Limited company directors problem (reporting PAYE annually which coincides with first AP of new UC claim)
Claimant and partner are directors of a company where they are the only employees. As I understand it, they receive irregular earnings throughout the year which the accountant then reports through PAYE on an annual basis. This resulted in a RTI report of nearly £19k in the same AP they had to make a new claim for UC. This is not when they received the income. He’s not working because of corona virus so they have no income at all now. Although entitlement is nil, they’ve kept the claim open and surplus income rules have reduced entitlement to nil in the subsequent AP and will do for some time.
I understand that the DWP should use RTI for employed earnings, but the costs should be reported as an expense for his s/e. But, what about the RTI figure for the first AP? Would it be an RTI dispute/MR on the basis that this money was not received during the AP? The figure represents his income for 2019/20 in full, rather than the first AP of his new claim.
Any advice much appreciated.
I know this is quite dry but does anyone have any ideas? Or encountered similar? Many thanks!
I hesitated to reply sooner, as I’m not an accountant and not that knowledgeable regarding payroll and taxation. However I came across a similar case last year, and could not find anything that allows an exception to running RTI on a monthly basis, where payments are made monthly.
There is an exception to allow an annual report if they are actually paid annually.
There is also an exception if earnings of all employees are less than LEL and no-one has another job or other taxable income.
Some employers are exempt from online filing, for example those who provide care or support at home, and exceptionally if the employer is unable for reasons of disability, age, or unable to use an online channel.
None of these exemptions were applicable in the case I had, or probably in yours.
I fed back to my client that the accountant was probably not processing payroll correctly by not submitting RTI monthly….and I heard no more from them.
It is actually extremely common (and permissible) for directors to take out money from the company throughout the year and still only run an annual payroll. This is due to the use of a Director’s Loan Account.
If the director is insistent that the irregular withdrawals were always intended as a wage, then yes, they should have technically run payroll each time. I have to say that I have NEVER heard of anyone doing this. Directors are always withdrawing money with the understanding that their accountant will classify it either as wages or dividends (or even leave it in the Director’s Loan Account), depending on what is most beneficial.
What is therefore done is either to run payroll as an annual salary, or as a regular amount each month regardless of what they actually take out in that month.
Obviously, someone on UC should normally choose the option of a regular monthly amount rather than the annual salary.
Coming to your question about what can be done now that an annual salary was done. I’m not really sure. It isn’t really possible to amend the payroll, as HMRC are only interested in the “Year To Date” figures (and in fact that is all that can be corrected using either of the two allowed methods of correcting errors in a previous year’s payroll).
I can only suggest your client raise an RTI dispute with UC saying that the RTI is wrong, as the wages should have been made each month over the year, and that HMRC do not allow for such errors to be corrected. This would be relying on Reg 61(3) to get it changed. I have advised a couple of clients to do this, but have not heard back if they were successful.
The other option is to appeal it based on the Johnson case from last year - see here. I believe the government’s appeal against that judgement was actually heard last week.
Yes, using a directors loan account would make sense - and so the issue then is that the employee IS only paid once a year!