In Ventura UK Ltd v HMRC TC06028, the First Tier Tribunal (FTT) considered whether a credit to the director’s loan account in respect of salary had been paid and so should be subject to PAYE.
The tax point for salary is found in s.18 of ITEPA 2003 and is the earliest of:
- When payment is made on account of earnings.
- When the employee becomes entitled to payment of or on account of the earnings.
- For directors (whether they were directors at the time):
- When the sums are credited in the accounts or records.
- If determined by the end of the period to which they relate, the end of that period.
- If determined after the end to the period to which they relate, the date they are determined.
At the end of each year (starting 2011/12), the chairman was voted a fee of £16,000 to be paid when the company had sufficient funds to repay loans he had made.
- Fees were credited to his loan account.
- HMRC conducted a Pay As You Earn (PAYE) investigation and assessed PAYE and National Insurance Contributions (NICs), plus penalties, on these amounts.
- The taxpayer argued that these were not genuine accruals and that no obligation to pay would arise until the company had the funds to pay.
- The taxpayer put through a Prior Year Adjustment (PYA) to reverse the accruals as they were 'no longer' payable.
- HMRC contended that the accounts were properly prepared, showing a true and fair view, under the Companies Act 2006 and hence, the PYA was incorrect.
The FTT found that:
- The chairman was 'clearly entitled to receive the annual fees'.
- He “could have called in the loan or otherwise enforced the debt”.
- PAYE was due in each of the years in which the annual fee was accrued.
It took the view that the PYA did not successfully reverse the charge to tax and NI.
- The PYA 'no longer' implied that the accruals had been payable.
- The chairman could absolve the company of its debt to him, but not its debt to HMRC.
- The FTT refused to comment on whether it was possible to successfully reverse the accrual.
The FTT noted that to avoid the tax and NI, the chairman would need to have stated “that he did not consider the annual fee payable to him in advance of each trading year-end, before the vote for accruals in his favour”.
Director’s loan account
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Real-time Information (RTI)
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