It is common practice for directors and employees of a business to charge private fuel for a company vehicle or personal expenses to a company credit card with the full intention of repaying the employer. Doing so reduces the taxable value of what is considered a taxable benefit-in-kind and is known as ‘making good’.
Private expenses paid
Where a company typically provides a benefit or pays private expenses on behalf of a director or employee, it is required to notify HM Revenue & Customs (HMRC) each year about the nature and cost of the benefit. It is also required to pay National Insurance Class 1A contributions. In addition, the director or employee will pay tax on the cost of that benefit.
Where private expenses are concerned, the nature of these costs is also declared on the P11D for tax purposes. However, the National Insurance aspect is deemed to be NIC Class 1 and is dealt with through the payroll system.
Avoiding a charge by making good
For all expenses and certain taxable benefits, excluding car or van benefits, the company and directors or employees can avoid any tax or National Insurance charge by ‘making good’ the cost.
There are several ways to do this and it may be a simple case of repaying the employer direct. Alternatively, the cost of the benefit or expense can be debited to a loan account, if such a facility is in place.
Prior to the tax year 2016/2017, HMRC was under the impression that all benefits had to be made good by July 6 following the end of the previous tax year. The only exception was company car and van fuel which, strictly speaking, should have been made good by April 5 (the end of the tax year).
HMRC’s interpretation proved to be incorrect as there was no specific date for tax purposes for benefits other than car and van benefits.
Legislation introduced in the 2017/18 tax year simplified the date when making good could take place in respect of non-car and van benefits. This is now July 5 following the end of the tax year.
Separate legislation applies to expenses subject to National Insurance Class 1. Making good has to take place in the earnings period for no NICs to be applied through the payroll system.
Making good through payrolling
To complicate matters, if a benefit or expense is dealt with through payrolling, making good must take place by April 5. Car or van fuel is the exception and, if payrolled, it can be made good by June 1 following the tax year.
Should anything be made good after the above dates, it’s important to note that tax and National Insurance will still apply.
In terms of best practice relating to private expenses paid for by the employer, we would always recommend that costs are made good when the company makes the payment, for example, updating the relevant loan account.
Making good benefits and expenses can be a complex area so if you have any queries, please contact our tax experts on 01785 243276 for advice about your particular circumstances.
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