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Benefits in kind for shareholders

Adrian Mooy - Friday, February 07, 2020
Your spouse owns shares in your company. As well as paying dividends it provides her with a car. She has declared it as a shareholder’s benefit but HMRC has challenged this and says that the car is taxable on you. How should you respond?


Companies aren’t confined to providing benefits in kind to their directors and employees. Although not commonplace they can provide them to shareholders without breaching company law. For example, this could be a suitable arrangement for a company and with few shareholders where one or more of them is not a director, say a company owned by a married couple. However, the tax consequences need to be considered.


Close companies


There are special rules for taxing non-cash benefits provided by a close company to its shareholders. A close company is one controlled by five or fewer individuals, usually its shareholders. A shareholder receiving a benefit is taxed on an amount as if they had been paid a dividend. The taxable amount of this is worked out using the same methods as those for calculating taxable benefits for directors and employees. This can be tax efficient as the overall tax bill payable on distributions is usually less than that for benefits taxed as earnings because the tax rates are lower and there’s no NI liability to worry about. There is a catch.
Taxable under other rules


In the circumstances described, anti-avoidance rules prevent any tax advantage from the use of shareholder benefits. These mean that a benefit is only taxed if a dividend:


is not chargeable as earnings under a different rule, i.e. as earnings because they are a director or employee; or


is provided to a shareholder who is the spouse of a director or employee, but not either themselves. In this situation the benefit is taxable on the director/employee.


Therefore, the answer is that the benefits provided to your wife are taxable on you.


If a director delegates some duties to his wife she could be put on the payroll and the benefit could instead be treated as her income. If her pay isn’t disproportionately high relative to the work she does, the second anti-avoidance rule above won’t apply. As long as her tax rate is lower than his this would reduce their overall tax bill.


Unmarried shareholders


While providing benefits to a shareholder who’s not an employee or a director but is married to someone that is doesn’t save any tax because of the anti-avoidance rules, it can if there are slightly different circumstances.


If a director and their partner aren’t married or civil partners neither of the anti-avoidance rules will apply. This means the partner would be taxed on the benefit as a distribution and there would be a tax and NI saving.


You can’t avoid tax and NI by providing benefits to your non-working spouse if they are a shareholder. Anti-avoidance rules will mean the income is treated as that of the director. You can get around this by putting your spouse on the payroll. The arrangement works if the couple aren’t married or civil partners.


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