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Tax expert warns against excessive remuneration. By Dan Martin

23rd Aug 2006
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Accountants should ensure their small owner managed business clients are aware of excessive remuneration for family members, a leading tax expert has urged.

The warning was made by lecturer Nichola Ross Martin during the latest AccountingWEB breakfast tax tutorial held in the lavish surroundings of the Law Society's headquarters in central London.

After enjoying morning coffee and croissants, the AccountingWEB contributing editor drew the attention of the 40 delegates in attendance to the rules to watch out for when advising SME clients on employee remuneration and benefits.

"HMRC is increasingly attacking the remuneration strategies of owner-managed businesses," she said. "Businesses and their accountants need to watch out for the fact that salaries are not excessive for the task in hand."

"Businesses and their accountants need to watch out for the fact that salaries are not excessive for the task in hand."

Nichola Ross Martin

Ross Martin warned there has been several tax court cases in the past which have denied excessive remuneration as a deduction in company accounts. She pointed out that when analysing cases whereby directors pay salaries to family members such as children, HMRC will look at the job that is being done.

"During one case, a judge pointed out that the court cannot interfere with a company's pay policy but it could look at that pay and disallow it for tax purposes and the employer's accounts," she said.

Since A-day employers have been able to make fairly substantial contribution into employees' pension policies. Ross Martin said the Revenue has "got wind that this change might be used by controlling directors and their families as a tax efficient method of paying lots of money and escaping national insurance contributions".

The tax expert added that the Revenue's first guidance on the issue caused uproar when it said the action would be disallowed if officials thought it was being done for tax avoidance reasons.

New guidance issued in March has calmed matters, Ross Martin said, but it is still an issue SMEs need to bear in mind.

"[The Revenue] will ask if the employee was employed at 'arm's length' would the remuneration package be the same size?"

Nichola Ross Martin

"The Revenue said it will examine the remuneration package in general. It will look at salary and any other benefits including pension contributions and ask is it commensurate with the duties undertaken?", she said. "It will ask if the employee was employed at 'arm's length' would the remuneration package be the same size?"

"Working this out is quite difficult for some small companies but hopefully it is the way the Revenue will measure employer pension contributions in the future," Ross Martin added.

Also included in the tutorial was guidance on SME employee benefits.

Listing her top benefits, Ross Martin said accountants should encourage their small business clients to look into providing bicycles which can be done so tax free as long as they are used mainly for qualifying journeys which are between home and the place of work, or between one workplace and another.

Providing lunch and staff parties was another top choice as was allowing employees to work from home which Ross Martin said is "one of the most underused staff benefits".

"The Revenue is very much aware we have a new breed of employees in home workers."

Nichola Ross Martin

"The Revenue is very much aware we have a new breed of employees in home workers," she added. "What is allowable and what isn't will depend on their status as in whether home working is mandatory for whatever reason or not."

Concluding her lecture, Ross Martin said: "Combining salary sacrifice with childcare and flexible working is the most efficient remuneration process of anything I have ever worked out."

For more details on future AccountingWEB events, click here.

Replies (10)

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By cwalker7
28th Aug 2006 09:49

Pensions again
So am I to understand that the Government and Revenue don't agree on pensions then?
The Government tell us we have to put more into our pensions (uh, because they've seriously fluffed their management of that one too...), but now the Revenue will penalise you for providing better pensions for staff.
Shame on them!!

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By baseline
23rd Aug 2006 16:26

I know of a cookie who buys Jaffa cakes instead of chocolate biscuits. Personally, I think its being done for tax avoidance reasons.

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By clarance.netto
23rd Aug 2006 12:52

home working
Ross Martins comments were noteworthy..
Where do you acess these allowable expenses and benefits..any clues on which IR homepage or manual?

How does one determine whether home wirking is mandatory?? Do we include a clause in the contract of employment??

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By Mike Bassy
24th Aug 2006 00:54

economic cycle
While accountants across the rest of the world are coming up with brilliant schemes to avoid tax, the British accountancy profession is advising clients a bicycle.

Isn't that just typical.

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By ronmorris23
24th Aug 2006 09:00

Bicycle perk
Can you recommend a dealaer who may be able to provide a bicycle to a man with one leg?
Free parking of course is another perk for the disabled!

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Nigel Harris
By Nigel Harris
23rd Aug 2006 17:01

Not that easy
I would love to cycle to work but the hills around here would kill me if the traffic didn't.

We have considered encouraging staff to cycle to work - they are keen, and the tax-free cyclists' breakfasts perk was a big attraction here - but having to create appropriate changing rooms and shower facilities made the whole project a non-starter. (Why don't bikes have proper mud guards any more?)

I bet someone out there has done a spreadsheet to work out if a company bike is worthwhile compared with the 20p per mile authorised tax-free rate for use of your own bike for business travel!

Don't forget employer-provided protective gear for cyclists is also tax -free. I'm just not sure about the heath and safety implications of providing staff with company bikes - are we liable if they get injured/killed? Do we need to provide training too? The implications are endless.

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By londonanalytics
29th Aug 2006 14:25

cycling, health and safety
If your company doesn't provide training or safety equipment for employees when they're out on business as pedestrians, is there any good reason why you should supply them for cyclists, given that cycling is, in much of the UK, safer per unit distance than walking?

NB be very careful about making assumptions as to what appropriate safety equipment is. In general, it may be better to provide guidance as to where to find out more information; do not provide specific equipment unless the user requests it, at their own risk. This applies in particular to helmets (the safety case for which is, at best, ambiguous); you're on safer ground with gloves and, it has been argued, panniers.

Your local council may well offer free or subsidised on-road training: it may be useful to point your employees at that.

For employees who know they want to cycle and who would cycle a reasonably large distance annually on (non-commuting) business journeys, the mileage allowance for their own bike use is probably most advantageous. For others, company pool bikes made available under the cycle-to-work initiative for combined work & personal use may be a viable and cost-effective solution, with bike maintenance outsourced to a local bike shop.

Disclaimer: this comment does not constitute professional advice.

Edit: For Ronald Morris - the "All abilities cycling guide", from Transport for London and the London Cycling Campaign, available at , covers cycling for disabled people.

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By Spoggle
23rd Aug 2006 12:33

Company bicycles
Are you serious? Company bicylces as a "top" benefit? I would be very interested to know whether anyone at all has taken up cycling to and from work for tax reasons alone.

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Chris Caspell CTA TEP
By ccaspell
23rd Aug 2006 15:45

I cycled to work once but I was put off the idea by some guy in a Ferrari flashing at me trying to overtake while I was in the fast lane of the M40! :)

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By davidtilsley
25th Aug 2006 11:17

Revenue's March Guidance on Pension Contributions
Can someone point me in the right direction for this - Nichola refers to it in her article.

Many thanks.

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