When personal bills are paid by the company
From HMRC’s point of view, if a company pays a personal bill, there will be tax and National Insurance (NI) implications unless that expense is work-related and incurred wholly, exclusively and necessarily for the job purposes.
Who is liable for tax and NI contributions when paying personal bills?
How tax is calculated and if it is the employee or also the employer who is liable for NI, depends on the name that bill is made to and who pays the bill.
If the employee has goods/services under their name whilst the employer is paying the bill, then the employer has discharged the employee’s debt. This payment is considered as salary and treated as a benefit in kind for tax purposes and liable to both employers’ and employees’ NI. The employer must deduct tax as if the employee had been paid in cash. However, tax cannot be deducted from a payment to a third party and the payment is treated as a taxable benefit-in-kind.
In this case, the individual may receive both, income tax and NI, whilst the company pays employers’ NI, on the same amount, exactly as if the employer had paid the employee cash. Some types of expenses may have their charge levied such as certain professional memberships. NI is calculated for the tax month the bill is paid on the employee’s behalf.
If the purchase is made under the employer’s name on the employee’s behalf, then it is a company expense. It’s likely to be a benefit-in-kind assessable on the employee when declaring P11D. Unlike other benefits in kind, there will be no employees’ NI contribution and NI will be payable by the employer.
When the company pays a director’s private bill, the outcome will depend on whether the director has a contract of employment or not. If one exists, then the director is treated as an employee. However, if those payments don’t fall as a part of their remuneration package, then they could be set against the director’s loan account. HMRC accepts that the above overrides the treatment of a benefit in kind and, in most situations, the employers’ NI as salary. Instead, it becomes a debt that needs to be repaid. Repayment can be made by debiting salary or bonus, a dividend or the director’s repayment.
These amounts may not be a permitted expense of the company and therefore not be deductible for corporation tax purposes if they are not part of a remuneration package. Usually, the tax value of a benefit-in-kind is the cost to the employer.
In some cases, the company may owe the director money because the DLA is in credit, possibly because the director lent the company money at the beginning. If the director requires the company to apply some of those funds to settle a third-party debt, then the payment does not arise out of the director’s employment but becomes a loan and is not subject to tax or NI.