HMRC’s basic premise is that where a company pays a personal bill, there will be tax and National Insurance implications unless the expense is work related, incurred ‘wholly, exclusively and necessarily’ for the job.
How the tax is accounted for and whether it is solely the employee who is liable to NI or both the employer and employee who are liable will depend on whose name the bill is made out to and who pays the bill. If the employee arranges for the goods or services in their own name with the employer paying the bill then the employer has discharged the employee’s debt. Payment is deemed as ‘salary’, treated as a benefit in kind for tax purposes and liable to both employers’ and employees’ NI. Strictly, the employer should deduct tax as if the employee had been paid in cash but as tax cannot be deducted from a payment made to a third party, the payment is treated as a taxable benefit-in-kind. The end result is that the individual may suffer both income tax and NI, whilst the company pays employers’ NI, on the same amount, exactly as if the employer had paid the employee cash. Whether a tax charge is levied will depend on the type of expense. Certain professional memberships are allowable, for example, tax-free to the employee and allowable in the company’s expenses. Any NI is accounted for in the tax month the bill is paid on the employee’s behalf.
In comparison if the purchase is made in the employer’s name on the employee’s behalf, then it is a company expense. It will also probably be a benefit-in-kind assessable on the employee again declarable on a P11D. However, unlike other benefits in kind, there will be no employees’ NI although NI will be payable by the employer.
The position where the company pays a director’s private bill will differ depending on whether the director has a contract of employment. If there is one in place then the above points apply as the director is an employee. However, if payments, made to or incurred on behalf of a director, do not form part of their remuneration package, then the payment could be set against the director’s loan account. HMRC accepts this overrides the treatment as a benefit in kind and, in most situations, the employers NI as salary. Instead, it becomes a debt that needs to be repaid at some time. Repayment can be by debiting salary/bonus, a dividend or the director repaying the payment made.
These amounts may not be an allowable company expense and therefore not be deductible for corporation tax purposes if they do not form part of a remuneration package. Generally, the tax value of a benefit-in-kind is the cost to the employer.
Sometimes the company owes the director money because the DLA is in credit, possibly because the director lent the company money on start up. If the director requires the company to apply some of those funds to settle a third party debt then the payment does not arise out of the director’s employment rather, it is a loan and therefore not subject to tax or NI.
Partner note: EIM20000; s 203(2) ITEPA 2003