Income Tax and the director of the 'one-man' company - an Overview

A legal FAQ from Roger Sinclair

A company is a separate and distinct legal entity in its own right, wholly separate from you, even though you may be its only employee, its only director, and hold 99% of its shares. The company's responsibilities are not your responsibilities, and your responsibilities are not the company's - unless of course the law specifically provides otherwise.

  1. Taxation is governed wholly by Acts of Parliament and rules made thereunder, clarified where necessary (ie as to exactly what they mean, and where the dividing lines fall) by the courts. There is a saying - 'there's no equity in a taxation statute' - this means that concepts of 'fairness' and 'justice' do not enter into it. Either something is taxable, or it isn't; either an expense is an allowable deduction from income before deducting tax, or it isn't.
  2. As an employee of the company you are prima facie liable for tax under Schedule E in respect of your Total Income from the company.
  3. Included in your Total Income are not only actual cash payments made to you by the company, but also payments that the company makes from which you benefit, together with other benefits you receive from the company. There are rules setting out how certain specific benefits are to be taxed. Where there is no specific rule, you are taxed on the 'cash equivalent' of the benefit ie the cost to the company of providing the benefit. Salary is included. So are your expenses as repaid to you by the company. So are other things provided for your benefit but paid for directly by the company.
  4. An employer (ie your company) is required at the end of each tax year to submit a form P11D to the tax office in respect of all directors, and all employees earning more than £8,500 pa. Your company was required to send in one of these forms each year for you. This form must identify all the payments which the company has made from which you benefit, and any other benefits you have received from the company, regardless of whether or not they are deductible when calculating your own tax liability.
  5. Certain expenses are deductible ie you can deduct the amount of the expenses from your Total Income and only pay tax on the income that remains after these expenses have been deducted (your Taxable Income). There are rules which set out whether an expense is properly deductible or not; these are contained within s198(1) ICTA 1988 (formerly s189(1) ICTA 1970)
  6. Whilst it is the company's responsibility to deduct tax under PAYE from any payments of money as salary or as director's fees it makes to you, this is not the end of the story, and PAYE can be regarded as a payment on account of tax due only; you (as any other taxpayer) are obliged to submit tax returns annually, which disclose not only the payments from which PAYE has been deducted, but also any other benefits you have had from your employer. You are obliged to show these payments and benefits in full, and then to show specifically what expenses you claim are deductible. It is not sufficient to simply disclose the net figure after deducting expenses
  7. Any tax due from you for a year which has not been collected by PAYE will be demanded from you by an assessment raised by the Inspector. Following the assessment, you have the right to challenge the amount. If you cannot negotiate an agreed figure you have the right of appeal to the Commissioners. The assessment stands as showing the amount of tax due until and unless you either persuade the Inspector to alter it or you successfully appeal it - the onus is on you to show that it is wrong.
  8. An assessment may be made within 6 years of the end of the chargeable period to which it relates, unless there was fraud or negligence on your part, in which case the period is 20 years. The Inspector cannot assess the same income for tax more than once.
  9. The Inspector can make what is called a 'Discovery' assessment if he discovers that either:
  10. The Inspector is on weaker ground in going back in time and raising further assessments relating to past years if the further income on which he is basing his assessment has previously been openly disclosed to him. In other words, if it was there in front of him, but he didn't realise its implications.
  11. Where you or the company have responsibilities to the taxman and those responsibilities have not been complied with, it is not a valid excuse to say to the taxman that you delegated the task to your accountant and he let you down. However, this *may* be persuasive to a greater or lesser extent in getting the taxman more on your side in areas where there is scope for some leeway.
  12. Where there is a difference of opinion, a genuine dispute, as to the application of the law to a particular set of circumstances, the taxman has the power to negotiate, and to reach a compromise in the form of a legally binding agreement.

I'd really appreciate your feedback on this FAQ - so mail me and tell me what you think of it, if it's been useful to you, or let me know of any specific problem you have where I may be able to help.

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This page was last updated 29 January, 1996.

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© Roger Sinclair roger@egos.co.uk 1996 - All rights reserved - see full copyright details

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The information on these pages is provided free and for information only, and is provided 'as is'. Whilst believed to be correct, it is in no way comprehensive. It is provided for your interest only and is not intended to be relied on as formal legal advice. The posting of information on these pages is not intended to create a lawyer-client relationship, and you should not act or rely on this information without seeking professional advice. No liability is accepted therefore for any errors, or for any losses that may be incurred if it is relied on.

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