As 31 March approaches, many companies will be getting ready to tie up tax matters for their financial year-end. Now is a time to ensure that everything is in order regarding directors’ expenses and review loan account record-keeping procedures. This is particularly so as HMRC report that they commonly find errors in relation to directors’ loan accounts when making routine reviews of company tax returns.
The statutory rules for computing taxable profits exclude companies from deducting expenditure unless it is incurred ‘wholly and exclusively’ for the purposes of the trade. As companies are separate legal entities that stand apart from their directors and shareholders they do not incur ‘personal’ expenses. However, many companies, particularly ‘close’ companies (broadly, one that is controlled by five or fewer shareholders), pay the personal expenses of their directors. Where payments, either made to or incurred on behalf of a director, do not form part of their remuneration package, these amounts may not be an allowable company expense and may not therefore be deductible for corporation tax purposes. In such circumstances it may be appropriate for these items to be set against the director’s loan account.
Accounting disclosure requirements for directors’ remuneration include sums paid by way of expense allowance and estimated money value of other benefits received other than in cash. The money value is not the same as the taxable amount, although this is often used in practice. This means the onus is on the director to justify why amounts not disclosed in accounts should be accepted as part of the remuneration package rather than debited to his or her loan account.
Where the expenditure forms part of the remuneration package it will be an allowable expense of the company and the appropriate employment taxes should be paid. Where the expenditure does not form part of the remuneration package the relevant amount will normally be debited to the director’s loan account.
Cash transactions between the company and directors may have tax consequences. A charge may arise where a director’s loan account is overdrawn at the end of the accounting period and remains overdrawn nine months and one day after the end of that accounting period (known commonly as the ‘section 455 charge’).
Proper records should be maintained of all cash and non-cash transactions between a company and its directors. Poor record-keeping may result in non-business expenditure incurred by the directors being incorrectly recorded or misposted in the company’s records and claimed in error as an allowable expense.
Voluntary disclosures top
HMRC have updated their online guidance on disclosing unpaid tax to include information on authorising an agent to deal with a disclosure made through the Digital Disclosure Service (DDS).
The DDS gives individuals and companies a chance to bring their affairs up to date in a simple, straightforward way. Anyone who owes tax on your income you must tell us about any unpaid tax now. Anyone who owes tax on income or gains must tell HMRC about any unpaid tax. They will then have 90 days to calculate and pay what is owed.
– How to make a voluntary disclosure to HMRC explains how individuals and companies not eligible for an HMRC campaign can make a voluntary disclosure to HMRC.
– Let Property Campaign: your guide to making a disclosure explains who can use the Let Property Campaign and how to make a disclosure to HMRC for unpaid tax. The online guidance has been updated to include details of a new form (form COMP1a), which can be used by clients to authorise agents to deal directly with HMRC about a disclosure made using the DDS. Agents should use the DDS to notify HMRC of a client’s disclosure.