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P11d Return of Expenses & Benefits – Directors Beneficial Loans

Comment 5th July 2010

The P11d(b) Return of Expenses & Benefits in kind is an annual Return that employers have to complete to declare any Taxable Benefit in Kind of Expense payments paid in a Tax year. This has to be returned to HMRC by the 6th July and any resulting Class 1A National Insurance Contributions paid by 19th July. Whilst many of the questions are factual and should pose no problem from a Tax point of view, there is one area that can be very difficult to deal with.

This is where in close companies Directors tend to use a Current Account with the Company to meet their personal expenditure. The idea is that an Annual Dividend is declared (but not withdrawn from the Company) which in theory is used to meet those personal expenses. Once the Accounts are produced a further dividend is declared to top up the Current Account. Problems arise when the Director spends more than what is in the Account and it becomes overdrawn. From the Company point of view a Section 419 liability is incurred which is payable if the excessive borrowing cannot be repaid within 9 months of the end of the Accounting year when the Corporation Tax liability is due. If not cleared within 9 months the Section 419 liability is repayable 9 months after the Accounting year in which the excess borrowings are cleared.  Therefore apart from the fact that a Company has to wait for its Section 419 refund the system is workable.

The difficulty arises in that the excessive borrowings are until repaid an interest free loan, and that unless the total borrowings are below £5,000 they are reportable as a benefit in kind and the equivalent of the interest is subject to Class 1A National Insurance Contributions. The difficulty is that many small Companies do not know their way around the benefits code and have great difficulty in quantifying the total of any directors personal expenditure on a tax year basis and in many cases will not be aware that they have spent too much many months later when their Accountant tells them after the Accounts are done and also sometimes has to inform them that the Company has not made sufficient profits to clear the loan by way of dividend. In those cases where a beneficial loan has not been declared on the P11d Return months earlier, they become liable for a late declaration penalty and interest on late paid Class 1A NIC and will also likely to be the target of an Employer Compliance Review by HMRC.

To remove this difficulty which causes problems for Close Companies, their advisers and HMRC, I would take the following action

  1. Remove the question on Beneficial Loans to Directors and family members of Small & Medium Close Companies from the P11d Return.
  2. Amend the Company Tax Return so that Beneficial Loans for Small & Medium Companies can be declared on an Accounting year basis including a charge equivalent to the Employer's Class 1A rate in force for the Financial Year that ends on the 31 March in which the Accounting year ends in on the Return.
  3. I would give the Company two options: Either gross up the value of the beneficial loan at the marginal rate of the Director concerned for the tax year that ended in the year that the Accounts cover and add the amount to the total tax payable through the Corporation Tax system, so that in effect the Company is meeting the personal Tax liabilities of the Director or for the director to declare the value of the beneficial Self Assessment Tax Return for the Tax Year that ends in the Company Financial Year (by amendment without penalty if appropriate)

Why does this matter?

  • This would remove one of the P11d heartaches where often the information simply has not been collated to answer the question on beneficial loans.
  • It would enable Small and Medium enterprises to meet their Class 1A NIC liabilities in pretty much the same way as now but on an informed basis enabling them to take any action necessary to address their excessive borrowings as part of any wider action to address profit margin issues.
  • The Grossing up option would remove the need to include estimates of beneficial loans in PAYE Tax codes which can often lead to significant Tax overpayments where the loan has been cleared in a subsequent Tax year.
  • It would reduce one of the risk areas for Employer Compliance visits i.e where a P11d has not been produced, but a Director has prudently declared a beneficial loan on their Self Assessment Tax Return.
  • It would ensure that the same levels of Tax are being collected as now, whilst simplifying the compliance burden.

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