Tax planning for directors: Off the beaten track!

Alan Pink looks into some useful but little-known directors’ tax perks.

The custom of remunerating employees and directors of a business through benefits-in-kind, as well as or instead of in cash, is probably as old as business itself. And the UK tax system has a typically idiosyncratic way of dealing with the various forms of employment ‘perk’ for tax purposes. 

The basic rule (subject to exceptions, of course) is that the employee/director is treated as being taxable on the amount of money spent by the employer in providing the benefit-in-kind – but some of the exceptions are quite interesting, and what we’re looking to do here is list some of the more advantageous ones, from the director’s point of view. 

There’s one very interesting feature of the way these rules work, in almost all cases. This is the fact that where there is favourable treatment aimed at encouraging employers to provide various benefits and facilities for their staff, these almost always are still available even where the only employees, or the only employees who benefit, are the director/shareholders of the business. 

The following list of tax favoured benefits-in-kind is, of course, not an exhaustive list, and excludes some of the better-known ones. The reason for this is because we are looking to highlight some of the less well-known tax advantaged benefits. 

Living accommodation provided by the employer can be completely exempt from tax. This is where the following conditions apply: 

Where it is not ‘job-related accommodation’ in accordance with the above, the amount is taxable, but under special rules. 

If the cost to the employer of acquiring the accommodation was no more than £75,000, the benefit-in-kind is measured by reference to the rateable value of the property – which is usually tiny in relation to its true rental value. It may be that very few directors are likely to live in accommodation with a cost of less than £75,000; however, it should be borne in mind that partial interests in properties are included. 

Where, however, the cost of the premises for the employer is more than £75,000, the excess is charged effectively as if it were a loan to the director concerned, with the benefit-in-kind being measured by reference to the ‘official rate’ of interest. Given an official rate of 2.5% at present, this can be a very tax-efficient way of a company rewarding its directors. 

The provision of cheap or free meals in a staff canteen is tax-free, provided the canteen is open to all the employees of the company; or all employees at a given location. 

The interesting question arises: could the home of the main directors of a small company be treated as a location of the company, and the kitchen/dining room of that house be treated as a ‘canteen’? In all cases such as this, it’s probably wise to adopt a cautious approach. However, the main principle mentioned above, to the effect that benefits are generally just as well favoured by the tax system where the recipients are shareholder/directors as other employees, still applies here.

The provision of car parking at or near the premises is exempt from tax; and this, of course, applies to directors as well as to other employees. 

Unlike the ‘canteen’ concession, there is no requirement that this benefit may be made available to all employees. 

In most situations, it’s true to say that the heyday of company car provision as a tax-efficient way of rewarding directors and other employees has long ago passed. For some years now, since some reforms were put in place when Gordon Brown was Chancellor, there has been a very rough and ready way of charging staff on the benefit of cars provided by their employers. A fixed percentage of the list price of the car when new is treated as if it were taxable income, with that percentage being based on the CO2 emissions of the car, and hence how ‘environmentally friendly’ it is. 

Two of the harshest features of the regime are that there is no allowance for situations where the car is very old and, therefore, the actual value of what is being provided is correspondingly low. In all cases, the tax charge is based on the list price of the car when new. Secondly, there is no allowance for the extent to which the car is used for business motoring as opposed to private motoring. The tax charge is the same for the employee that does one private mile and 20,000 business miles, as it is for the one who does 20,000 private miles and one business mile. 

But, as with all instances of ‘rough justice’ enshrined in the rules, these anomalies can be turned on their heads and made into advantages. A convenient way of doing this is to take the situation of the director’s university age child, who is being provided with a car by the director’s company. It is mother or father who is chargeable to tax on the benefit-in-kind because the car is treated as being provided by reason of their own employment rather than any employment the child might have with the company; however, a car provided to a youngster of this kind is likely to be small and environmentally friendly, resulting in a low benefit-in-kind charge. Also, the fact that the child is unlikely, in most circumstances, to use the car for the purposes of business at all does not matter because the charge is the same regardless of how much business versus private mileage he or she does. 

When you consider that the cost of the provision of the car will include an eye-watering insurance premium, to say nothing of the other expenses of running the car, you could easily end up with a far lower benefit-in-kind charge being taxed on the director than the actual cost to the company of providing the benefit.

The cost of entertaining business contacts is not allowable as a deduction in the company, under special rules introduced very many years ago by the ‘killjoy’ Inland Revenue. 

However, the benefit of going out to posh restaurants is something which can be conferred by a company on its director without there being any personal tax charge. In practice, where the entertaining is business related and is not just an excuse for a ‘jolly’, it is not suggested that the cost of the entertaining should end up being taxed on a director personally. He may enjoy lunching at the Ivy; however, the main purpose (of course) of lunch was to ‘network’ with important business contacts. As ever, this rule applies just as much where the company belongs to the director concerned as in more arm’s length situations, as a matter of basic principle.

This can take place tax-free, for directors as for other staff members. 

Directors, in the same way as other employees, can receive loans from their employer of up to £10,000 without any tax charge on the benefit (you should also bear in mind, though, that if the lending entity is a close company, and the director is also a ‘participator’ (broadly shareholder) or ‘associate’ of a participator, any such loan will give rise to the ‘loans to participators’ tax charge, which is a 32.5% refundable amount). 

Loans of more than £10,000 can, of course, be made and the excess will be chargeable as a benefit at the ‘official rate’ of interest (see the section on living accommodation above).

If the company’s business requires a director to move from one part of the country to another, relocation expenses of up to £8,000 can be met by the employer tax-free. 

Relocation expenses include not just the move itself, but also financial costs incurred as a result, and the costs of things like new carpets and curtains.