Jennifer Adams considers the tax position should a company pay a director's personal expenses.
Directors of small companies, especially those with prior experience of self-employment, often overlook the distinction between company funds and personal finances.
It can be hard for some directors to resist the temptation to channel all expenses through the business bank account, whether those expenses are company-related and tax-deductible or personal. However, such a practice has tax implications.
To obtain a tax deduction for an expense incurred by a director (or any employee), three conditions must be met:
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The director-employee must be obliged to incur the expense.
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The expense must have been incurred in the performance of the employment duties.
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It must have been incurred ‘wholly, exclusively and necessarily’ in carrying out work on the company's behalf.
The test of 'necessity' has been considered relatively recently in the tribunal case HMRC v Kunjar [2023] UKFTT 538, where it was confirmed that merely fulfilling a condition imposed by the employer (e.g., having to reside within a certain distance from the workplace and claiming the cost of travel) does not necessarily make the expenses allowable.
Any expense paid from the company bank account that does not meet these criteria or was not incurred directly to conduct company business will be taxed as a personal expense for the director. This will be treated similarly to a salary payment, attracting both income tax and National Insurance contributions (NICs).
Tax and NICs liability
How the tax is accounted for and whether it is solely the employee who is liable to NICs or both the employer and employee who are liable will depend on whose name the bill is made out to and who pays it.
If the employee arranges for payment in their own name and the employer pays the bill, the employer has effectively discharged the employee’s debt. In this scenario, the director will be responsible for both income tax and NICs, while the employer will also incur employer’s NICs, just as if the employer had paid the employee directly in cash.
Conversely, if the employer pays the bill directly, this expense will be deductible for the company accounts. The director will then be charged to tax and NICs, which could be classified either as salary or as a benefit-in-kind. Whether the employer is liable for NICs depends on whether they can claim the employment allowance.
Type of expense
Although the payment may be taxable on the employee as a personal expense, whether a tax charge is actually levied will depend on the type of expense. For example, many companies pay for an employee's professional subscription fees.
In such cases, even if the invoice is issued in the employee's name, the payment remains tax and NICs free for both employee and employer being also deductible from the company's profits.
Director's loan account
Many directors, particularly those of their own companies, have personal expenses paid for by the company, which are then charged to their director’s loan account (DLA). Where this occurs, the DLA may become overdrawn and then be cleared by crediting with salary, bonuses or dividends.
HMRC has been known to argue that personal expenses regularly paid from the company account and then debited to the loan account should be treated as ‘an advance’ of salary, so PAYE, etc., should have been accounted for earlier, at the date of payment.
However, regular payments reimbursed through dividend payments cannot be regarded as 'in advance of salary.' Therefore, it is acceptable to declare a dividend credited to a DLA at the beginning of the accounting year and withdraw over subsequent months. Distributing dividends early in the accounting year can reduce the risk of the DLA becoming overdrawn, which may otherwise result in a beneficial loan interest tax charge on the director.
Practical tip
Many companies provide credit cards for business use, but it is important to remember that any personal expenses charged to these cards may also be subject to the tax rules outlined above.
