business support – Tax
Employee Benefits can be taxing I recently met a pleasant couple who ran their own business. They understood how to run their business profitably, although openly admitted they were unsure of financial accounts and tax. As they put it “we always thought our accountant looked after these things”. They had been unfortunate enough to receive a visit from the PAYE compliance arm of HM Revenue & Customs. The selection of these types of visit tends not to be random. Often they stem from information provided to HM Revenue & Customs which is inconsistent, strange or wrong. A common area for error will be a P11D form, which returns the benefits provided to an employee. My average couple had a problem. Their visit had arisen from an incorrect return which turned out be a genuine mistake. However, in the brief meeting we had I discovered various issues, most of which the owners did not really understand and felt they had been let down by their accountant. Regardless of the blame, there was a lack of understanding and several glaring errors had been made. Their business traded as a limited company and the shares were owned by various family members. In a rush to obtain a National Insurance saving they, like many other small limited companies, had used dividends to reward working shareholders as an alternative to paying them a salary. There is nothing wrong with paying a dividend if done correctly. However, they had been advised that some shareholders should waive their right to a dividend in order to divide profits tax efficiently. Further the dividends were paid weekly as part of the payroll and no paperwork produced recording the dividend paid. A bigger red flag could not have been waved at HMRC. By paying weekly dividends the payments could be determined to be remuneration. The company will have to pay the underpaid national insurance, penalties and interest. HMRC will, as a matter of course, go back up to four years checking for similar errors.
Unfortunately, it did not stop there. Other problems were apparent with the calculation of company car benefits. A second hand car had been bought and the benefit calculated using the purchase price rather than the list price of the car. Tax was due by the director and Class 1A National Insurance by the company. The directors had also borrowed money from the company for a couple of months to purchase a flat. Although the loan had been repaid the directors had received the benefit of an interest free loan. The beneficial loan interest should have been returned to the HMRC as an employee benefit in kind. This was 3 years ago so back tax, interest and penalties would apply. Although yet to be resolved the cost is likely to run to thousands of pounds and seriously affect the cashflow of the company. The advice to be learned by any business is that cutting corners to save tax does not pay off. HM Revenue & Customs are watching you and the information you submit. Once an enquiry is made any errors or mistakes found in previous years will be costly to your business. Provided by Andy Ritchie, partner at the Perth Office of Campbell Dallas LLP, Email: andrew.ritchie@campbelldallas.co.uk, Tel: 01738 441888, Web: www.campbelldallas.co.uk.
Andy Ritchie Partner Dallas Campbell
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THE PERTHSHIRE CHAMBER OF COMMERCE BUSINESS MAGAZINE • SUMMER 2012 www.perthshirechamber.co.uk