Tax Free Benefits - How to maximise profit extraction

Tax Free Benefits - How to maximise profit extraction

You may extract value from your business via certain benefits without a personal tax liability. However, the rules surrounding these benefits must be carefully followed to ensure they are allowed. Some only apply to companies and may not apply to sole traders and partnerships.

Wholly and exclusively
For expenses paid by the company to be allowable, the basic rule is that they must be incurred wholly and exclusively for the purpose of trade. Normally, if an expense results in a “benefit in kind” for an employee, it is deductible for the company.

Duality of purpose
HMRC does not usually regard any expenditure with a dual-purpose element as allowable for taxation. For example, a suit or dress purchased for work has a dual purpose: you must wear clothing anyway, so tax relief is unavailable. Where an expense is not permitted, it must be refunded to the company. Alternatively, if the invoice is in the company name, you can report it on form P11d and pay tax and NIC this way.  

VAT on benefits in kind
Most benefits in kind do not have VAT. Medical insurance, life insurance and director loans do not have VAT on them. While cars are subject to VAT, it is usually blocked. Some benefits may have VAT on them, such as gym membership and the VAT should not be reclaimed on these as it does not satisfy the HMRC business test.

Tax-free benefits
The HMRC website has many tax-free benefits, although many are unlikely to benefit you. The articles in the client area have a lot of useful tips on how you can maximise value from your company.


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