Significant changes have recently taken place in respect of payroll procedures regarding Real Time Information, which, for most employers, is now operational. The purpose of this guide is to consider how these changes impact upon the salary payments for directors of small companies.
Real Time Information (RTI) – Overview
Under RTI, employers and pension providers are required to provide detailed information to HMRC in respect of more or less all wages/salaries on or before each payment date, instead of after the end of the tax year. This system of Real Time reporting is designed to ensure that HMRC has both up to date and accurate details of employment income and tax deductions for all PAYE taxpayers, thereby helping to reduce the number of end of tax year reconciliations with resultant underpayments and repayments.
RTI reporting is now an integral part of an employer’s normal payroll obligations every time wages/salaries are paid and will also provide the Department of Work & Pensions with up to date information regarding claimants’ employment income, enabling calculations of Universal Tax Credit payments to be made on a monthly basis without the need for further information submissions by individual claimants.
Although the new scheme dramatically changes the PAYE system there are still many aspects which remain as before, in particular employers will still use codes to determine the amount of tax to be deducted from employees, P60s, P45s and P11Ds will continue to be used and PAYE/NI deductions will still be due to HMRC by the 19th/22nd (depending upon the payment method used) of the following month. However with RTI HMRC will be in a much better position to pursue unpaid deductions and impose penalties in respect of both late submissions and late payments.
Director’s Loan Accounts – Overview
A director’s loan account can in practice be any form of account or bookkeeping record and is operated like a current account with a clearing bank showing the running balance between the director and the company. The account will show various credits (i.e. monies owed to the director from the company) such as undrawn salary, undrawn dividends, money put into the business and expenses paid on behalf of the business (not reimbursed) etc. Monies withdrawn by directors from the business for non business purposes will be shown as a debit to the account and reduce the running balance
When the balance is, in overall terms, a credit figure, i.e. in net terms the company is holding funds for the director, then this is classed as a loan to the company from the director. When in net terms the director has borrowed funds from the company there will be a debit or overdrawn balance. From time to time balances can move from credit to debit and vice versa. It should also be appreciated that the tax system penalises debit/overdrawn balances.
If the company has more than one director then strictly speaking separate records for each should be kept, although it is usually acceptable for spouses and civil partners to operate joint accounts (again in a similar way to a joint account held at a clearing bank).
One particular point to note is that otherwise unpaid remuneration or dividends can only be credited to a director’s loan account at the point at which such remuneration (received in an individual’s capacity as a director) or dividends (received in an individual’s capacity as a shareholder) is formally voted. The Companies Act 2006 sets out the appropriate procedures but under no circumstances can remuneration or a dividend be said to have been voted at some point in the past, i.e. any credit arising from the voting of remuneration or a dividend can only take place on the date on which the appropriate resolutions are passed which in respect of remuneration would also be the date on which a PAYE/NI liability would be triggered and the date on which RTI details should be submitted to HMRC.
Funds paid to Directors – Historic Approach
It is often the position that directors (especially those who are also shareholders) assume that company funds are equivalent to personal assets. Actually this is not true as a company is a separate legal entity (and indeed it is this separate legal status which also provides shareholders with the benefit of limited liability).
Notwithstanding the above, company directors often withdraw funds from their companies and advisors subsequently make sure such withdrawals are correctly accounted for to reflect both the separate legal entity status of the company and the taxation implications for both the company and its directors. Often this process involved “after the event” processing of directors’ salaries which (after accounting for PAYE/NI) were allocated to the credit of the director’s loan account to offset (or partially offset) director’s loan account debits in respect of amounts withdrawn by directors from the company.
Funds paid to Directors – The New Position
The historic approach will in many respects continue, notwithstanding the introduction of RTI. Indeed the general approach for most company directors will continue to be:-
The impact of RTI is the requirement to deal with the processing of any salary payments on or before each payment made. The previous practice of processing salary payments (especially those which did not give rise to any PAYE tax and/or national insurance liabilities) after the event often at the end of the tax year will not be permitted.
HMRC would normally expect salary payments to be made (and now processed with appropriate information submitted to HMRC) on a monthly basis. Even if no salary payments are made in a particular month the general position under RTI is that a monthly online report to HMRC is still required. However, for company directors it will often be possible to reduce this to an annual payment/submission (if there are no other employees, and the employer registers as an “annual payer/filer” the number of submissions to HMRC will reduce to just one or possibly two). It is important that whatever basis is to be used, a plan is established to ensure that any RTI submissions are dealt with at the correct time (bearing in mind that in due course late submission penalties will be charged).
Whilst writing, it is also worth reiterating that for a lawful dividend to be voted it is necessary for the appropriate Companies Act 2006 requirements to be followed, in particular, resolutions, dividend vouchers and identification of the profits from which dividends are paid. HMRC is now taking greater interest in the mechanics of dividends being voted and looking to challenge circumstances where all the Companies Act 2006 procedures have not been followed. In addition, it should be noted in the case of PA Holdings Limited an appeal to the Supreme Court has been withdrawn and therefore the previous Court of Appeal decision is now final. The Court of Appeal found that in deciding whether dividends were liable to PAYE/NI it was necessary to establish why dividends had been received. In the PA case it was a reward for services rendered and consequently PAYE/NI was due. How far this principle might apply, especially to small limited companies remains to be seen.
Ensuring that you remain compliant with the Real Time Information rules is a tricky subject of directors of small/medium sized businesses. Our experienced team are well versed on these issues and are ready to help if you require assistance. Feel free to get in touch today for a free consultation to explore how we can minimise the compliance burden. We can be contacted by telephone at 0141 848 7474 or alternatively by email at firstname.lastname@example.org.