A company may not deduct expenditure in computing its taxable profits unless it is incurred wholly and exclusively for the purposes of the trade (S54 Corporation Tax Act 2009). 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, pay for personal expenses of the directors. It is important to note that 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. In such circumstances it may be appropriate for these items to be set against the director's loan account. Establishing whether a payment forms part of a director's remuneration package can be complex.
In close companies, there is a strong possibility that the business will be used to pay private expenses of the owners. Standard Accounts Information forms part of the self-employed pages and the self-employed have to add-back the non-business element of expenses in their return. However, a company as a separate entity from its directors can legitimately pay expenses on their behalf as part of the remuneration package. It is not objectionable for private expenses to be categorised as remuneration provided these expense payments are properly treated in the books and accounting requirements for the disclosure of directors’ remuneration are satisfied.
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 though this is often used in practice. Thus there is an onus 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 loan account.
Inspectors may encounter a claim that directors’ expenses uncovered during an enquiry will be made good by a debit to the loan account. Often though, the benefit is also chargeable as money’s worth under ITEPA03/S62 to which making good does not apply.
The resulting benefits should be returned on a P11D by the company and by the directors on their returns. Liability to National Insurance Contributions (NICs) on the company as well as Employment Income Tax liability on the director arises since 2000/2001 on practically all benefits. Guidance on the Employer Compliance aspects is at EM8250. Where expenses are not part of the remuneration package these must be debited to the director’s loan account.
In practice there are rarely precisely defined contracts between directors and their close companies. Moreover, it is widely accepted behaviour among close company directors to draw on the company bank account for certain expenses. These are often not distinguished, or can be mis-described, in order that the company’s auditor or accountant and inspectors will not discover them. Inspectors will, therefore, always check directors’ private expenditure when undertaking a close company full enquiry. When opening the enquiry inspectors will ask for details of what has been charged to any loan accounts. Unless these and the expenses returned on P11Ds appear comprehensive, inspectors will include in their examination a check to see what might not have been dealt with correctly.
This toolkit broadly covers expenses that do not form part of a director's remuneration package. Where a company makes payments on behalf of a director which forms part of their remuneration package reference should be made to the relevant guidance contained within Employment Income Manual (EIM).
For further information on errors that HMRC find commonly occur in relation to expenses and benefits from employment see Expenses and Benefits from Employment Toolkit.
