unrelated) owners just may vary the extraction method from year to year?

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Replying to Matrix:
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By lionofludesch
13th May 2024 21:24

The question is, is the higher remuneration excessive for the work done? If yes, it may be disallowed in whole or part.

You'll probably be grand but the question still needs asking.

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Replying to lionofludesch:
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By Matrix
13th May 2024 21:33

No, per above, it is commensurate with the work done, that is not an issue, otherwise they would not do it at all.

It is the switching which I am still thinking about. And switching back potentially.

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Replying to Matrix:
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By FactChecker
13th May 2024 22:37

Whilst what passes as the logic behind when HMRC do or do not decide to enquire can be beyond normal comprehension, the make-up of the remuneration package is a matter for the employer not HMRC - subject as everyone has pointed out to it being commensurate with the work performed.

If it makes it any easier to accept ... imagine the following scenario:
* salary is £10k every year, but each year the Board decides whether to award a Bonus (via PAYE) or a Dividend;
* total package broadly the same and salary unchanged, but variation between Bonus or Dividend at discretion of company (might flip-flop back'n'forth).

[Before anyone points it out, the salary figure is just broad-brush and the whole thing assumes that we're talking about OMB-type operation ... but just trying to illustrate the point others have made.]

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Replying to FactChecker:
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By Tax Dragon
14th May 2024 05:54

If you admit that dividends are really just part of the package... https://www.taxinsider.co.uk/can-a-dividend-be-recategorised-as-salary-ta

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Replying to Tax Dragon:
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By Justin Bryant
14th May 2024 09:50

The author (like many others) has got PA Holdings wrong. In that case, the payment was always salary in the first place and the fact that a convoluted scheme delivered it in the form of dividends from a company obviously made no difference to that salary starting point.

In an OMB the situation is totally different and taxpayers can choose the most tax efficient profit extraction and CT deduction is only at risk if the salary is deliberately inflated. See references to Hoey here: https://www.bailii.org/uk/cases/UKUT/TCC/2024/104.html

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Replying to Tax Dragon:
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By Paul Crowley
14th May 2024 10:14

I am not aware of any HMRC challenge or tribunal case where the arrangements are simple shareholding, even alphabet shares.
I thought HMRC gave up that fantasy once Dividends got its own brand new special tax, that is now higher than EENIC.

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Replying to Tax Dragon:
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By FactChecker
14th May 2024 15:44

... which is why I said "the whole thing assumes that we're talking about OMB-type operation" (and probably should have more explicitly said where OMB is probably sole director/shareholder).

Otherwise we're back to 'commensurate with the work performed'.

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By kim.shaw-and-co.com
13th May 2024 22:06

Matrix wrote:

No, per above, it is commensurate with the work done, that is not an issue, otherwise they would not do it at all.

It is the switching which I am still thinking about. And switching back potentially.

It likely makes no difference if remuneration is not governed by a contract of service, apart from potentially messing up tax codes and POAs. I've had clients doing this for years for various reasons (including with lumpy pension contributions to factor in) and it's never been an issue.

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By Paul Crowley
13th May 2024 23:16

Never had a challenge on wages put through the PAYE system.
HMRC cannot even answer the phone, they do not have time to spend on small stuff like this.
I would have more worries on R&D.

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Replying to Paul Crowley:
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By FactChecker
14th May 2024 00:01

Aaah (sound of penny dropping) ... only just spotted last sentence in OP: "There are various factors here including R&D and residence".

IF the idea is to pay low salary + high dividend in most years, BUT just happen to pay a high salary in the year for which R&D claim is being input (and claiming suddenly that most of this was an essential part of the R&D costs) ... then I can see a whole bundle of major problems.

All of which neatly encapsulates the problem with AA as a forum (even for experienced members) ... when the main question asked is correctly answered - but without responders being certain of associated potentially relevant factors.

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Replying to FactChecker:
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By kim.shaw-and-co.com
14th May 2024 02:30

FactChecker wrote:

IF the idea is to pay low salary + high dividend in most years, BUT just happen to pay a high salary in the year for which R&D claim is being input (and claiming suddenly that most of this was an essential part of the R&D costs) ... then I can see a whole bundle of major problems.

If the costs are defensibly arm's length market value relevant costs attributable to the R&D expenditure there is surely nothing to prevent this being done electively if the fact pattern supported it.

There is nothing requiring a company to pay market value for directors' services if they accept lower remuneration for one year versus another but agree to being fully remunerated as a worker under a contract of service in certain years (should the services they supply justify such a payment being made)....

Surely the relevant question is whether the remuneration they do receive is justifiable rather than whether they and the company agree such remuneration will not be paid if it suits both parties that it is not (in another year).

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Replying to kim.shaw-and-co.com:
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By Tax Dragon
14th May 2024 05:49

I never like "surely" - and you've used it twice.

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Replying to kim.shaw-and-co.com:
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By Matrix
14th May 2024 06:05

Thanks this is helpful. To date where R&D has been claimed the salary was low but there has been the odd lump sum pension contribution. So I suppose there is a history of varied remuneration.

