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Know which way the win blows

The private company has always offered substantial opportunities to the adviser to create and benefit from genuinely win/win solutions. By use of win/win in this context, I am talking, quite simply, about a win for the client and a win for the adviser.

An entry ticket for this market can be generated by the adviser aligning his business interests with those of his client. This alignment needs to be founded on real and constantly improving understanding of the commercial, tax and legal imperatives that drive his client&#39s business objectives.

Either working alone or, more likely, with other professionals, the adviser can be party to enabling the business owner to tax-effectively extract funds from his business either to spend or invest. Part of this process is likely to involve giving advice on appropriate wrappers for invest-ment funds funded either directly by the company, for example, an occupational or personal pension plan, or by the individual using funds that have been extracted from the company for personal use.

In advising on strategy for the distribution of profits, the adviser will no doubt have in mind the relative tax and National Insurance attractions of dividends over salary, especially for money that is to be spent and, increasingly, for money that is to be invested where the investor wishes to avoid the constraints and potentially higher tax bill that emerges from benefits being paid as an income from an approved pension arrangement.

The adviser will also need to keep in mind (for certain clients) the provisions of Schedule 12 of the Finance Act 2000 (IR 35) and, for all company directors, the effect of the national minimum wage provisions under which a minimum payment of £3.70 an hour must be paid to a working director.

The Tax Faculty of the Institute of Chartered Accountants in England and Wales has recently issued a guidance note that was agreed with the Inland Revenue which covers this subject. The relevant part reads as follows: “If a person is a director and does not have an explicit employment contract, then he is highly unlikely to be subject to the national minimum wage legislation even when he carries out a wide variety of activities. These might include, for example, working in the company&#39s shop. Such activities can be done in his capacity as an office holder (director), rather than as a worker.

“If a director has an explicit employment contract, he will be within the national minimum wage in respect of earnings under that contract as he and the company will have chosen to create a worker/employer relationship alongside the director/company one.

“The Department of Trade and Industry have told us (the Revenue) that if there is no written employment contract or other evidence of an intention to create an employer/worker relationship, it will not seek to contend that there is an unwritten or implied employment relationship between a director and his company. As the Inland Revenue administers the national minimum wage as agents for the Department of Trade and Industry, it will adopt this policy also.”

As to the application of the legislation to family members who work for a family company but are not directors of it, the guidance note confirms that, whereas there is an exemption for family members working in a family business, one of the consequences of incorporation is to confer the full protection of employment legislation including the national minimum wage on such people. The absence of a formal written contract does not mean no contract exists.

If the family member is appointed to act as company secretary and receives a wage, that family member is an office holder by virtue of being company secretary and is unlikely to be covered by the national minimum wage legislation.

In the case of a group of companies, the guidance note confirms that a director who works intermittently for a subsidiary company is regarded as furthering the interests of the group as a whole and is not therefore within the national minimum wage legislation as a result of that work. As regards new businesses, loss-making family companies, dormant companies and flat management companies, the principle that directors are outside the scope of the legislation applies.

On the other hand, the guidance note confirms that workers of such companies do have to be paid the national minimum wage since “the Government&#39s policy is that no UK company should exist on the basis that it has to pay its workers below the minimum wage”.

As regards arrears of wages due to underpaid workers, the guidance note explains as follows: “If it is decided that because of the national minimum wage an employer has to pay arrears of remuneration to an employee, the view of the Revenue is that the worker was entitled to the arrears at the time of the original (inadequate) payment.

“That entitlement date is effective both for the purposes of the receipts basis of assessment and the time of payment for pay-as-you-earn by virtue of section 202B(1)(c) Taxes Act 1988. This means that when the employer makes the physical payment of national minimum wage arrears, the sums can be paid net of the tax due at the time pay-as-you-earn was exigible, namely, the time of entitlement. The arrears of tax will normally be sought from the employer by means of a settlement and interest will be due in the normal way. Penalties will not be sought.

“The contributions legislation differs from that relating to tax and the National Insurance contributions should be accounted for in the normal way at the time of actual payment of the arrears.”

If a worker/employer relationship exits between the company and director but the director does not take the mini-mum wage, the tax and NIC on the appropriate amount of minimum wage will still be due.

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