Bill: Chris, you've got to help me! We've just received a six-page letter from the Inland Revenue about last month's PAYE audit.
Chris: You had a visit from the PAYE auditors? Why didn't you tell me?
Bill: Because I didn't want to incur any charges.
Chris: That's a false economy!
Bill: Probably, because in this letter they're demanding nearly pounds 8,000 in tax for this year alone. They're also talking about going back six years. Can they do that?
Chris: Yes, I'm afraid they can if they've found something amiss. I'll come round to see if we can sort it out.
Some time later, in Bill's office, Chris has inspected the auditor's report.
Chris: The PAYE auditor's looked at all the favourite areas. How long was she here?
Bill: Only a couple of days and the audit seemed to go well. She had no real questions of any importance, but now we get this....
Chris: Well I think we can do something about all these matters. Let's go through them in some detail.
The first area is corporate entertaining. This includes taking clients to lunch, taking them to Lord's to watch the cricket, to the opera or theatre, all that sort of thing. Provided we can show that all this expenditure has been disallowed to the company, then we should be able to convince the PAYE auditor that there's no taxable benefit to the members of your staff doing the entertaining. They were there on duty, so to speak.
Bill: Is that so? Well, that's a relief because that seems to be the largest part of the amount at stake.
Chris: Yes, that should be the case. While there is no direct correlation in law, you can see logically that either the company bears the disallowance for entertaining, which means that employees involved are there merely incidentally; or conversely, the main point of the exercise was to entertain members of staff which causes a taxable benefit to them but means that the company would get corporation tax relief through its accounts.
Bill: What about when staff are entertained?
Chris: Pure staff entertaining, will cost tax. I am thinking here of your Christmas party, and your usual summer entertainments, plus your celebrations for creative teams when you win pitches.
Bill: But that can't be right, surely? Everyone is on duty at those times, too.
Chris: Remember what an inspector once told me, which was, "You don't have to enjoy a benefit to be taxed on it." But you can negotiate to pay off all your employees' tax bills for them - it's getting very complicated and self-assessment won't help, but we'll sort all that out for you.
One bit of good news. The PAYE auditor hasn't pointed out to you a concession that has recently been improved. This used to say that you could give an annual party free of any tax implications provided it cost less than pounds 50 per head. If the cost exceeded that amount then the whole lot would be taxable. You can tell that the Inland Revenue don't hold their parties in London. The concession has now gone up to pounds 75 per head.
But watch out for loans. I have told you about this in the past. There's a double tax whammy with loans to directors who are also shareholders, quite apart from the fact that it is illegal for a company to loan money to directors.
Bill: I remember what you said but we always clear it by the year end anyway.
Chris: Yes, but while it is on loan to the director it is considered, by the Revenue at least, as being a distribution of profits and just as if it were a dividend the Revenue expects some tax. In addition, if the loan is interest free it will make that a taxable benefit. But remember, if the loan is less than pounds 5,000 no benefit arises. That applies to all your season ticket loans.
Next there are home telephone bills. What's the precise position there?
Bill: Well, we pick up the telephone bills completely for about half a dozen people because they have to phone the States frequently from home.
Chris: I'm afraid the Revenue rarely accepts that the rental can be anything other than a taxable benefit, but you should be able to get a high proportion of the calls allowed as a business expense.
Bill: The only remaining area is the consultants that we use.
Chris: Yes, the thorny question of status: are they self-employed or employed?
Bill: Presumably they just picked up these payments through our records?
Chris: That's right. They ask about any regular payments. They tend to be biased, and expect that all the consultants concerned should have been treated as employees.
Bill: But that's absurd, they don't get any holiday pay or sick pay entitlement. And what's more important, if the work isn't there then we don't have to use them.
Chris: As far as the Inland Revenue is concerned, if these people should have been your employees then you should have been deducting PAYE and National Insurance contributions on these payments.
Bill: But that could cost thousands. We get them all to sign a letter when the arrangements are first put in place confirming that they will be responsible for tax and National Insurance.
Chris: That doesn't cut much ice with the Inland Revenue, but we had better look at those letters. It's not the paperwork that matters here, it's the actual fact of the relationship between the company and these individuals. The total picture needs to be considered. But perhaps the most important question is one of control. Do you control these individuals - in other words do you dictate how and when they carry out their part of the bargain between you, or are they their own boss?
Bill: They are very much their own bosses. You know what these creatives are like. They are simply given a task and how and when they carry it out is entirely up to them.
Chris: That sounds good. I think we will have a pretty good chance of overturning the auditor's opinion on that.
Bill: I'm glad you came round.
I left Bill to ponder what I'd told him. He was a sadder and wiser man but, I hope, not a poorer one, at least notbecause of the Inland Revenue.
The writer is a tax consultant with the chartered accountants Kingston Smith.Reuse content