During the pandemic your company was struggling for cash. To help, you didn’t claim reimbursement of business expenses you incurred. However, your company can now afford to pay you back. Will this cause a problem?
Personal or business cost
If you’re an owner manager you might help keep your company afloat by lending it cash. You 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 your 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 your company’s business and those which relate to your role as owner manager.
Where you personally meet overhead and direct costs, e.g. premises rent or stock, in effect, you have lent your company money and this ought to be reflected in its accounts to give a true picture of its trading activity. However, the position regarding your job-related expenses is more nebulous.
Job expenses
Whether job-related expenses are costs of the company or yours 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, as a company owner manager you might not work on the same terms as your employees. In fact, you might not have any clear contract for your work.
In this situation you have a choice of whether to claim reimbursement of job expenses.
Reimbursement or no reimbursement
If you claim reimbursement of job expenses from your company it can pay them tax and NI free as they are exempt payments. If you don’t claim reimbursement, you can instead claim a tax deduction for them. However, this isn’t ideal.
Trap. Claiming a relief for job expenses puts you in the same tax position as if your company had reimbursed you, but not so for NI purposes. Therefore, you and your company could be worse off.
Subsequent reimbursement
If initially you don’t claim reimbursement of your job expenses but later decide to, you and your company need to be careful you don’t inadvertently double up on tax relief.
Trap. You’re only entitled to tax and NI relief for an expense once. If you claimed a tax deduction for a job expense and also claim a reimbursement for it, your company should apply PAYE tax and NI otherwise you will have received tax relief twice. To prevent this you could withdraw your claim for tax relief so that your company could make an exempt reimbursement to you. The trouble is, you can only do this if you’re within the time allowed for amending your self-assessment tax return for the year you claimed the tax relief.
Tip. As a rule of thumb, it’s always more tax and NI efficient to claim reimbursement of job expenses from your company. If it’s struggling for cash it doesn’t have to pay you. Instead the expenses owing to you can be treated as a loan, e.g. a credit to your director’s loan account, until such time as your company can afford to pay.
There’s no problem unless you have personally claimed tax relief for the expenses. In that case if your company reimburses you it must deduct tax and NI. It’s generally more tax and NI efficient for your company to reimburse you. If necessary it can defer the reimbursement until such time as it can afford to pay.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit <a href=”http://www.indicator-flm.co.uk”>www.indicator-flm.co.uk</a> or call 01233 653500.