Establishing whether a payment forms part of a director's remuneration package can be complex, especially for “close” companies where the company may pay for a director’s personal expenses.
As a rule, companies may not deduct expenditure in computing its taxable profits unless the expenses satisfy the test of having been incurred wholly, exclusively and necessarily in the performance of the duties of the trade (S54 Corporation Tax Act 2009).
Companies are separate legal entities that stand apart from their directors and shareholders and 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.
HMRC have produced very useful revised guidance covering the three tax years – 2013/2014, 2014/2015 and 2015/2016
The accounting treatment of these loans depends on which accounting framework has been adopted.
