Where should you invest your company money?

Discounted Gift Trust

A tribunal recently considered the tax consequences of a director investing company money into his personal bank account. The judgment didn’t go well for the director, but does this ruling mean this type of scheme can never work?
If you’ve been shopping around for the best place to invest your company’s cash you’ll have found that interest on corporate bank accounts falls short when compared to those offered to individuals. You could, like Mr Sweeny (S), a director of Mirror Image Contracting Limited (MIC), aim to solve this problem by paying company cash into your personal account. But what will the Taxman say? The Taxman doesn’t like it, but there’s nothing to stop a director holding money in their own name on trust for their company. However, as S and MIC discovered, this must be arranged in the right way because if you get it wrong the Taxman can clobber you and your company.

Tax options

When a director draws cash from a company the Taxman’s knee-jerk response is to say this counts as extra salary or a bonus. Or if the director was the only shareholder he might argue the money drawn was a dividend. Either way, there’s likely to be a hefty tax bill, and in the case of salary, NI as well. But in MIC’s case his approach was instead to claim the money was a loan from MIC to S. Although S transferred MIC’s cash into his own personal savings account he was saved from any attempt by the Taxman to treat this as income. The main reason was that the money remained untouched and that, although after the event, S had obtained approval of the arrangement from his co-director and shareholder. Had nothing changed, MIC and S might have won their case.

Personal use

The tax trouble started when S shifted MIC’s money again, this time to his offset mortgage account. In the judge’s view this meant the company’s money was being used to reduce S’s personal debt. Therefore, even if a trust existed the personal use of company money by S would have been a breach of this and so ended the trust. The judge therefore ruled that the transfer was a loan from MIC to S.

Successful trust accounts

The judge accepted that, in theory, a director can personally hold company money on trust, but that it ought to be held separately from the director’s personal funds. We’ve seen a few cases in the past where a bank was willing to open an account on this basis. But in these days of money laundering and other regulations banks might not be so willing; however, there’s no harm in asking. Even where you can get a bank to open a personal account with company money you’ll still need to convince the Taxman that this doesn’t count as a loan to you. What you need to do is:

  • obtain prior approval from the board or, to be doubly sure, ask the shareholders to pass a resolution approving the arrangement; ask them to agree a standing approval so you can move money from one personal account to another
  • keep the money in a separate account from your personal funds at all times
  • tell the bank what you’re doing.