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22 March 2011
Where one spouse is the director shareholder of a limited company, the other spouse is often the company secretary
I act for a number of husband and wife companies, most of which are owned by the couple 50:50. In all cases, the company’s activities represent the full-time activities of one of the spouses (usually the husband) and, depending on the particular company, the other spouse would tend to do either no work for the company (except be the company secretary) or some of the administration work.
In only one case do both spouses work full-time for the business.
Over the years, I have had no concerns about giving the ‘non-working’ spouse benefits – such as a company car – but I have always been careful to treat the benefit as that of the working spouse (except in that one case where both were active in the business).
In recent years, I have felt comfortable giving the non-working spouse a pension contribution of up to £5,000, feeling that (somehow) I can justify this under the wholly and exclusively test, given that being company secretary puts some personal obligation on them.
However, I have since wondered whether such a contribution could in fact be significantly increased. While it might be hard to say that a higher contribution could be justified by reason of the non-working spouse’s contribution to the company’s business, could one not instead argue that the contributions (calculated by reference to the non-working spouse’s personal circumstances) are nevertheless part of the package to reward the full-time worker?
In other words, can one treat (for corporation tax purposes) the tax-efficient benefit of a pension contribution in the same way as the less tax-efficient benefit of a company car? Or is there a catch somehow? For example, does this plan impact upon the other spouse’s contribution record?
Comments from Taxation readers would be welcomed.
Query 17,764 – Prudence
Reply from Cello Boy
HMRC view ‘remuneration’ as the overall level of salary, benefits and pension contributions, but not dividends (see Business Income Manual at BIM47105/6). The ‘wholly and exclusively’ requirement for business deductions means that the overall level of this remuneration package – rather than any specific item – must be commensurate with the spouse’s duties to give a tax deduction for the business.
To be commensurate and fully deductible, the spouse’s remuneration must be in line with what the employer would pay to any unrelated third party for such work, and which would be commercially reasonable bearing in mind the employee’s responsibilities, skills, experience, hours, etc. If not, any excess would be disallowed as a trading expense. It should be the reward for their work, not a shifting of income from the full-time working spouse.
HMRC at BIM47106 do not seem to have an issue over any level of remuneration for a controlling director who is the driving force (‘unlikely that there will be a non-business purpose’), but in terms of maximising the couple’s joint tax allowances the full-time spouse could delegate more work and pay the spouse appropriately.
Any employer can tell you that there are variations in market rates for the same equivalent posts. But part-time hours should only mean pro-rated earnings of the full-time equivalent. If there really is a spouse who does no work, then rather than a disallowance HMRC can determine that the income is that of the working spouse.
Prudence is correctly not charging benefits in kind to the non-working spouse, but where they are employed and undertake some work he can consider allocating them a reasonable benefit if ITEPA 2003, s 169 is in point.
I assume that the company secretaries are being properly appointed on the relevant Companies House forms. Prudence is correct that company secretaries do have specific obligations and duties to the company, but not to the same degree that directors have responsibility for the overall business. It may be hard to justify £5,000 only for company secretarial duties in a two-person company in an HMRC enquiry.
For many husband-wife businesses, these company secretarial duties will not be onerous, but often they are just part of other administrative duties carried out by the spouse. Each case has its own facts and there is a wide spectrum extending to spouses who may, de facto, be acting more in a wider directorial capacity without officially being directors.
HMRC note at BIM47105 that ‘with effect from 6 April 2006 the monetary limits in respect of contributions to pension schemes have been significantly increased. This in itself provides a genuine opportunity and incentive for an increase in the level of contributions payable to the workforce in general’.
While this may give a flash of hope in facilitating more generosity with contributions, it is more a question of being mindful of recent changes in the remuneration mix, and I would say that the ‘commensurate’ consideration of the whole package is still the overriding factor.
Prudence could consider the spouse’s National Insurance contribution record, and whether their earnings history will give them a state pension, plus the state second pension.
Bearing in mind the low level of annuity rates for private pension savings, rather than having a private pension contribution such spouses may be far better off having a salary of at least the lower earnings limit (£5,304 for 2011/12) to frank their National Insurance contribution record for such benefits.
So, at levels where there is no PAYE or National Insurance deduction they could have their cake and eat it. Above considerations re ‘commensurate’ obviously still apply. Private pension contributions and car benefits will not frank their National Insurance contributions record.
Prudence should also bear in mind the impact of the national minimum wage legislation for non-directors, or directors under a contract.
