Directors salaries and WTC

[MyAccountantOnline]

I have just had a telephone conversation with someone at the tax credit office who has told me that a director of a limited company drawing a salary of £5,000 pa as an office holder working 35 hours per week, and hence not subject to National Minimum wage is entitled to Working tax credits.

Sadly when I asked if they'd confirm this in writing they declined and were unable to point me towards any written guidance either.

I just wondered if anyone has had first hand esxperience of claims being challenged where directors have drawn low salaries and drawn from directors loan accounts, rather than pay a commercial salary?

 

[Zeno]

I have always understood that directors who do not work under a contract of employment are not entitled to WTC. (Ignoring their partners).

I doubt the person at the tax office knows what a director is to be honest. The tax credit helpline is worse than useless at the best of times without the complication of the self employed/owner managed companies.

 

[SLF]

It is allowed if your are employed and taking a salary low enough to get WTC.

 

[Zeno]

It is allowed if your are employed and taking a salary low enough to get WTC.

That is under a contract of employment.

 

[bwglaw]

Technically, any dividends should be declared as income but many Directors just declare the personal allowance per year.

 

[SLF]

emplolyed and under a contract of emplyment is the same thing (in the eyes of the Law and a Tribunal)

 

[Zeno]

emplolyed and under a contract of emplyment is the same thing (in the eyes of the Law and a Tribunal)

Yes, I know but in Nicolas question she is talking about a director taking a salary of £5k as an office holder.

 

[Zeno]

Technically, any dividends should be declared as income but many Directors just declare the personal allowance per year.

I have noticed this too. I have never seen it questioned either to be honest.

 

[MyAccountantOnline]

I have noticed this too. I have never seen it questioned either to be honest.

Well what can you say to that

 

[bwglaw]

Director is an employment status in its own right. A Director only becomes an employee where there exists a written contract of employment. HMRC have a slight different way of determining the status of an individual. I do not think the HMRC do actual distinguish between an office-holder and an employee. However, an office-holder is likely to be deemed self-employed.

I know of a few Directors who get WTC with a salary of £5225 per year and have not had any problems.

 

[MyAccountantOnline]

I doubt the person at the tax office knows what a director is to be honest. The tax credit helpline is worse than useless at the best of times without the complication of the self employed/owner managed companies.

I couldnt agree more - I am just hoping somewhere their is a guidance note or someone has it in black and white.

 

[Zeno]

Well what can you say to that

Just to add - I don't do it for my clients.

It generally comes from where they have done their own in previous years or from other agents.

It is just odd when dividends are declared on tax returns that HMRC don't seem to link them up with WTC forms.

 

[Zeno]

Director is an employment status in its own right. A Director only becomes an employee where there exists a written contract of employment. HMRC have a slight different way of determining the status of an individual. I do not think the HMRC do actual distinguish between an office-holder and an employee. However, an office-holder is likely to be deemed self-employed.

I know of a few Directors who get WTC with a salary of £5225 per year and have not had any problems.

As I understand it, a director cannot be exempt from NMW and qualify for WTC at the same time.

Why would you say an office holder is deemed self-employed?

 

[bwglaw]

It is just odd when dividends are declared on tax returns that HMRC don't seem to link them up with WTC forms.

But are they actually declared...?

 

[bwglaw]

As I understand it, a director cannot be exempt from NMW and qualify for WTC at the same time.

Why would you say an office holder is deemed self-employed?

I think you are assuming that WTC is only for the employed. Self-employed are entitled to WTC as far as I understand.

 

[Zeno]

But are they actually declared...?

Yes, I prepared the tax returns however they prepared their own tax credit forms.

Surely the two systems should tie up some how and flag this?

 

[Zeno]

I think you are assuming that WTC is only for the employed. Self-employed are entitled to WTC as far as I understand.

Yes, but a director of a limited company without a contract of employment is neither employed or self employed.

Come to think of it, no wonder the rabbits running HMRC can't understand this.

 

[bwglaw]

Yes, I prepared the tax returns however they prepared their own tax credit forms.

Surely the two systems should tie up some how and flag this?

It will... eventually, and your clients will be contacted by the Overpayments Office!

 

[bwglaw]

Yes, but a director of a limited company without a contract of employment is neither employed or self employed.

That depends on whether that Director also has a controlling share, if so, they are deemed self-employed. I have a controlling share in another company and I have been deemed self-employed by one government agency, and employed by another government agency!

Clear as mud!

 

[bwglaw]

If a Director of a company with no contract if employment and no shares then as you rightly say the office holder is neither employed or self-employed.

