Company Payment of Director’s Personal Expenses: Understanding the Tax Implications

Conditions for Tax Deductibility

For a company to obtain a tax deduction for an expense incurred on behalf of a director (or any employee), it must satisfy three key conditions:

1. Obligation to Incur the Expense – The director-employee must be required to incur the expense as part of their role.
2. Performance of Duties – The expense must be directly related to carrying out employment responsibilities.
3. Wholly, Exclusively, and Necessarily – The cost must be incurred entirely for the purpose of the business.

A recent tax tribunal case, HMRCv Kunjar [2023] UKFTT 538, reinforced the strict interpretation of the necessity test. It ruled that even if an employer imposes a condition (such as requiring an employee to live near the workplace), this alone does not make associated costs (e.g., travel expenses) deductible.

Tax and NICs Implications

Any expense that fails the above criteria or is not directly related to conducting company business will be treated as a personal expense for the director. The tax treatment varies based on how the payment is structured:

• If the director arranges for payment in their own name and the company settles the bill, HMRC treats this as the employer discharging a personal debt of the director. This means:
   
  • The director is liable for both income tax and employee NICs.
   
  • The company incurs employer NICs as if it were a salary payment.
 
• If the company pays the bill directly (e.g., to a supplier), the company may claim a tax deduction for the expense in its accounts. However:
   
  • The director will still be liable for tax and NICs, either as salary or as a taxable benefit-in-kind.
   
  • Whether employer NICs apply depends on whether the company qualifies for the employment allowance.

Common Scenarios and Their Tax Treatments

1. Professional Subscriptions

If a company pays for a director’s professional subscription fees (e.g., ICAEW, ACCA), and the subscription is relevant to the business, the payment is generally tax-free for both the company and the director. The expense remains deductible for corporation tax purposes, even if the invoice is in the director’s name.

2. Personal Expenses Charged to the Business

Many directors use the company’s credit card to pay for personal expenses. If these are later reimbursed by the director or deducted from their salary, HMRC may still argue that they represent an advance of salary. This can trigger PAYE and NICs obligations from the date of the transaction, rather than when the reimbursement occurs.

3. Director’s Loan Account (DLA)

A common practice is for directors to charge personal expenses to their director’s loan account. If the DLA becomes overdrawn, it is usually cleared through salary, bonuses, or dividends. However, HMRC may argue that regular personal expenses paid directly from the company account should be classified as ‘salary advances’—potentially attracting immediate PAYE and NICs liabilities.

Preventative Measure: Early Dividend Declarations

One way to avoid DLA issues is to declare dividends at the beginning of the financial year and withdraw them gradually throughout the year. If structured correctly, this approach reduces the risk of the DLA becoming overdrawn and helps directors avoid beneficial loan interest tax charges.

Practical Tip: Using Company Credit Cards Wisely

Providing directors with a company credit card can be useful for business expenses. However, if personal expenses are charged to the card, they must be handled carefully to prevent unexpected tax charges. A best practice is to maintain strict policies on usage and ensure that any personal spending is promptly reimbursed to the company to avoid tax complications.

Conclusion

For small business directors, understanding the tax implications of company-paid personal expenses is crucial to avoid unexpected tax bills. Ensuring expenses are properly categorized and managed can prevent costly errors and unnecessary tax liabilities. If in doubt, seeking professional advice can save significant financial and administrative headaches in the long run.

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