Tax and NIC implications of private bills being paid for by a company
Tax and NIC implications of private bills being paid for by a company
Working from home during the Coronavirus pandemic created a range of tax issues, not least where private bills, such as for internet usage, were paid for by the company. The tax and NIC implications are different depending on who pays for the item or service and how the payment is made. The first point to consider is in whose name is the contract – the employee, or the employer.
Employee’s name
- Where the employer indirectly pays a bill that is in the employee’s name by giving them the cash with which to pay (or reimburse if already paid), then PAYE is operated as normal as the employer is paying cash earnings to the employee. The employee has made the contract but it is the employer who has provided the money, so Class 1 NIC for both employee and employer is chargeable.
- Should the contract/ purchase be in the employee’s name but the employer pays the bill direct, then the employer would have discharged the employee’s debt. The employer is required to apply NICs as if the employee had been paid in cash as the employer is making a payment which is remuneration or profit derived from the employment made for the benefit of the employee. The amount is included in gross pay for NIC. However, the approach for income tax purposes is that tax cannot physically be deducted from a payment that has been made to a third party and, instead, the payment needs to be recognised as a taxable benefit-in-kind on the employee’s Form P11D section B (Pecuniary Liability) for the tax year. Class 1 NIC is accounted for in the tax month that the bill is paid on the employee’s behalf. The end result, however, is the same as if the employee had been paid in cash such that the employee pays both income tax and primary NICs, and the company pays employers’ NICs on the same amount.
Employer’s name
If the employer makes the contract, then it is a company expense and probably a benefit-in-kind assessable on the employee as the employer is providing a free service in kind. The cost is reported on the employees form P11D and the employer is liable to Class1ANIC on the value of the benefit. The key difference being that, as a benefit-in-kind, there is no exposure to employees’ NICs although Class 1 NIC is payable by the employer.
Directors
If the employer makes payments to, or on behalf of, the directors for their personal bills, and (importantly) these payments do not form part of their remuneration package, then according to the HMRC’s ‘Checklist for Directors’ Loan Accounts’ these payments should normally be debited to the appropriate director’s loan account (DLA). The employer is paying for something on the basis that the employee/director will eventually reimburse the company – i.e. a loan. Overdrawn DLA’s are settled either via payment of a salary (or bonus) or dividends (or repayment of the overdrawn amount). A NIC liability will only arise where the overdrawn balance in respect of the bill is cleared by a payment of salary or by a bonus.
If the company owes the director money because the loan account is in credit, and the director requires the company to apply some of his or her funds to the settlement of a third party debt, then that payment does not arise out of the director’s employment, does not become earnings and as such is not liable to NIC.
Tenant in common v joint tenants – What is the difference and does it matter?
Under English law, there are two ways in which property can be owned jointly – as tenants in common or as joint tenants. The way in which the property is owned can have tax implications.
Tenants in common
Where a property is purchased as tenants in common, each owner owns a specified share of the property. There is no requirement that the ownership shares are equal. Each person’s share will normally reflect their contribution to the purchase price of the property. As tenants in common own a specified share of a property, they can sell their share independently. On death, their share passes to their estate to be distributed in accordance with the terms of their will.
Where property is owned jointly by unrelated persons, it is often owned as tenants in common. However, it may also be beneficial for married couples and civil partners to hold property in this way, particularly if the property is let.
Joint tenants
Where a property is owned as joint tenants, the owners together own all of the property equally. Any transfer of ownership needs to be signed by all parties, and as all parties have an equal interest in the property. Any sale proceeds are split equally. Under the survivorship rules, should one joint tenant die, the property passes automatically to the surviving tenant(s), and becomes wholly owned by them.
Tax considerations
If the property is let out, the income split for tax purposes depends on whether the joint owners are married or in a civil partnership or not. Where they are not, the income is usually split in accordance with their underlying shares, but the joint owners have the option to agree any income split among themselves.
However, where the property is owned by spouses or civil partners, each is taxed on 50% of the income, regardless of how it is owned. If this is not beneficial and the property is owned as tenants in common in unequal shares, the couple can make an election on form 17 for the income to be taxed in accordance with their actual ownership shares. These can be changed by taking advantage of the no gain/no loss capital gains tax rules to effect a more beneficial income split. However, where the property is owned as joint tenants, the only permissible income split is 50:50. Where a 50:50 split does not give the best result, consider owning the property as tenants in common.
For capital gains tax purposes, where the property is owned as joint tenants, the gain will be split equally between the joint tenants. However, any gain arising on a property owned as tenants in common will be allocated and taxed in accordance with each owner’s share. Each tenant in common can also sell their share independently of a sale of the property as a whole.
On death, where a joint tenant dies, the property automatically passes to the surviving tenant(s). However, where a property is owned as tenants in common, each owner can pass on their own share – it does not go to the other automatically. Their share forms part of their estate.
Plan ahead
When buying a property, consider the tax implications when deciding whether to own a property as joint tenants or tenants in common.