2 questions in one really, namely;
From 6th April 2016 sole director / employee companies will not be able to claim the employment allowance but will 2 or more where all directors are employees be able to claim the allowance.
Secondly is there any issue with sole director / employee plus an employed spouse.
Thanks
Replies (26)
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A good question
I believe the addition of a second director would mean the employer would qualify for the allowance. My question is what if that director is the other director's spouse? I cannot believe that we simply ask our clients to appoint their spouse as director to get the allowance. But maybe that is the case. Does that second spouse director have to be paid aswell? If so how much? Is I have asked this question several times and not got a definitive answer.
George's Car
George obviously thought this one out on his way to the House of Commons.
I've seen some poor legislation in my time but this has more holes than a string vest.
I don't think so
Has the legislation been published?
I agree that you cannot come up with an answer based on a politician's announcement and some initial commentary at the time. You need to see the legislation, which will presumably be in the form of an amendment to NICA 2014. However, that currently says "Status: This is the original version (as it was originally enacted)". I am not sure if this means that there have been no amendments enacted or that they have just not got round to implementing any amendments, but if so, there is not the usual drop-down header about amendments that have not yet been implemented. I can see nothing about this (or the proposed increase to £3,000) in the Finance Bill, which is currently in the House of Lords, nor any other separate bill for NI which contains anything about the Employment Allowance. I assume that this amendment will require primaty legislation rather than just a statutory instrument.
So, unless someone knows otherwise, we shall just have to wait and see.
Frankly ...
... I cannot see the point of it.
The saving will only be two or three hundred pounds on average as sole director/employee companies do not pay large enough salaries to collect the whole £2000 (£3000) allowance: the pay off is not worth it - you are swapping 7.5% tax on dividends for 11% NI on salary
Agreed but
If the client pays £2500 more salary because he gets the EA to use up his £11k PA he gets 88% of this - £2200. It costs his company £2k after CT
If he doesn't get the EA he would pay a dividend of £2378 to receive the same £2200
So it costs him £378 per year by not claiming the EA - and he has the added hassle of having to pay NI to HMRC (and we have hassle reconciling his payments at the end of the year).
Having said this don't we have a duty to try and offer this £378 saving if all we need to do is appoint a spouse director?
You miss-understood me ...
If the client pays £2500 more salary because he gets the EA to use up his £11k PA he gets 88% of this - £2200. It costs his company £2k after CT
If he doesn't get the EA he would pay a dividend of £2378 to receive the same £2200
So it costs him £378 per year by not claiming the EA - and he has the added hassle of having to pay NI to HMRC (and we have hassle reconciling his payments at the end of the year).
Having said this don't we have a duty to try and offer this £378 saving if all we need to do is appoint a spouse director?
I tell clients the two options and let them decide, some take it, some don't.
What I meant was I can't see the point in "cracking down" on it, the loss to the treasury is piddlng from this "abuse" and will probably cost more to police than it will raise!
Director = tax return
note that by adding spouse as a director - spouse may be required to file tax returns [ costs..] if they are not already filing
Not wishing to be rude
Tim Vane, but this suggests otherwise.
https://www.gov.uk/self-assessment-tax-returns/who-must-send-a-tax-return
Is this a wind up?
Tim Vane, but this suggests otherwise.
https://www.gov.uk/self-assessment-tax-returns/who-must-send-a-tax-return
David
Tim Vane, but this suggests otherwise.
https://www.gov.uk/self-assessment-tax-returns/who-must-send-a-tax-return
HMRC are wrong, Tim is right. The problem is that HMRC won't accept that they're wrong. So they issue notices to file. Which from that point on means that directors do have to file even though HMRC are wrong.
Exactly
Tim Vane, but this suggests otherwise.
https://www.gov.uk/self-assessment-tax-returns/who-must-send-a-tax-return
HMRC are wrong, Tim is right. The problem is that HMRC won't accept that they're wrong. So they issue notices to file. Which from that point on means that directors do have to file even though HMRC are wrong.
If you get a notice to complete, you must complete. In that sense, it's HMRC's opinion that counts.
