Don’t make it personal

In carrying out bookkeeping for clients, we often find directors using the company credit card or bank account to make payments for personal expenses. Whether it’s a meal out on Saturday night, payment for the family holiday or some new furniture for the home, there’s a compelling reason why they shouldn’t do this.

Because the expenditure is personal, we’ll allocate it to the director’s loan account – just as if the director had made a transfer of funds from the company to his personal account and then paid for these items personally. However, HMRC recently tried to argue that these payments were additional salary, on which the company should have accounted for PAYE and both employee’s and employer’s national insurance.

The correct position is that a payment made by a company on behalf of the director to a third party, to settle a personal liability of the director, is a benefit in kind on the director. It’s not subject to PAYE but, unfortunately, it does count as salary for national insurance purposes and so it should be subject to both employee’s (12%) and employer’s (13.8%) national insurance. The only correct way to avoid the national insurance trap is for the personal bills to be invoiced to the company rather than the director, as this way the company is settling its own bill rather than the director’s.

Several complications arise, as you can see, where company funds are used to pay for private expenses of a director. The simplest way to avoid this (and a potentially expensive national insurance bill) is to simply not use company funds in this way. If, as a director, you need to pay for something which is private, it’s better to use your private bank account or personal credit card. If this means drawing a little more from your company each month, so be it. It’s much cleaner to do this.

Start typing and press Enter to search

VAT DownloadedSpousal Profit Sharing