 

[Philip Hoyle]

DOn't get too bogged down with concentrating on employment law. It is tax law that matters here and it is clear that a director is an employee for tax purposes. I can't think of any case where a director was held to be self employed for tax purposes.

Per HMRC tax credit manual

A director of a limited company is usually employed by that company under a contract of service. He may also be an office holder within the company In either case, remuneration is taxed under the Income Tax (Earnings and Pensions) Act 2002

You have to appreciate that tax law re employment is completely different from employment law. For tax law, there is no significance as to whether there is a contract of employment or not. It's only relevance is for NMW.

A "low" wage for tax purposes carries through to the tax credit system. There is no link between hours worked and wages in the tax law system. It follows that it is entirely possible for a director to pay a low wage yet still work the requisite number of hours. Both matters are capable of proof in their own right and nothing in the tax laws require them to be linked.

HOWEVER, be very careful as there is an anti-avoidance provision which may apply where wages and dividends have been artificially reduced to increase the tax credit award:-

Claimants providing services to other persons for less than full earnings
The claimant is treated as having an amount of employment or trading income that is reasonable for that employment, if they provide a service for another person and

• The other person makes no payment of earnings or pays less than for a comparable employment, trading or business in the area

And
​

• The Board are satisfied that the other person has the means to pay for, or to pay more for the service

Obviously, for this to apply, their own limited company would have to come within the definition of "other person", so it is likely that this would have to be decided in the courts as to whether it did apply to directors limited companies, and HMRC would have to prove that the company could have paid a full wage/dividend package - i.e. that it had the money to pay and didn't need the money for other business purposes. I think this would be exceptionally difficult to prove and have heard of no challenges under this anti avoidance rule.

So to summarise, forget contracts of employment etc as that is a red herring here. It is the fact of whether the director works the requisite number of hours that triggers the tax credit entitlement (not necessarily how he is paid). Just remember that dividends have to be declared as other income.

 

[Wild Goose]

Hi Philip,

Good post. I had a nagging doubt I'd heard somrthing about this on a cpd course, but it turned out I'd read it on A-web at http://www.accountingweb.co.uk/cgi-bin/item.cgi?id=189023&d=1031&h=1021&f=1026

quote
"I was very concerned to hear recently, in the course of CPD, that as of 2008-09, in order for directors to claim tax credits, they must be earning minimum wage."
end quote

Have a look at the thread Philip and see what you make of it. Clint Westwood's post of 30 Sept in the thread has a few useful links.

Quote from Clint
If you refer to the legislation it could not be more clear: To be in qualifying remunerative work you either have to be self-employed or you have to be in an employee or officer in a "contract of service". When originally published in reg 2(1) SI2002/2005 the definition of an employee for WTC purposes included office holders without a contract of service:
http://www.opsi.gov.uk/si/si2002/20022005.htm
That was critically amended for this purpose in reg 3(3) SI2003/701 to exclude office holders without a contract of service
http://www.opsi.gov.uk/si/si2003/20030701.htm
The definition was later altered by reg 13 SI2003/2815
http://www.opsi.gov.uk/si/si2003/20032815.htm
although that last change was irrelevant to this thread but is included for completeness to provide a current definition.
end quote

It seems reg 3(3) SI2003/701 excludes office holders without a contract of service. As you've rightly said, it's doubtful anyone on HMRC's alleged help-lines would ever have heard of this obscure piece of legislation. But if the cpd lecturer who gave this an airing is to be believed, the Revenue are planning on giving it an outing this current year.

What do you make of it?

 

[Jenni384]

Hi Philip,

Good post. I had a nagging doubt I'd heard somrthing about this on a cpd course, but it turned out I'd read it on A-web at http://www.accountingweb.co.uk/cgi-bin/item.cgi?id=189023&d=1031&h=1021&f=1026

quote
"I was very concerned to hear recently, in the course of CPD, that as of 2008-09, in order for directors to claim tax credits, they must be earning minimum wage."
end quote

Heh, you beat me to it, I was going to refer to the same thing.

As I understand it, but can't quote chapter and verse:

• A director claiming WTC must be earning NMW for the number of hours s/he claims s/he works
• This is a totally different issue to directors being exempt from NWM in the standard 6035 salary/ topup divis setup
• The staff at WTC do not understand this. I have spoken to them, stated that a sole trader has incorporated, and will now be earning 5225 + divs and working a 30 hour week, and the response has been "That's fine, no worries, just tell us how much the divis are as soon as you know."
• Relying on the above bullet point is not a good idea - the rules are as they are and may bite people in the posterior at some point down the line.