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Replying to kim.shaw-and-co.com:
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By FactChecker
14th May 2024 15:55

Like TD I'm always wary of "surely" and even more so when lengthy "if" conditions are introduced ... where these are undoubtedly true but not as a direct sequitur to the point in question.

No doubt I'm equally guilty in letting my bias show ... having seen too many R&D claims where the salaries component is approached as 'how much can we put in there?' - rather than 'which resources were needed for the project + when and for how long were they used (set against measurable project milestones)?'

If all your 'ifs' (see what I did there!) and 'surelys' were in place then I'd agree with your conclusion ... my point was more about how likely the OP's apparent scenario would be to encouraging HMRC enquiries (and that they might be hard to defend if, there you go, those figures are subject to interpretation).

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By rmillaree
14th May 2024 16:05

surely it is time for shirley to crop up in the conversation - even if thats on a maybe or but basis.

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Replying to FactChecker:
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By rmillaree
14th May 2024 16:08

how likely the OP's apparent scenario would be to encouraging HMRC enquiries

surely the point is that we all want to get something that can robustly be defended anway in which case an enquriy should be as much hasle as a routine vat visit - I think for once we all may be roundly in agreement even if it may not seem like that. justify what you have and be able to defend that and its job done.

I would agree one needs to know the technical detail here

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Replying to Paul Crowley:
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By rmillaree
14th May 2024 10:09

Never had a challenge on wages put through the PAYE system.

i can guarantee if it came across enquiry officers desk and there was 100k of income with wife providing speciality consultancy services and husband doing "basic admin dtuties only" - and there was salary each of 50k (to avoid h rtae tax) that they would enquire. We for one never put ourselves in position where clients are clearly the wrong side of this line as the rules are reasonably clear cut are they not. worst of both worlds if the extra paye tax has been paid and there is no tax deduction for that salary

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Replying to rmillaree:
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By Paul Crowley
14th May 2024 10:21

My clients tend not to take the P, and HMRC seem to have given up on old fashioned ordinary enquiry work.
Who would choose to have that level of salary over dividends? Leveling up the shares would be the first priority. Dead easy if just one share, jointly owned on setting the company up.

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By Tax Dragon
14th May 2024 05:48

Might HMRC argue that the fact pattern demonstrates that the director's remuneration is c£10k, the extra is for work as an employee, NMW/NLW legislation is then engaged - and breached in subsequent years? Might such an argument be strengthened if employee costs are attributed to work done as a researcher [not part of directorial duties]? In the alternative, that the 'bonus' director's remuneration is not attributable to R&D?

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Replying to Tax Dragon:
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By Matrix
14th May 2024 06:33

Thanks what do you mean by the last sentence?

The Directors have worked as unpaid researchers for years then. It is the reverting back that I am still thinking about, although there wouldn’t be huge benefit in HMRC recharacterising dividends as salary at current rates.

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Replying to Matrix:
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By Tax Dragon
14th May 2024 06:50

The "unless" at the start here: https://www.gov.uk/hmrc-internal-manuals/national-minimum-wage-manual/nm...

An office holder might also be engaged as a worker/employee.

Is there a tension between attributing salary costs to R&D and saying that those salary costs are not for services provided as such a worker (ie not subject to NMW)?

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Replying to Tax Dragon:
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By Matrix
14th May 2024 07:14

Potentially. But then if NMW is applied prospectively then why not retrospectively?

Will have plenty of time to think about this before any R&D claim and a lot could change in the meantime.

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By kim.shaw-and-co.com
14th May 2024 11:20

I've never known R&D activity to be linear in terms of inputs from one year to the next. Nor any prohibition on applying NMW/NLW to a contract of service based on hours spent working in the performance of those particular duties (as separate from the duties of a statutory office).

What's needed is proper record-keeping, timesheets etc. for the R&D-related work done. No need to record time spent otherwise than in the performance of same remunerated outside of the NMW/NLW framework.

The question then is whether the relevant parties can be bothered to evidence their approach or whether it's all too much hasstle for any potential tax savings in point.

If relevant costs are eligible then they are eligible and if not they are not. The requirement to evidence that they are is the responsibility of the relevant claimant.

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Replying to kim.shaw-and-co.com:
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By Matrix
14th May 2024 12:08

Thanks, yes the R&D changes each year and they would have to keep records anyway.

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By FactChecker
14th May 2024 16:08

"What's needed is proper record-keeping, timesheets etc. for the R&D-related work done. No need to record time spent otherwise than in the performance of same remunerated outside of the NMW/NLW framework."

Totally agree ... but with one additional caveat.

If, as OP indicates (and is common in small companies), the nature of the R&D varies from year to year - and indeed there may be more than one project running concurrently during one or more of the years - then those timesheets really need to be in units of more than just the 'hours in performance of R&D work'.
Personally I go for overkill ... every project has its own code, and each code has its own sub-projects/activities, and each of those has both a set of planned start/end dates and a resource 'budget' (in hours).

So, whilst I agree that there's no need to record time outside of any R&D projects (whilst as you say keeping an eye on NMW/NLW), the time being claimed should be attributable to progress/activity within a specific project.
It's not complicated IF the project is planned in the first place as an R&D project ... but considerably harder if the figures are being created post-hoc for a claim.

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