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HMRC internal manual

Enquiry Manual

HM Revenue & Customs
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Close Companies: Directors: Private Expenses

In close companies, there is a strong possibility that the business will be used to pay private expenses of the owners. Standard Accounts Information forms part of the self-employed pages and the self-employed have to add-back the non-business element of expenses in their return. However, a company as a separate entity from its directors can legitimately pay expenses on their behalf as part of the remuneration package. It is not objectionable for private expenses to be categorised as remuneration provided these expense payments are properly treated in the books and accounting requirements for the disclosure of directors’ remuneration are satisfied.

Accounting disclosure requirements for directors’ remuneration include sums paid by way of expense allowance and estimated money value of other benefits received other than in cash. The money value is not the same as the taxable amount though this is often used in practice. Thus there is an onus on the director to justify why amounts not disclosed in accounts should be accepted as part of the remuneration package rather than debited to his loan account.

You may encounter a claim that directors’ expenses uncovered during an enquiry will be made good by a debit to the loan account. Often though, the benefit is also chargeable as money’s worth under ITEPA03/S62 to which making good does not apply. If retrospective making good is sought after the amendment window for the ITSA return for which the benefit arises (and the director’s return is not under enquiry) you should make a report with the file to Contact Link.

The resulting benefits should be returned on a P11D by the company and by the directors on their returns. Liability to National Insurance Contributions (NICs) on the company as well as Employment Income Tax liability on the director arises since 2000/2001 on practically all benefits. Guidance on the Employer Compliance aspects is at EM8250. Where expenses are not part of the remuneration package these must be debited to the director’s loan account.

In practice there are rarely precisely defined contracts between directors and their close companies. Moreover, it is widely accepted behaviour among close company directors to draw on the company bank account for certain expenses. These are often not distinguished, or can be mis-described, in order that the company’s auditor or accountant and you will not discover them. You should therefore always check directors’ private expenditure when undertaking a close company full enquiry. When opening the enquiry details of what has been charged to loan account should be requested. Unless these and the expenses returned on P11Ds appear comprehensive, you should include in your records examination a check to see what might not have been dealt with correctly.