It is only permissible for a company to deduct expenditure in computing its taxable profits if incurred wholly and exclusively for the purposes of the
trade. Since a company is a separate legal entity that stands apart from its directors and shareholders, it will not incur personal expenses. However,
many companies, particularly 'close' companies (broadly a company under the control of 5 or fewer participants) pay for personal expenses of the directors.
It is important to note that where payments, either made to or incurred on behalf of a director, do not form part of their remuneration package, these
amounts may not be an allowable company expense. In such circumstances it may be appropriate for these items to be set against the director's loan
account. Establishing whether a payment forms part of a director's remuneration package can be complex and good record keeping is essential to back
up such claims.
Accounting disclosure requirements for directors’ remuneration include sums paid by way of expense allowance and estimated money value of other benefits
received other than in cash. The money value is not the same as the taxable amount, although this is often used in practice. This means the onus is
on the director to justify why amounts not disclosed in accounts should be accepted as part of the remuneration package rather than debited to his
or her loan account.
Where the expenditure forms part of the remuneration package it will be an allowable expense of the company and the appropriate employment taxes (PAYE
income tax and NICs) should be paid, where relevant. Where the expenditure does not form part of the remuneration package the relevant amount
should normally be debited to the director's loan account.
Cash transactions between the company and a director may have tax consequences. Broadly, at the end of an accounting period, if the director owes the company
money, a tax charge may arise. Subject to certain conditions, a charge may arise where a director’s loan account is overdrawn at the end of the accounting
period and remains overdrawn nine months and one day after the end of that accounting period. The tax charge (known as the ‘s 455 charge’) is the liability
of the company and is calculated as 32.5% of the amount of the loan. The tax charge can potentially be avoided if the loan is cleared by the corporation
tax due date of nine months and one day after the end of the accounting period.
Good record keeping of all cash and non-cash transactions between a company and its directors is essential. Poorly kept records can mean that information
provided is not accurate, which in turn may result in non-business expenditure incurred by the directors being incorrectly recorded or misposted in
the business records and claimed in error as an allowable expense. Conversely, justifiable business expenditure incurred by the directors may not be
claimed or claimed inaccurately. Consequently, directors' loan account balances may be incorrect resulting in the company being liable for a s 455
charge if the loan account is overdrawn, or corporation tax relief not being claimed on allowable expenses by the company at the appropriate time.
A review of particular accounts headings may identify directors' personal expenditure that has not yet been allocated appropriately. Transactions should
normally be recorded as they occur and a detailed transaction history maintained, so that it is possible to identify the director's loan account balance
on any given date.