 

[TraceyAnn]

Just read through the above, and am having a "blonde" moment - are you saying that directors who are taking s very small salary topped up by large dividends is entitled to WFTC?

 

[Jenni384]

Just read through the above, and am having a "blonde" moment - are you saying that directors who are taking s very small salary topped up by large dividends is entitled to WFTC?

Hi
No, we are saying the opposite - the guidance is somewhat convoluted but we think not. It all depends on your actual income though: dividends are counted as income for WTC purposes. The crux of the argument is regarding the salary and NMW. Best thing is to get advice (from someone who really knows) tailored to your individual circumstances.

 

[Wild Goose]

• Relying on the above bullet point is not a good idea - the rules are as they are and may bite people in the posterior at some point down the line.

I guess if the rules really are trotted out it would have to be after the event - when filling in the annual declarations. It'll bite people on the bum retrospectively. Wonder how that will dovetail into Corporal Brown's mission to save the Western economies from financial ruin?

 

[Philip Hoyle]

Thanks for that. Very illuminating. Luckily (for my PII!) I've not done any claims for working tax credit for any limited company clients as their wages/dividends take them over the earnings limits anyway. Certainly something to bear in mind for the future though. Funnily enough, a CPD course I went to in the Summer was still banging on about how good WTC claims are - they were concentrating on reducing sole trader profits to get the enhanced WTC but I've checked the course notes and in passing they did mention the option of directors taking a dividend "holiday" for a year to get their income low enough to qualify - their only cavaet was the anti-avoidance I mentioned above. Sounds like my CPD providers may not be as good as I thought. It will be interesting to see how this pans out if the tax credits helplines and the tax credits websites make no mention of this issue. I've taken a screenshot of their website and help files just in case a client has made their own claim and may need some help in defending themselves in the future. Thanks everyone for this - I've learned something new today!

 

[Wild Goose]

Hi
Best thing is to get advice (from someone who really knows)....

Good Idea. I asked Ling, who says that the Statutory Instrument passed in 2003 is the clincher.

viz:
That was critically amended for this purpose in reg 3(3) SI2003/701 to exclude office holders without a contract of service
http://www.opsi.gov.uk/si/si2003/20030701.htm

But it seems it seems it's taken the Revenue 5 years to select that particular club from their armoury to beat director claimants with. Waaah!

 

[Wild Goose]

I've taken a screenshot of their website and help files just in case a client has made their own claim and may need some help in defending themselves in the future. Thanks everyone for this - I've learned something new today!

The bizarre thing is that the legislation's been on the books for 5 years, but the Revenue are only now thinking of using it. Maybe that's because their planned assault on income shifting has been postponed, and other attempts to hit small limited companies have got nowhere (even including the latest postponement of CT rate increase).

I try not to get involved in tax credits claims, but have one client who I like and thought was getting the rough end of the stick. Similar to your div holiday, that client (a sole trader) switched year end, which shuffled her profits around to the point where they fell nicely for the new £25k uplift threshold, and the resultant clawback was zero.

What prompted me to put myself out to help someone who was struggling? Actually the news that Gordon Brown had begun selling aged student debts to so called "Vulture debt-collector" companies (companies who act largely outside of the law in their methods - many are under investigation by the OFT - and, separately, to compound their attck on the poor the Government have legislated that post 2006 Consumer Credit Agreements [Oct '06 or thereabouts] no longer have to be evidenced in written statutory format) where was I? Oh yes, Gordon has sold student loan debts to such companies. Result - one suicide by a young teacher I was acquainted with. There's only so much pressure and stigma some young people can take from those vultures.

Hmm I've gone off on one. Just needed to get that one off my chest. Nice one Gordon - give my son all the loans he asks for to keep the bars, restaurants, and nightclubs of his university town busy. Nice to know you'll set the vultures on him to collect it back a few years down the line. Don't be surprised if he emigrates.

 

[Estimator]

You may be able to justify it legally, and some will try to interpret the words their own way, but morally?
A company director pocketing 50K dividend a year whilst paying himself £5K plus expenses shouldn't be claiming tax credits, housing allowance or council tax credit and other benefits - but many are.:redface:
Surely, benefits are intended as a safety net for the vulnerable in our society and for the genuinely low paid.

 

[UKSBD]

I did it for a couple of years whilst building up company reseves.
Basically paid my wife £5400 a year for 16 hrs a week and paid myself
the same for 30 hrs a week.
You can't draw a dividend though and all other taxable income is also
taken in to consideration.

My accountant said it is fine, and he has clients who use 3 year cycles.
2 years of low pay and claim WTC, then a year of taking a big dividend
but not claiming WTC.

