Expenses that do not have tax relief

thelawnet

I have read in various places that certain expenses are allowed to be put through my new Professional Services Company.

E.g.,

http://www.warr.co.uk/company-allowableexpenses.html

Listed below are expenses that will be allowable to be paid by your Limited Company. Corporation Tax relief is available unless otherwise stated.

...
Company formation expenses (tax relief not available)
...

So I spend £150 on forming my company. I put it through my company, but no CT relief is available.

E.g.,

let's assume my company bills £100,000

I have £15,000 of expenses for which tax relief is allowable, and £15,000 of expenses for which tax relief is not allowable (yes these figures are high, they are just examples). I also have £10,000 in salaries

I then have £100,000 - £15,000 - £10,000 = £75,000 of taxable profits. I pay 19% on that £75k = £14250

My company has then got £100,000 - £15,000 - £15,000 - £10,000 - £16150 = £43,850 in profits. I then pay this out to my wife and myself as a dividend of £21,925 each.

Am I correct in my analysis? Putting the expenses through my company doesn't benefit my company at all, but it benefits me because my company's is £15,000 lower, so I pay less tax on that.

So by having my company pay the company formation expenses (as an example non tax relief expense) rather than paying it myself, the result for me and my wife, assuming we have no other income than my £5,000 salary is:

£5,000 income (minus a small amount for NI)
£21,925 dividend (equivalent to £24,361 salary when 10% tax credit is added)
I would be inside the basic rate tax limit and no extra tax is payable.

Whereas if the £15,000 expenses had been paid myself personally outside the company, the result is that the company pays £7,500 dividend to me and to my wife, increasing my dividend to £29,425, equivalent to £32,694, giving me a total deemed income of £37,695, which is £400 over the 40% limit, so I have:

£400 deemed gross income at 40%
£130 higher rate tax at 32.5%
- £40 tax credit at 10%
= £90 higher rate tax due

So my wife and I have saved £90 each.

Am I correct in my analysis: even though an expense does not have corporation tax relief, it will still probably be advantageous to put it through the company, as it reduces the profit I have to pay out, but it will only reduce the tax bill if my income is over the higher rate limit (or would be but for the expense)?

thelawnet

otoh, it seems that there is no point in putitng high levels of expenses that do n ot attract corporation tax relief through the company unless you are over the higher rate tax threshold, because high expenses is more likely to make the Inland Revenue come and audit you (which is a pain, even if you have done nothing wrong), and there is no point unless you are paying 40% tax, as the dividend tax credit for corporation tax covers basic tax, so any income that your company has already paid corporation tax on is not going to be taxable unless you are a 40% tax payer.

pchelpman

At the risk of complicating your thoughts even more .... are you/your company taxable under the infamous "IR35" regulations and have you considered the implications of the Arctic Systems case [Jones v. Garnett; appeal in process to the House of Lords]?

This goes deeper than what you are asking but is important.

thelawnet

I have opinion that I am outside IR35. Arctic Systems as it stands I believe in the Court of Appeal is that husband/wife dividends are ok. If the House of Lords decide to the contrary it would be expensive but I shall wait and see. Until such time, 50/50 shares are fine....

cash99

What sort of expenses are you talking about. There are not many business expenses which do not attract tax relief. If you are talking about personal expenses then if the company pays them, they would attract tax relief, but would be a benefit in kind for you, and the company would incur national insurance. This puts you in the same position as if you had been paid salary.

Arctic Systmes case is being appealed by HMRC, so it if far from settled. If HMRC lose I would not bet against a change in the law.