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Schedule E

As we enter the final quarter of what for many companies will be the last accounting period of the millennium, the thoughts of a company&#39s financial advisers should be turning towards entering the serious phase of corporate and, for the owners of the business, personal tax planning. For individuals, of course, it is the end of the income tax year that has (for most planning strategies) the greatest implications.

To be effective for corporate tax reduction, most expenditure must be incurred before the end of the company&#39s trading period. This is certainly true for any pension contributions. Now that dividends no longer generate advance corporation tax (ACT), the need for them to be paid before the year end if the ACT credit is to be used against the mainstream liability for the year no longer exists.

Remuneration paid as bonus/salary assessable under Schedule E can, however, be deductible for the company even though it isn&#39t paid or made unreservedly available before the end of the company&#39s trading period for which the deduction is required – provided, of course, that it is so paid or made available within nine months of the end of the trading period in question.

For those advising private company directors/owners an apparently inconsequential piece of legislation could have important implications on remuneration strategies. The National Minimum Wage was introduced on 1 April 1999 under the National Minimum Wage Act 1998. The rate for an adult worker is £3.60 an hour. For the Act to apply to an individual the individual must be &#34a worker&#34. &#34A worker&#34 can be a director or an employee and must be employed under a contract. There is an exclusion for family members who live at home and participate in the family business which would seem to facilitate the exclusion of the spouse of a sole trader. Spouses of shareholders in incorporated businesses would not however seem to be covered by this exclusion. There is certainty nothing excluding directors.

A contract can be oral or in writing, express or implied. The term &#34contract&#34 is not defined, so it apparently takes its normal meaning in contract law.

It is well known that some company directors, rightly or wrongly, wish to avoid the payment of any salary. In most cases this is because the director is also a shareholder and wishes to receive all of his benefits in the form of dividends so as to avoid the dreaded National Insurance.

Now such a director would need to consider the National Minimum Wage Act. If having considered the Act the company and director would still like to maintain a &#34nil wage&#34 position, it would seem that the company and the director could legitimately side-step the Act by signing a written agreement to exclude the provisions of the Act to say there is no contract, the director is not a worker for the purposes of the Act and so there is no entitlement to the minimum wage. The company could always pay ex gratia remuneration if it is required, and the director would then be liable to income tax under Schedule E.

If there is no such written agreement the Act will however apply and this would represent a real trap for some. The minimum wage would apply in respect of each hour worked which could easily cause the NIC threshold to be breached. Based on the current threshold, any more than 18 hours a week of work could cause problems. Even if payment of the minimum wage is postponed or it is not paid, then without the aforesaid written agreement this will not postpone liabilities to income tax under Schedule E. Pay As You Earn income tax is charged on all emoluments that the employee is entitled to even if they are not paid. The company will therefore need to keep records of the director&#39s entitlement under the Act even if amounts are not paid.

It is also important to note that the Inland Revenue have been made responsible for enforcing the Act. The practical reason for this appears to be that the Inland Revenue already examines the company&#39s annual accounts and tax computation as well as conducting routine PAYE compliance visits which could lead to an enquiry. If the Act has not been complied with, the Inland Revenue can issue an enforcement notice and possibly a penalty notice with the employer being guilty of an offence if he refuses or wilfully neglects to pay the minimum wage to any worker who qualifies for it.

As stated above, the National Insurance contribution threshold of £66 per week would be crossed if the director worked more than 18 hours per week at £3.60 an hour ie. the full rate. The hourly rate will increase to £3.70 in June 2000. The development rate for 18-20 year olds will then increase from £3.20 to £3.30 an hour. Young people aged 16-17 and those on formal apprenticeships will continue to be exempt.

Regardless of the choice of remuneration strategy, as mentioned earlier the director may wish to cut through the red tape of the Act by signing a written agreement to exclude the provisions of the Act so that planning can take place without the need to consider its provisions. A parallel can be drawn with the red tape surrounding &#34Eurotime" the director can write a letter to the company confirming that he wishes to exclude himself from the Working Time Regulations which impose a 48 hour a week limit. This releases the company from the requirement of keeping a weekly log of hours worked and enables the director to work in excess of 48 hours a week if he chooses to.

Whatever action is taken in respect of the minimum wage it is essential that professional advice is sought before any decisions are made.


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