A Director can decide on his/her salary and / or bonus and remuneration as the board sees fit, subject to agreement by the board. That is, if there is a board. Please note HMRC may challenge excessive salaries and benefits-in-kind on the basis that they are not ‘wholly and exclusively’ paid for the purposes of the trade.
The challenge?
HMRC is less likely to challenge the remuneration of a sole director ‘…where the controlling director is also the person whose work generates the company’s income then the level of the remuneration package is a commercial decision and it is unlikely that they will be able to say it is for a non-trade purpose
A challenge is more likely is where payment is made to other directors (who may be a spouse, civil partner, close relative or friend of the controlling director) under the ‘settlements’ anti-avoidance legislation (ITTOIA 2005, s 619 et seq.), If HMRC are successful they will taxing the remuneration as if it were that of the controlling director. Payment is acceptable if the payment is fair, for the work, and properly recorded.
HMRC can also look at previous years’ and compare year on year, as in Earlspring Properties Ltd v Guest (1995), 67 TC 259. In that case, remuneration paid to the company director’s wife was her remuneration enabled the large premiums to be paid. The court held that the payments were not ‘wholly and exclusively’ for the company’s trade but represented a diversion of income for fiscal advantage.
Tax implications
If HMRC consider that excessive remuneration has been paid, they can potentially charge the employee to PAYE tax and NICs and the employer to secondary NICs but refuse corporation tax relief on the payment against business profit. Generally, the ‘excess’ is disallowed, with any justifiable amount being deductible.
Where the payment is deemed excessive and the recipient is also a shareholder, HMRC may treat the payment as a distribution of profits – effectively as a dividend, taxed at dividend rates.
Other shareholders
Directors should be aware that payment of excessive remuneration to directors can amount to unfairly prejudicial conduct towards other shareholders. Such a legal challenge by those shareholders is more likely where profits are available for distribution, but are taken by the directors for themselves.
Practical tip
Proper documentation and justification for director remuneration are essential. If the company can provide evidence that the remuneration is reasonable and in line with its financial position, industry standards, and the director’s duties, it may be more likely to withstand scrutiny from HMRC.
Kind regards,
Howard Gross BFP FCA FCCA CTA
Director
