Any Answers Answered: Private health insurance and Form 17

Close up of a medical insurance form
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This month TAXtv hosts Giles Mooney and Tim Good tackle AccountingWEB reader queries on the treatment of private health insurance as part of an HMRC enquiry and Form 17.

To watch the full video of Good and Mooney answering readers’ questions, click here or scroll down to the bottom of the page.

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Treatment of private health insurance

The first question on the agenda was from AccountingWEB member 0098087, who is dealing with an HMRC enquiry into one of their clients. The tax authority has decided that private health insurance, which the AccountingWEB member has treated as directors’ loan account and subsequently dividends, should be treated as earnings.

“Of course clients won't listen when told not to pay private bills out of the business account,” said 0098087, “how do we get around the above?”

Giles Mooney began his answer by expressing concern about the way the private health insurance has been dealt with.

According to Mooney, there are two different ways of doing the same thing, one resulting in a tax charge and one not. “The question asked here,” said Mooney, “is are the Revenue right to argue this private health insurance should be treated as earnings?”

Tim Good picked up on the question’s final sentence as a tacit admission that the director/shareholder has arranged their own medical insurance, but instead of paying the premium personally got their company to stump up.

Good pointed to a comment on the thread from another AccountingWEB member, John R, which gets to the nub of the matter: “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.”

To sum up Good added: “If an employer meets the pecuniary liability of an employee, then that is a trigger for PAYE and NI at the time the payment is made. So you can’t have directors taking their personal electricity bill into the company and saying to the bookkeeper ‘pay this for me’. It doesn’t matter what the double entry is, the payment of that bill is meeting pecuniary liability of the director and that triggers PAYE and NI at that point.”

Good and Mooney went on to discuss how this issue would then be settled, which you can see from around the three minute thirty mark on the video.

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Form 17 property income

The other question looked at was from Pete57 and related to Form 17.

“As I understand it,” wrote Pete57, “Form 17 allows you to change the underlying beneficial interest in a property to change the rental income proportions to enable profit shifting between man and wife or any other parties.”

Giles Mooney highlighted this question as an example of how people keep getting Form 17 wrong.

“Form 17 was introduced when independent taxation came in back in 1990-91,” Tim Good added. “The default position where property is jointly owned is that each of the husband and wife takes a one-half share in the income.

“That default position can only be replaced using an actual split that’s not 50-50 if, first, we are looking at property that is beneficially owned other than 50-50, so with real property there would need to be a declaration of trust, unless the property has been conveyed into their names as tenants in common with shares other than 50-50.

“So first we’ve got to have the actual beneficial interest being not 50-50,” continued Good, “and second, if it’s husband and wife, the default position will still be 50-50 unless they complete Form 17.”

According to Good, Form 17 is not available to anyone other than married couples or registered civil partners. It is not available to siblings, family friends or business partners. It is only available to married couples and civil partners, and only if that Form 17 is submitted should the income on their individual tax returns then follow the actual benefit interests.

 Mooney and Good then ran through a number of examples, which are available at around the seven-minute mark on the video.

Full video

For the latest episode of TAXtv visit PTP Interactive. TAXtv is a monthly tax update programme available as an annual subscription from £199, (11 issues plus special editions) to view online, download from the internet or watch on DVD.

About Tom Herbert

Tom is acting editor at AccountingWEB, responsible for all editorial content on the site. If you have any comments or suggestions for us get in touch.

Replies

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16th Oct 2017 09:54

Why can't I find the video?

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to JCresswellTax
16th Oct 2017 10:29

Hi JCresswellTax,

Thanks for the comment. Can you see the video now? It should be at the bottom of the page.

Tom

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to TomHerbert
16th Oct 2017 14:00

Yes it's there now thanks.

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By owlcott
16th Oct 2017 12:01

PHI question - as I am no longer in practice, I may have missed something but, surely, if there is a pre-existing credit balance on the DCA, which may be made up from taxed income such as dividends or salary/fees etc, the PHI premiums are simply a part withdrawal of amounts already due to the director?

I quite see that it might well be different if there is no credit to draw against.

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to owlcott
16th Oct 2017 12:53

Very interesting issue that has been brought up there as we all frequently see clients using the company account as an extension of the personal account and this is something we can now refer to to hopefully reinforce the advice that business is business and personal is personal.

However, assuming a salary has been declared at some level then I'd be trying to argue that, effectively, salary payments already declared cover this with other funds then going to the loan account (imagining that the salary declared has simply gone to the loan account as well).

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16th Oct 2017 12:45

HMRC's argument is that it's taxable because they want it taxed.

What is actually happening is rather than the director take the money out of the company (as he is owed money by the company and it's profitable so he is free to do so) and pay the bill personally he just pays it from the company. He's shortening the steps. HMRC's argument is that this makes it liable to PAYE as settling a pecuniary liability.

I'd agree with HMRC if the director has no balance to draw on.

If the director has money to draw on then he can withdraw that money however he wants- as long as it is treated as a withdrawal then no tax can be applied. Whether that is to pay for whatever bills or goes into his bank account is just a step along the way.

The purpose of the payment is to reduce the director's loan to the company. What it is spent on by the director is not material, it's his money.

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By owlcott
to Ian McTernan CTA
16th Oct 2017 12:58

It seems we are in agreement - thank you!
And you have explained my thoughts so much better than I!

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to owlcott
16th Oct 2017 13:50

I totally agree as well but this has led me to look into the rules closer and, firstly, it's amazing that there is so little discussion on this even looking at guidance of director loan accounts from larger firms they only really talk about s455 tax on overdrawn loan accounts.

I'd guess the issue is to make sure that the loan account remains in credit - client's who, perhaps, are in the habit of giving themselves the dividend at year end to mop up what went before are surely at the riskier end even if they end up year end in credit.

Then I see this https://www.gov.uk/hmrc-internal-manuals/enquiry-manual/em8505 which actually confuses the position even more e.g. in the example here, if the company claimed tax relief on the medical insurance then, fair enough I see the issue. However, if it was debited to the loan account in the first place then what is the problem as even this HMRC guidance makes no distinction between a loan account being in credit or overdrawn..... the focus instead seems to be on the company claiming tax relief on the expense.

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17th Oct 2017 12:49

Not sure I agree on the PAYE point, but the analysis for NIC is certainly correct in respect of personal pecuniary liabilities (assuming the loan account was not already in credit by enough to cover the premiums debited).

PAYE has never been applied to paying an employee's bills directly to a third party - the regulations only apply to payments 'to' the employee, unless one of the anti-avoidance rules applies, which would not seem to be the case here. The regs recognise that an employer can't deduct a % of a payment to a third party just because it's taxable income, and they don't require gross-ups: the payments go on a P11D, in a non-Class 1A box.

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17th Oct 2017 18:25

Mea culpa!
David Heaton is of course right. I should have said that meeting an employee's pecuniary liability counts as earnings and triggers the NI liability, but it does not trigger PAYE. The employer cannot operate PAYE on payments to third parties.
See https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim00590 for further clarification.

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