 

[Estimator]

Nice one Gordon - give my son all the loans he asks for to keep the bars, restaurants, and nightclubs of his university town busy. Nice to know you'll set the vultures on him to collect it back a few years down the line. Don't be surprised if he emigrates.

I'm sure that your son understands that a loan has to be repaid WG, Gordon Brown isn't forcing him to blow money he hasn't got on clubbing. Surely that's a question of education? :| Are you suggesting that the government should bail-out student debt now?
If he is that hard done by, why doesn't he emigrate now?
He will probably then realise that the UK is a good place to get educated.
Ask many of the overseas students who come here and are happy to pay much higher fees.

 

[Wild Goose]

I'm sure that your son understands that a loan has to be repaid WG, .

He certainly does. I'm not sure Gordon Brown does. The 25 year old teacher who committed suicide clearly didn't.

Gordon Brown isn't forcing him to blow money he hasn't got on clubbing. Surely that's a question of education? :| Are you suggesting that the government should bail-out student debt now?

Well they've bailed out just about everyone else. Look, nobody forced Pinocchio to go to Pleasure Island - I just wish Gordon and his student loans and his state-owned banks would stop dangling temptation under students' noses.

If he is that hard done by, why doesn't he emigrate now?.

Because I've advised him to obtain his degree from the top university he's at first. Just hope the ship doesn't sink before then.[/quote]

He will probably then realise that the UK is a good place to get educated..

He worked as a teacher's assistant in a lower middle-class Comp part of his gap year, so he knows differently.

Ask many of the overseas students who come here and are happy to pay much higher fees.

Look, I'm not an authority on the subject like you, but I have heard from people at both Oxbridge collegates there is a growing problem with foreign students returning home never to be seen again.

 

[Philip Hoyle]

You may be able to justify it legally, and some will try to interpret the words their own way, but morally?
A company director pocketing 50K dividend a year whilst paying himself £5K plus expenses shouldn't be claiming tax credits, housing allowance or council tax credit and other benefits - but many are.:redface:
Surely, benefits are intended as a safety net for the vulnerable in our society and for the genuinely low paid.

No, your missing the point of the thread. In your example, his dividends will count towards income, so he wouldn't get working tax credits. The point is where a director takes just £5k salary and no dividends, thus potentially making himself entitled for full working tax credits. That's what this thread is about. On the one hand, if a director is deliberately taking just £5k from his company to get working tax credits, that is morally wrong (and probably legally wrong too). On the other hand, it seems unfair that a director of a poorly performing company which doesn't have enough money to pay a "proper" wage may be denied working tax credits because he isn't paying himself the minimum wage, even though the company couldn't afford to pay him the minimum wage. In the latter example, the opposite is true - it is morally wrong that he may be denied working tax credits.

 

[scm5436]

Can we assume an example where the director takes a minimum salary + dividends and therefore can't claim WTC, but also employs his wife to work in the business (she is also the 'company secretary') - can the wife claim wtc? (given that she only earns a minimum wage, and gets no dividends)

If so how much is WTC worth? I have to say I've been running a ltd company for donkey's years and never even heard about the possibility of this... accountant certainly never mentioned it! can it be back dated?

 

[Jenni384]

WTC is calculated on a couple's income if they are married/ living together so in your scenario they would not be eligible if their join income was over the threshold

 

[scm5436]

how about for a 1 year period where the director didn't take any dividends, but instead paid himself (and wife) a minimum salary, and made the rest up by withdrawing money from the directors loan balance (ie. withdrawing cash previous invested in the company). would they be eligable for that year? would that repayment count as income?

 

[Jenni384]

Last time I checked, Capital income doesn't count for WTC. Don't ask me why.

So yes, if you took a minimal salary and no dividends, and drew down on your DLA you might be eligible for WTC. But heed the technical points earlier about NMW and get advice from your accountant.

The above comments are logical only and don't take into account the moral points people like Estimator have raised.

Edit: If you have a credit on your DLA why are you taking dividends and not just drawing down anyway?

 

[oldeagleeye]

Don't know if it has been mentioned yet as just skipped through the previous posts but there was a woman on Dragons Den in the last series I think that has a company making over £170,000 net pre-tax profit. She said that she didn't even pay the basic directors salary and so was claiming every social security benefit there is - including housing benefit.

She then had the chek to ask for some £250,000 I think to expand and even then planned to carry on claiming social security benefits.

Has this world gone crazy or what.

 

[Delta-SI]

She then had the chek to ask for some £250,000 I think to expand and even then planned to carry on claiming social security benefits.

What an utter scumbag! I really have nothing more to add apart from the fact people like that disgust me and she should be fined.