UK Directors Expenses

[Lee Thomas]

Hello Fam,

I joined A small family business. The director pays school fees, family rent, holidays and a few other non business transactions from the company bank account. He told me they are allowable benefits and should be posted to the P&L.He insisted that they should be allowed for stats accounts purposes. I had disagreed with him.
At year end, the external accountants transferred the whole balance on the P&L (benefits in kind) to the directors’ loan account resulting in an overdrawn status of the directors account.
This is the first time to work for a small and family company.
Can someone please help explaining the treatment of such transactions? Is it correct that his children school fees are an allowable expense?

lee

 

[Lee Thomas]

Hello Fam,

I joined A small family business. The director pays school fees, family rent, holidays and a few other non business transactions from the company bank account. He told me they are allowable benefits and should be posted to the P&L.He insisted that they should be allowed for stats accounts purposes. I had disagreed with him.
At year end, the external accountants transferred the whole balance on the P&L (benefits in kind) to the directors’ loan account resulting in an overdrawn status of the directors account.
This is the first time to work for a small and family company.
Can someone please help explaining the treatment of such transactions? Is it correct that his children school fees are an allowable expense?

lee

The heading should be director’s expenses.

 

[Truemanbrown]

Family rent, holidays and a few other non-business transactions have correctly been transferred to the director's loan account.

I suspect that the school fees should go the same way.

There are situations where paying school fees on behalf of employees or employee family member can offer significant tax savings.

With regards to the employee, if the prospective student is an employee of the company, it is possible for the employer to pay the fees on their behalf as part of their remuneration package. This is referred to as a ‘benefit-in-kind’ (BIK), whereby the employer provides some benefit to the employee, and the equivalent cash value of the benefit is treated as if it were actually the employee’s taxable income. So the employer would pay the education fees, receiving a corporation tax deduction, while the employee pays tax and National Insurance contributions (NICs) on the same amount.

There are two ways that the family-run business could pay for schools fees using monies from the company:-

1. If a child intends to go to university, it may be possible for them to purchase shares in the company. Provided the company has consistent profits or ample retained earnings, they could withdraw dividend payments to go towards their university fees. In addition, a legitimate gift of a small number of shares annually to the child (within the annual exempt amount for capital gains tax purposes) could potentially allow tax and NICs-free dividends of up to £14,570 (i.e. annual allowance and dividend allowance combined) to be paid;

2. If the obtains their A-levels, they can be employed full-time by the family business. Following a period of legitimate employment, they may then attend a full-time university or college. Scholarships, exhibitions and bursaries held by a person receiving full-time instruction at university are exempted from income tax, and the business could pay them up to £15,480 per annum free of any tax and NICs liability. This can be for expenses including lodging, subsistence and travelling allowances, but excludes any tuition fees payable by the employee to the educational institution.