Compensation payment - how to categorise it? Limited company

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  • martindow
    martindow Posts: 10,230 Forumite
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    uknick said:
    martindow said:
    I hesitate to step into this amongst experts, but doesn't the reason for being offered this compensation come in to it.
    If the reason was that something purchased was sub-standard or mis-represented and the OP is accepting the payment for this, it is in effect a discount to the price originally paid and should be treated as such in the company's accounts.
    On the other hand, if the OP has spent lots of time trying to sort things out and the insurance company is offering compensation to him personally for his wasted time or worry created, isn't this analogous to being sent a gift to him personally and independent of his company?
    I think as the Ltd bought the insurance therefore the Ltd takes the money.  I suppose if the insurance company had made the payment to the individual's bank account specifically stating it was due to the insurance company upsetting the individual you could ignore it for Ltd purposes.

    But, at the end of the day my suggested treatment avoids any additional taxation at this point, and the owner of the company can take it out as dividends when it best suits them with regard to their personal taxation situation.

    With regard to your gift scenario, why would a company gift an individual something if they have no business reason to, e.g. future sales?
    Thanks @uknick.  I suppose a company could make a gift to an individual if they knew they they were the person likely to authorise future sales ...  But it's all a bit academic as your strategy avoids additional taxation.

  • pjs493
    pjs493 Posts: 432 Forumite
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    Thanks for the  discussion on this everyone. 

    It certainly raises some interesting questions, especially when one considers that the compensation was given due to a personal reason but then on the flip side the insurance policy wouldn't be in place and the compensation wouldn't have been given if the limited company didn't exist. I've currently categorised it as 'other income' for the purposes of my record keeping and won't include it in any figure that comes from sales, etc. I'll deal with it accordingly when I come to do the taxes. I'll have a paper trail should I be audited. I certainly felt at the time, and I'm still inclined to feel now, that the money ought to stay within the business. 

    Before the company gets to the stage of paying profit dividends there is the initial capital investment my husband and I put into the business to be repaid. We took money out of personal savings to put in the business as a capital investment (loan to the company from its directors) rather than taking out a bank loan, start up grant, or similar. We decided on a figure that we thought we needed to invest in order to see if the company would work out that was also a figure we didn't mind losing if the business failed. I'm hoping that this money can be repaid in the next tax year as the business now has a good amount of working capital.
  • uknick
    uknick Posts: 1,632 Forumite
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    With regard to your loan to the company, use the compensation to pay part of that back and you avoid any possible tax on getting it out of the company.

    Plus, don't forget you can charge the company interest on that balance.  We tend to tell clients to use the HMRC official rate they pay on over paid taxes.  Depending on your overall personal tax affairs you could get that tax free as it can be counted as part of your savings/investment income and be eligible for the £1,000/£500 personal savings allowance. 
  • pjs493
    pjs493 Posts: 432 Forumite
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    uknick said:
    With regard to your loan to the company, use the compensation to pay part of that back and you avoid any possible tax on getting it out of the company.

    Plus, don't forget you can charge the company interest on that balance.  We tend to tell clients to use the HMRC official rate they pay on over paid taxes.  Depending on your overall personal tax affairs you could get that tax free as it can be counted as part of your savings/investment income and be eligible for the £1,000/£500 personal savings allowance. 
    This is sound advice. Thank you. 

    I’ve been considering the interest option and keep changing my mind about it. I suppose it makes sense and we would have benefited from interest if the money was in one of our savings accounts or an ISA. For personal reasons I’d have to withdraw it in this tax year (for my personal tax return) because I know I’ll be taxed considerably on savings interest in the next financial year having received a substantial death in service lump sum when my husband died. 
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