Hi, if a directors current account has become overdrawn at year-end can it be cleared by the director issuing the company a fee for consultancy?
Assume this is taxable income to director?
Are there any other tax-efficient ways to resolve the problem? Salary and mileage at civil service rates are 2 I know of
Thanks
Hi,
Directors fees are subject to PAYE in the same way as salary.
Unless you are talking about the director invoicing the company. In which case the invoice would have to be raised by the director for goods or services provided as part of a trade entirely separate and distinct from the activities of the company, and at an arms length value. This would be very difficult to prove, particularly if you are talking about "consultancy", and I've never seen it actually accepted in practice.
As for mileage expenses at the civil service rates, these can and should be paid to the director, for all business mileage incurred by him. Payment of mileage expense should be substantiated by records such as diaries / logs containing the details of each business trip, date, location visited, purpose of visit, duration of visit, distance travelled etc... If you're asking if it's a good idea to just make up a contrived mileage expense claim to reverse the overdrawn balance, I doubt you'll find anyone here who'll advise you to engage in tax evasion.
The alternative you haven't mentioned is to just let the balance lie. The director has 6 months from the year end to repay the overdrawn balance, failing which the company is liable to pay over a withholding tax equal to 20/80ths of the overdrawn balance, when they file their Corporation Tax return.
This is only a withholding tax however, and the company can have it repaid to them (or take a credit for it against tax owing), in the period when the director repays the loan. So if you know that the director will repay the loan in the relatively short term, then the most tax efficient way to do things may well be to just pay the withholding tax and claim it back next year when the loan is repaid.
However, there is potentially a liability to tax on the company, if the loan is treated as interest-free to the director. In this case there is a PAYE liability, as the interest foregone is treated as a BIK on the director. This may still be preferable than the alternative; it means the company only pays PAYE on (say) 12% of the loan, rather than recording it as salary of the director and paying PAYE on the whole lot.