Tim
To be fair kiwilondon did say 'may be required'. Which could be taken as shorthand for 'HMRC may decide to issue a tax return'. Which means the individual is then obliged to file. Unless you get into an argument with HMRC about withdrawing the notice to file, which gets very tedious as they are convinced that they're right.
At the moment that's the case
In a recent course on the new Finance Act it was stated unequivocally that under the new legislation, as it is just now, a one man company can add their spouse as a director and they will then qualify for EA.
They also stated however that the expectation was that before April 2016 this loophole would be closed and there would be a specific exclusion for such a situation, though nothing saying as much has been published yet. That's little better than hearsay but it's what my colleague on the course was told and it was stated it had come from a reliable source.
Apologies to all. I had no wish to restart "that" debate so I should have let it go. Let's move on.
@Duggimon - who ran the course? How an earth can somebody state anything unequivocally before legislation has even been published? Did they cite sources or just charge a fee for spouting guesswork?
@ David Beaumont
This has been done to death on here. There is absolutely no statutory requirement for a Director to file a return. Just because it is on HMRCs website does not make it a legal requirement.
Sorry all...
This has been done to death on here. There is absolutely no statutory requirement for a Director to file a return. Just because it is on HMRCs website does not make it a legal requirement.
As I posted I didn't mean to be rude it was just that I remembered that bit of HMRC guidance. I get the feeling this has been debated many times before and as a relative newcomer I wasn't part of the debate.
At a ATT course recently.
It was suggested that this may be amended. The wife or husband can be just a salaied individual to qualify rather an appointment as a director.
Telling client the options
Yes I currently offer my clients the option to save £378 (or whatever it currently is) per year and yes most take it. But of course I need to know whether they even have an option (ie can they just appoint a spouse to qualify for the EA?) next tax year. It seems I will just have to wait and see if this loophole is blocked as expected.
If a spouse was appointed as an employee but not a director I worry about whether a) the company then needs to be brought into the auto enrolment criteria or b) HMRC could challenge the payments because no office is held. I also prefer a directorship because it is exempt the minimum wage legislation and the NI is considered annually not monthly giving more flexibility
So the answer to your question is...
We tell the clients that as it stands at the moment the appointment of your spouse as a director is a good idea and likely to allow you to claim the allowance and this is a good idea.
However she will have to do some work to justify the salary, so you should keep a note of this. The cost of appointing your wife as a director is £175+vat, would you like us to proceed.
She also needs to be a shareholder and you should move 50% of the shares to her ( tax free) Our cost £280+vat for completing the J30
She will require a tax return to scoop up her salary and the dividends she gets and the cost of this is £300+vat.
You will be able to pay yourselves both an extra £5k a year salary. This will save £1000 in corporation tax. It will cost you 11% NIC ie £550 but overall you will be better off by £450 plus the high rate tax saving on the dividends ( 5k) and the tax on the other £8k or so salary ( £3200) So for a small investment in accountancy costs there will be substantial gains.
However there is some talk in financial circles that the EA will be withdrawn for sposal companies and if this happens we can then adjust the set up you have at the moment if needs be for £200+vat to carry on optimising your position as the tide changes.
That pays for tonights curry n'est ce pas?
I digress
A couple of related points: (1) In my experience it is not a good idea to have a one-director Company in case he/she dies which can lead to problems. (2) Where a director is a shareholder but doesn't currently complete a tax return but will once the dividend tax kicks in, there are potential problems. When registering to file SA Returns don't complete 'date became director' section. If you do HMRC will request Returns backdated to that date!
Just an announcement
To confirm @Euan's comment, no law or even draft law has been published, it was just an announcement and mentioned in the Summer Finance Bill press release as something that would be legislated for at a later time.
As a lecturer on the tax circuit, I wouldn't be bold enough to state unequivocally that by employing a spouse would be sufficient in its own right to qualify for the EA without seeing the law.
Maybe we will find out more at Autumn Statement time.
Malcolm
A big deal ?
Is it such a big deal anyway ?
Most single director companies will only be paying a few quid in Employer's NI anyway.