Tax compliance check requires contract of director

[tbon]

Hi All,

I have a limited company that I use for my software development services. I'm the only shareholder and only director and the company doesn't have any other employees. Now, I'm under a company tax complience check. The HMRC wants to see "the details of the employment package and a copy of the employment contract for the director". Am I really supposed to have contract to employ myself as a director? Shall I just tell them I don't have a written contract, and that will be accepted? If I need one, what do you think would be a good template to use?

For more context, in the year in question, I paid myself a minimal salary and employer's pension contribution. I did not take any dividends.

Thanks,
-tbon

 

[Newchodge]

They are checking to see that you have complied with the NMW (minimum wage) regulations and personal pension contributions. Are all your pension contributions made by your employer?

 

[UK Contractor Accountant]

the details of the employment package

I paid myself a minimal salary and employer's pension contribution.

I suspect it more to do with this - how much was the EPC?

 

[MyAccountantOnline]

Hi All,

I have a limited company that I use for my software development services. I'm the only shareholder and only director and the company doesn't have any other employees. Now, I'm under a company tax complience check. The HMRC wants to see "the details of the employment package and a copy of the employment contract for the director". Am I really supposed to have contract to employ myself as a director? Shall I just tell them I don't have a written contract, and that will be accepted? If I need one, what do you think would be a good template to use?

For more context, in the year in question, I paid myself a minimal salary and employer's pension contribution. I did not take any dividends.

Thanks,
-tbon

As above I suspect it's the pension that they are interested in.

For info about directors salaries have a read here

If you have an accountant do contact them before replying to HMRC.

 

[NortonBishop]

How much was the Employer's Pension Contribution?

 

[tbon]

The director's salary was £6630 and the Empoyer's Pension Contribution was £26000. And that's all the pension contribution I had, there were no other payments into my pension pot in that year. As I said, I didn't pay dividends, as not much profit was left that year after paying the EPC. Are there any concerns with this?

The amount of EPC depend on the actual turnover in that year (how much money I earn for the company with software development). I keep my salary low, as I think it is standard for contractors.

My question was mainly about the employment contract for the director. I never thought of signing a contract with myself, it doesn't make sense to me. Is it legal not to have one?

 

[tbon]

They are checking to see that you have complied with the NMW (minimum wage) regulations and personal pension contributions. Are all your pension contributions made by your employer?

As far as I know the NMW speficies a minimal hourly rate. I don't know how that translates in my case as I don't work by the hour.

 

[Newchodge]

Check your payroll software to make sure that the pension contributions came only from the employer.

 

[numbersrule]

They are checking to see that you have complied with the NMW (minimum wage) regulations and personal pension contributions. Are all your pension contributions made by your employer?

I thought NMW did not apply to Directors?

 

[numbersrule]

The director's salary was £6630 and the Empoyer's Pension Contribution was £26000. And that's all the pension contribution I had, there were no other payments into my pension pot in that year. As I said, I didn't pay dividends, as not much profit was left that year after paying the EPC. Are there any concerns with this?

The amount of EPC depend on the actual turnover in that year (how much money I earn for the company with software development). I keep my salary low, as I think it is standard for contractors.

My question was mainly about the employment contract for the director. I never thought of signing a contract with myself, it doesn't make sense to me. Is it legal not to have one?

HMRC will be looking at this because you are reducing your CT bill by means of EPCs.

In the case of personal contributions, tax relief is restricted to pension contributions up to your income level. I know you have not said you are making personal contributions but you are effectively receiving the tax relief via the CT saving. They won't like that for such a disproportionate EPC.

HMRC will want to know the basis for the EPC so they are asking for your Employment Contract so that they can provide you with a full and comprehensive response.

If you don't have a written contract you could just tell them that because as far as I am aware it's not actually illegal not to have one. However, it could be argued that your Limited Company has not fulfilled it's duty to provide a written contract within 2 months of employing you. But having said that I'm not sure how enforceable such a duty can be in your circumstances of a sole director as sole employee.

Then again, I think you may need to justify your EPC and an Employment Contract may be a way of communicating that to HMRC.

But before you do that, I agree with MyAccountantOnline that you should contact your Accountant. They in turn may point you in the direction of a Tax Adviser.

 

[Newchodge]

I thought NMW did not apply to Directors?

It doesn't apply to Directors carrying out Directors' duties. It does apply to directors who are also employees, for the work carried out as employees.

 

[Newchodge]

However, it could be argued that your Limited Company has not fulfilled it's duty to provide a written contract within 2 months of employing you.

It's now required on day 1 of employment.

Employers' pension contributions are justtified if they meet the HMRC 'wholly and exclusively' test - the test that applies to all tax deductible company expenses.

This sums it up quite well:

1. Company director pension contributions are an allowable business expense providing the employer contributions passes the 'wholly and exclusively' test, meaning that HMRC deems the employer pension contribution to be wholly and exclusively for the employer's trade or profession.

• HMRC will want to establish whether the level of total remuneration – salary, dividends, bonuses, benefits in kind, pension contributions etc – is commercially 'reasonable' for the work being done.
• Where the individual is a sole company director and the main generator of the company's income, the contribution is unlikely to fail this test, but always check with an accountant that specialises in small businesses.

 

[WaveJumper]

If the OP has an accountant an area that perhaps they should have been advising on and subsequently helping with response to HMRC ?

 

[tbon]

Yes, of course, I've contacted my accountant. I just thought to ask it on this forum as well, as I'm interested in other people's opinions. There's something to learn from all of them. So, a big thank to all, who contributed with replies.