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HMRC enquiry

All directors loan account items as PAYE

We have had a enquiry from HMRC re one of our clients and they have decided that private health insurance which we have treated as directors loan account and subsequently dividends should be treated as earnings. In addition most of the motor expenses they want to treat as earnings rather than added back to the corporation tax computaton.

 

Of course clients won't listen when told to not pay private bills out of the business account. How do we get around the above?

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28th Sep 2017 09:21

Tell HMRC to whistle. Presumably the director's have paid tax on the BIK arising from the beneficial loan, and the company has paid S.455 tax on the OD loan account.

Tell HMRC that if they want to tax it as income, then the company will require an immediate refund of S.455, and the directors will require a credit against any arising liability for any BIK in years where the DLA no longer exists.

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By 0098087
to SteLacca
28th Sep 2017 09:34

Was no benefical loan. Was treated as dividends.

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28th Sep 2017 09:44

You should probably start by explaining the double entry as often the officers don't understand that.

Demonstrate the entries that have been posted to the directors loan account

Explain they are cancelled by the dividends (produce the relevant vouchers if you have to)

Etc etc

Bookkeeping time, take baby steps, assume (probably correctly) they don't understand how director's loan accounts work. Show all your workings and your problem should go away.

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28th Sep 2017 09:51

Yes; just about the only thing the SC got right in the recent Rangers SC court case was the clear distinction in tax treatment of BIKs compared to PAYE/NIC'able earnings.

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28th Sep 2017 09:56

Was there any dividend paperwork?

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By mrme89
to andy.partridge
28th Sep 2017 09:59

If it hasn't, it can just be written up now. It'll be grand.

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By 0098087
to mrme89
28th Sep 2017 10:00

We can sort it out if they ask for it

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to 0098087
28th Sep 2017 10:12

The dividend is not the issue here, though, is it ?

This is, presumably, a PAYE visit.

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By 0098087
to lionofludesch
28th Sep 2017 10:21

yes it was a PAYE visit

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28th Sep 2017 10:14

Just one point of caution - Between whom was the contract for the PHI?

If InsCo and Co - HMRC are right, albeit the premiums are BIK, not actual wages.

If InsCo and director - HMRC talking out of backsides.

I disagree that private motoring can be added back in the CT computation. Again, much depends on whose car it is but, on the inferences I draw, I'm thinking DLA at the moment.

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By 0098087
to lionofludesch
28th Sep 2017 10:10

It was not a company scheme for the private health.

And yes, we can adjust the motor through the directors loan as well.

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By mrme89
to 0098087
28th Sep 2017 10:13

The motor. Who owns it? The director or the company?

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By 0098087
to mrme89
28th Sep 2017 10:21

The director

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to 0098087
28th Sep 2017 10:34

OK, I agree with your treatment of the PHI but not the motor expenses.

They are DLA too and need covering by dividends, salary, s455 or - heaven forbid - the director actually paying his owsn car expenses.

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to lionofludesch
29th Sep 2017 19:34

Isn't debiting the premiums to the loan a/c 'making good', if the policyholder had been the company?

I agree with you about the motor expenses. Companies don't have a private life and therefore can't have private motoring. Not claiming a CT deduction does not stop the expenditure from being remuneration or a bik.

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By John R
28th Sep 2017 10:33

It seems that HMRC have taken the view that the company has settled a pecuniary liability and that therefore PAYE should have been applied at the time of payment. See eim00580.

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By 0098087
to John R
28th Sep 2017 10:41

Yes have read that info.

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to John R
28th Sep 2017 11:05

It seems so and that view is, in fairness, supported by the treatment in the accounts, albeit the cost has been added back.

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02nd Oct 2017 10:31

.."and subsequently dividends"..

No-one, so far, as addressed the question of creating dividends retrospectively, which I have always understood to be a breach of company law?

..or was MrMe being sarcastic?

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02nd Oct 2017 10:35

You can't just 'treat them as dividends' - paying a liability on behalf of an employee/director creates a liability for both tax and NIC. If you want to treat it as cancelled by a dividend then you need to create a dividend, not treat it as a dividend. Furthermore you cannot treat a payment retrospectively as if it was a dividend and create the paperwork trail that didn't exist in the first place (unless that suggestion was ironic of course!) if you did that would be fraud... sounds like a badly advised client situation here...

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02nd Oct 2017 10:59

As said above, the argument here is pecuniary liability.

HMRC think the company has paid for director's personal bills (which it has).

You are saying, yes, the company paid for these, but the director then repaid the amounts due to the company (by way of his director's loan account).

You need to convince them the amounts were repaid and should not be taxed under the pecuniary liability rules.

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02nd Oct 2017 11:08

This is not a simple question.
The books have to show that there was sufficient balance due on directors' account to cover the benefits, and the dividends.
I once had a clever inspector who asked to see weekly cash flow sheet and bank statement.
It was clear from these documents that at certain times there could not have been sufficient funds in the director's account to cover the drawings as they arose. This even though the Annual accounts appeared in order.
Also, you do not say whether the director received any PAYE salary for his services. If he did not HMRC might claim avoidance of NI and PAYE.

money

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02nd Oct 2017 11:13

Sadly again lazy directors not posting properly and then leaving the accountant to sort out the mess. Hopefully the director will now pay these items from his personal account in future.

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