Using a Ltd to Save Tax?

BizHighflyer

Good evening!

We had some friends over yesterday who were advocating incorporating and using a limited company to lower a tax bill.

In absolute layman's terms, they were suggesting:

• asset/cash injection of capital into the company account
• make necessary purchases (wholesale food items from Costco, phone bills etc) from the account / claim the tax back

Some of the expenses they're putting through have no obvious link to the business i.e. daughter's phone bill.

Ethics of this aside, is this legal? 

I sit in the 40% tax bracket but as the sole breadwinner in the house, making my PAYE go further is obviously interesting to me. 

Thanks in advance for any advice!

Dazed_and_C0nfused

What type of business are you running?

Grumpy_chap

BizHighflyer said:

Good evening!

We had some friends over yesterday who were advocating incorporating and using a limited company to lower a tax bill.

In absolute layman's terms, they were suggesting:

• asset/cash injection of capital into the company account
• make necessary purchases (wholesale food items from Costco, phone bills etc) from the account / claim the tax back

Some of the expenses they're putting through have no obvious link to the business i.e. daughter's phone bill.

Ethics of this aside, is this legal? 

I sit in the 40% tax bracket but as the sole breadwinner in the house, making my PAYE go further is obviously interesting to me. 

Thanks in advance for any advice!

I assume you operate a business and currently do so as a sole trader?

If so, there may or may not be benefits of incorporation.  This is a matter for a professional Accountant to provide you proper (paid) advice as the decision can be involved and a mix of pros and cons.

Does the reference to buying wholesale food mean that you run some kind of catering business?  If so, you should be showing these costs as business expenses in any case.

As for costs entirely unconnected to the business, it is possible to claim almost anything but it would then be subject to BIK tax on yourself so may not actually save tax.

At the end, you refer to making your PAYE go further.  If you are operating a business as a sole trader, then you are not on straightforward PAYE in the way that phrase is most commonly applied. This is a bit of a confusing comment.

I assume your friends were not suggesting that you are employed and paying PAYE but create a fictitious company as a shadow to simply apply costs against - even if they were I don't think this would achieve the outcome desired as there would be no company income against which to offset tax of any kind.  This also sounds like straying from tax avoidance (legal minimisation of liability) towards tax evasion.

BizHighflyer

Okay Grumpy_chap, I thought this to be the case - it does smack of fraudulent evasion to me.

They do have a limited company with regular income, but are applying costs which have no direct connection to the business - i.e. a publishing business but claiming for personal purchases which have no link to the business itself for tax relief. This doesn't seem in the spirit of the law to me but I'm no expert, but morally it doesn't sit well but was curious what the view of HMRC would be in this scenario.

I for one will not be setting up a fictitious company - it would've been legitimate moving from a sole trader model (ad-hoc consultancy) to a limited company, but was curious whether the tax relief in using the business to claim personal items against was A) lawful and then worthwhile. It sounds like the BIK is unlikely to make that effort worthwhile from that perspective.

Jeremy535897

A company has no business paying the personal expenses of its employees, unless it either recharges the employee (probably via a loan account) or adds it to their pay for tax purposes. In the first case (the recharge) the company claims no deduction against corporation tax. In the second (added pay) it does, but the employee pays tax. If a company claims a corporation tax deduction for an employee's personal expenses, and does not declare that as a benefit or as pay, the company is committing an offence.

Grumpy_chap

BizHighflyer said:

it would've been legitimate moving from a sole trader model (ad-hoc consultancy) to a limited company

This is something that remains a valid choice.  It may very well mean that a lower overall tax liability arises.  There can be other factors to consider in making the decision as to the suitable trading model for any particular business.  Your Accountant would be able to advise very easily to give you accurate information for your situation and allow you to make an informed decision.

Jeremy has explained the factors around paying personal expenses through the Ltd Company.

penners324

If your neighbours are putting their weekly shopping and daughter's mobile bill through their company they are committing tax fraud & evasion.