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Private Bills Paid By The Company – What’s The Tax And NIC Position?
By Lee Sharpe, March 2018
Lee Sharpe looks at a key issue affecting ‘directors’ loan accounts and similar arrangements. 

It is commonplace for company directors to have their personal bills paid by their own company. In some cases, the bill is paid by the company and then taken to the director’s loan account. This is not always as straightforward as it might seem.

A big difference
Many directors will have an arrangement with their own company that covers expenses such as golf club membership, private gym membership, home telephone bills, or similar. Sometimes it is written into the director’s contract, but in small owner-managed companies, this is quite rare. 

One of the most important points, which is frequently overlooked by businesspeople when taking out contracts (and which may be too late to ‘fix’ by the time the accountant or tax adviser finds out about it) is who made the contract; is it with the employee, or is it with the employer?

If the employer makes the contract, then it is a company expense and probably a benefit-in-kind assessable on the director/employee. If it is a personal contract, then the company may well be ‘settling an employee’s pecuniary liability.’ 

Pecuniary liability
This old-fashioned phrase effectively means that, if the employer steps in to pay something that the director/employee owes, then it is effectively settling the employee’s personal debt.


Example 1 – Corporate golf club membership


Jim, who is a director of his own company, telephones a golf club and explains that he wants to set up corporate membership for his company so that he can use the facilities as a nominated employee of his company.


The golf club sends the paperwork to Jim, but in his capacity as company officer. The paperwork is made out to the company and any agreement is between the company and the golf club. It may well still be Jim signing the paperwork, but he is not doing so as an individual. The company settles the payment by monthly direct debit.


Example 2 – Personal mobile phone contract


Jane, who is director of her own company, walks into a mobile telephone retailer and negotiates a contract for a new mobile phone for work. Without realising it, she is set up on a personal tariff. The retailer is dealing with Jane as an individual and the contract is drawn up with Jane as the customer.


When she receives her monthly invoice/statement, it is addressed to her personally. The direct debit, however, comes from Jane’s corporate bank account.

Set side by side, it should be easy to spot that Jane’s company is settling her personal debt to the mobile ‘phone company. It does not matter if this was the intention throughout or not, nor would it matter if this were a one-off personal bill that the company decided to settle on a voluntary basis.

Tax and NIC implications

I have recently read that this is a straightforward matter and that PAYE and NIC should be applied immediately. Strictly, this is incorrect, as the approach diverges between income tax (PAYE) and National Insurance contributions (NICs) The employer is supposed to apply NICs as if the employee had just been paid in cash (see, for example, HMRC’s National Insurance manual at NIM05690). 

However, the approach for income tax purposes is that tax cannot physically be deducted from a payment that has been made to a third party and, instead, the payment needs to be recognised as a taxable benefit-in-kind on the employee’s Form P11D for the tax year (see HMRC’s Employment Income manual at EIM00590). The end result, however, is that the individual suffers both income tax and primary NICs, while the company pays employers’ NICs, on the same amount, exactly as if the employer had paid the employee cash, rather than paying his or her personal debt.

The key difference here is that, as a normal benefit-in-kind, there is no exposure to employees’ NICs. In the above examples, Jim should always come off better than Jane because he will not have to pay primary NICs on a normal taxable benefit.

What if I debit the loan account?

Here again, I have read recently that this is essentially irrelevant and the pecuniary liability approach still stands. I am afraid I disagree. And I think HMRC is on my side. Take, for example, the following extract from HMRC’s ‘Checklist for Directors’ Loan Accounts’:

‘Has any personal expenditure of the directors that does not form part of their remuneration package been debited to the directors' loan accounts as appropriate?’ 

Simply put, a loan is a loan, and salary is not a loan. If the toolkit wants certain third-party payments to be taken to the director’s loan account, then it is not earnings, otherwise, it would not have to be repaid.

The Toolkit goes on to say:

‘If the company makes payments to, or on behalf of, the directors for their personal bills, and these payments do not form part of their remuneration package, these should normally be debited to the appropriate director's loan account. For example, payment of personal bills including credit cards, personal expenses paid by company credit card and personal entertaining, such as of the director's family or friends, should not be overlooked. If these payments are not debited to the appropriate director's loan account, the loan account balance will be incorrect’ (emphasis added). See also HMRC’s Enquiry manual at EM8505.

There is no mention of the tax or NICs implications of settling a pecuniary liability. Very simply, ‘pecuniary liability’ payments would fall within the scope of payments that do form part of the director’s remuneration package because they count as earnings. But, if the company pays for something on the basis that the employee will eventually reimburse the company – i.e. a loan – then why should the employee be taxed as if it were salary? This from HMRC’s Employment Income manual at EIM42280:

‘If an employer and employee make an agreement under which the employer lends the employee money and the employee agrees to repay it at a future date or dates, the amount in question is a loan, not a payment on account of earnings.’

Or this from EIM42270:

‘Paying the income to a third party or using it in some way at the employee’s discretion or with his consent to a purpose of his choosing [will generally constitute earnings subject to PAYE]. This does not mean that PAYE is due on all ‘pecuniary liability’ payments. PAYE will only be due if what is paid out is income that is due to the employee, but that the employee directs to be applied in a way of his or her choice’ (emphasis added). 


If the director’s contract of employment or similar includes an agreement to pay certain third-party expenses, then the payments will essentially comprise part of the directors’ remuneration package and comprise earnings when paid. However, the director would not then have to reimburse the employer; that would be a nonsense.

If the company owes the director money because the loan account is in credit, and the director requires the company to apply some of his or her funds to the settlement of a third party debt, then that payment does not arise out of the director’s employment and does not become earnings (what if the company’s debt to the director arose because his bonus had been credited to his loan account; should it be treated as earnings again, if and when some of the money is paid out on his behalf?!).

If the payment is taken to the director’s loan account but is then reimbursed to the company by way of salary, then HMRC could argue that the loan is effectively an advance on the employee’s salary and should be treated as earnings when paid away to a third party. However, I would struggle to see that this could apply if the loan were settled by way of dividend – that would not be a payment arising out of the employment, so the previous third-party payment could not be argued to be a prepayment of his salary.

Practical Tip:

If the employer settles a director’s third-party liability, then it may well be subject to income tax and NICs. But, if the payment goes against the director’s loan account on the basis that it is to be repaid, any claim by HMRC that it should be categorised as earnings should be considered very carefully. 

This article was first printed in Business Tax Insider in December 2017.

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