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Excessive pay?
My client’s company carries out business in several countries around the world. One of the shareholder directors is non-UK resident for tax purposes and carries out all of her duties for the company outside the UK. She is paid what we consider to be a reasonable salary, considering the importance of her work and her general performance levels.
HMRC has now advised me that it considers the remuneration paid to this individual to be excessive – although it is not clear what basis there is for this position. The department then proposed that the amount of remuneration that it considers to be excessive should be treated as a loan to a participator under CTA 2010, s 455. This, of course, would mean that there is a liability to corporation tax on the company on the amounts concerned.
I consider HMRC’s position to be hopelessly incorrect, on the basis that there is no loan and, in any case, the remuneration is not excessive. We would, nevertheless, be interested in Taxation readers’ views on this matter.
Query 19,611– Diver.
Unpaid possibilities
My client Mr X trades through his limited company Y Ltd and started providing consulting services to a new client Z Ltd towards the end of 2018-19. The services have been paid for by way of monthly invoices since that time.
Several months into this new arrangement, in the summer of 2019, Mr X was appointed as a non-executive director of Z Ltd, although this position is unpaid.
The other members of the Z Ltd board are a professional investor and the chief executive officer of the company and they both receive payment as part of their primary roles.
As a possible aside, Mr X is also non-executive director of two other unrelated companies. Again, both of these are unpaid roles.
My question is whether HMRC may have any grounds for arguing that the payments from Z Ltd to Y Ltd for the services of Mr X should be subject to income tax and National Insurance by Z Ltd under the PAYE system.
Query 19,612 – Adviser.
Too generous?
My question concerns the government’s coronavirus job retention scheme as it relates to a single person company where the owner could not work during lockdown and therefore furloughed themself. As far as I can see from the summary of the job retention bonus (see ‘Covid-19’, Taxation, 6 August 2020, page 4), as long as the company pays the director at least £520 a month in November and December 2020 and in January 2021, the company will be eligible for the £1,000 bonus. Given that ‘the director is the company’ and would hardly sack themself, this seems too good to be true; however, in my book this normally suggests that something is not true. That said, I want to claim the bonus if the director is entitled to it.
Another thought that occurs to me is whether I should be concerned as to when the director and company owner decides to ‘unfurlough’ themself.
Let’s say they were unable to work during lockdown because the businesses that they deal with were closed. Those firms are now reopening, but my client decides not to resurrect their business until the new year and to just keep paying themself at the same rate from the company reserves. Is that acceptable? I assume it is on the basis that the director has the discretion to decide when it is commercially the best time to resume business.
Do Taxation readers see any problems with this scenario? I want to do the best for the client, but am nervous of issues arising further down the line.
Query 19,613 – Cruncher.
Bad debt
We act for a business that is owed £500,000 (including VAT) by one of their customers. The debt accumulated over a number of unpaid invoices between late 2018 and all of 2019.
When our client prepared the last quarterly VAT return for 2019, they decided to write off an element of the total debt that related to some of the oldest outstanding invoices. The gross amount written off as a bad debt was £200,000 and VAT of £33,333 was reclaimed on the return.
In early 2020, our client started negotiations with their customer and the following legal agreement between them has finally been reached.
The client agreed to pay £150,000 at £5,000 a month.
£250,000 will be settled by way of a debt/equity swap.
The balance of £100,000 will be written off as a bad debt.
We should be grateful if Taxation readers can provide advice on the following questions.
- What is the best way to correct the overstated bad debt write-off in the final 2019 quarter? Should we send a VAT652 to HMRC because the VAT amount exceeds £10,000?
- How should the £250,000 debt/equity swap and the £100,000 bad debt be dealt with on the client’s next 2020 VAT return?
- The written-off debt was included in the December 2019 annual business accounts; are there direct tax implications?
- Are there any other issues that we should take into consideration?
We look forward to replies.
Query 19,614 – Marshalsea.
