Business expense trap for companies and directors

Personal or business cost

Owner managers might help keep their company afloat by lending it cash. They might also personally meet the cost of expenses which it would usually pay for. For example, business trips or even direct costs such as stock. This is sensible if the company needs cash but it does have tax and accounting consequences.

Accounting for business costs

There’s a distinction between costs which fall squarely on a company’s business and those which relate to the owner manager.

Where the individual personally meets overhead and direct costs, e.g. premises rent or stock, in effect, they have lent their company money and this ought to be reflected in its accounts to give a true picture of its trading activity. However, the position regarding job-related expenses is more nebulous.

Job expenses

Whether job-related expenses are costs of the company or the owner manager personally depends on the policy. Most companies say that if an employee pays a job expense it will reimburse them.

Therefore, the cost should be handled in the same way as for overheads etc. However, a company owner manager might not work on the same terms as employees. In fact, they might not have any clear contract for work.

In this situation they have a choice of whether to claim reimbursement of job expenses.

Reimbursement or no reimbursement

If they claim reimbursement of job expenses from the company it can pay them tax and NI free as they are exempt payments. If they don’t claim reimbursement, they can instead claim a tax deduction for them. However, this isn’t ideal.

Claiming a relief for job expenses puts the owner manager in the same tax position as if the company had reimbursed them, but not so for NI purposes. Therefore, both the individual and the company could be worse off.

Subsequent reimbursement

If initially owner managers don’t claim reimbursement of job expenses but later decide to, the individual and company need to be careful they don’t inadvertently double up on tax relief.

An expense is only entitled to tax and NI relief once. If an owner manager claimed a tax deduction for a job expense and also claims a reimbursement for it, the company should apply PAYE tax and NI otherwise they will have received tax relief twice. To prevent this the individual could withdraw the claim for tax relief so that the company could make an exempt reimbursement. The trouble is, they can only do this if they’re within the time allowed for amending the self-assessment tax return for the year they claimed the tax relief.

As a rule of thumb, it’s always more tax and NI efficient to claim reimbursement of job expenses from a company. If it’s struggling for cash it doesn’t have to pay this out. Instead the expenses owing can be treated as a loan, e.g. a credit to the director’s loan account, until such time as the company can afford to pay.