It is common for directors to be tempted to take money from their company’s bank account. One way in which they do this is through taking the money as a Benefit in Kind (BiK) and using it as an ‘interest free loan’. It is then thought that reporting the BiK on Form P11D and the director declaring it on their tax return is enough to satisfy HM Revenue & Customs (HMRC). However, this is not always the case as HMRC argues that any money paid to a director from the company should be treated the same as salary, and tax and National Insurance (NI) should be applied. In one such case the only director and shareholder of a company used his company’s bank account to pay a building firm carrying out an extension on his home. The director in question paid all of the money back to his company within the same tax year and declared the original payment as a BiK or loan. HMRC failed to see this as a loan, but as additional salary and therefore stated that PAYE tax and NI should have been applied. This began a tax inspection and despite various appeals HMRC did not back down and demanded PAYE tax and NI to be paid.
HMRC is able to argue this case as legislation states that any payment made by a company to a director that can be construed as “money or money’s worth” counts as pay and tax must be applied. This legislation has caught out many directors. Indeed, it is possible to semi-counteract the above statement by declaring any payment of a personal bill by your company as a BiK, but although this allows you to avoid PAYE tax, you must ensure NI is paid on the amount. The BiK is not a tax free loan.However, if you are looking to avoid tax and NI, all is not lost. For this to work, you must arrange for personal bills to be invoiced in your company’s name, which means the above legislation is void as the company is meeting its own debts and not yours. You then need to reimburse your company for the bills within three months after the tax year in which it was paid. This essentially means that the money will not be taxed as a BiK and you will have therefore received money from your company tax and NI free. HMRC have strict guidelines for tax avoidance so if you are looking to take additional money from your company’s bank account it is important that you do this correctly to avoid any implications later on.
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