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February 16, 2015

Private or business expenditure? – Dennis White v HMRC

The case of Dennis White v HMRC illustrates the importance of an adequate record keeping system and keeping business and private expenditure separate in a business.

The issue before the Tribunal was whether the private expenses incurred by Mr White should be assessed on him as benefits in kind, and if so, whether he should be allowed to rewrite his director’s loan account to make good those benefits.

The Facts

-          Mr White was the director of a company and did not declare benefits in kind on his tax return

-          HMRC undertook a check into the Employer and Contractor’s records of the company and discovered the following:

  • The company credit card was used for both business and private expenditure,
  • Personal motoring expenses were met by the company, and
  • The directors’ loan accounts were incorrect.

The Case

HMRC argued that the company credit card was used for private expenditure, therefore contended that this is taxable as remuneration. As the personal motoring expenses of Mr White and his family were met by the company, this too was taxable as a benefit in kind.

Mr White and his fellow director admitted that there was no system in place to identify how indebted to the company they were, however they claimed that the capital injected into the company by the directors outweighed their withdrawals.

The company’s major customer was based in Netherlands and Mr White was obliged to frequently travel to meet the client and to deal with problems arising in fairly remote parts of the world, meaning that it was difficult to keep accurate records and receipts.

Furthermore, under s. 203(2) ITEPA 2003, the directors have a right to retrospectively make good a benefit in kind once they become aware of it.

It was held that as there were no systems or controls in place, it was difficult to quantify the private amount of expenditure. No evidence was provided to show that private expenditure had ever been appropriately reimbursed to the company by the directors and details of the directors’ loan accounts were not supplied.

Although it was agreed that certain flights were solely for business purposes, some flights were also for private purposes. Therefore, where no evidence was submitted as to the nature and purpose of the journey, it was assumed that the expenditure was personal.

The Tribunal also agreed with HMRC in regards to his director’s loan account and held that s. 203(2) ITEPA 2003 does not grant any right to retrospectively make good a benefit as income tax is an annual tax, and the value of the benefit depends upon what is made good in that tax year.

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