Understanding the relationship that a director/shareholder has with his/her company is critical if errors in operating the business, and unnecessary tax charges, are to be avoided. The main things to keep in mind are as follows.
The company’s cash belongs to the company.
Some people operating their business fail to understand that they must not spend company’s cash on personal items, and this is especially true if they are the only person involved. Unfortunately, to do so could amount to a loan from the company to the director. Not only is this illegal under the Companies Act but may also:
- Amount to a distribution, resulting in a Corporation Tax charge on the overdrawn amount.
- Result in a income tax being payable on the benefit-in-kind unless interest is paid by the director
- Erode the protection of limited liability, resulting in the director incurring a personal liability for the company’s debts
To avoid this, the company can pay some mix of salary and dividend to the director/shareholder, although the company must always consider the legality of any dividend paid.
The company’s assets belong to the company.
If the director/shareholder uses the companies assets for their personal use then they may incur an income tax charge on the resulting benefit-in-kind. The most common and expensive example of this is the provision of a company car and fuel. There are published rates which set the taxable benefit if a car and/or fuel is available for private use, and in most cases these are at a punitive level. Another example is the provision of a residence to the director/shareholder. However, personal use of any asset will, with minor exceptions, result in a benefit-in-kind.
The director’s personal liabilities belong to the director.
If the company pays a bill which belongs legally to the director then this is not charged to income tax as a benefit. Instead, it is the company meeting a “pecuniary liability” of the director. This is specifically subject to PAYE, and gives rise to a charge not only to income tax but also to nationai Insurance. The most common example of this happening is the cost of telephones, especially if the company operates from the director’s home. The contract is often between the telephone provider and the director. Even if the telephone is used for company business, however, this results in a potential problem if the company pays the bill.
WatkinsonBlack are pleased to advise on these and other matters. They have considerable experience in these and other matters, including providing a very cost-effective payroll bureau service. If you want to arrange a no-obligation initial meeting on any taxation or accounting matter then please contact us. Please note that these ideas are intended to inform rather than advise and you should always obtain professional advice before taking any action.