Payments to employees at University??

Scooby7 · PayPerShop Newbie Joined: 25 Feb 2008 Posts: 3

I've just come across the "Payments made by employers to employees when in full-time attendance at university...." regulations.

My daughter (currently 16) does admin/payroll for my company and is paid a small salary through the business. In 2 years she will be off to university and it looks like the business (a ltd co) can pay her up to �15,480 + the �3K tuition fees all free of any Tax or NI

Is that REALLY correct??! Surprised

Ian Whyteside

Hi scooby7,

This is a good one and well worth posting because it raises a number of issues which need to be considered.

You are absolutely correct that payments up to �15,480 can be made free of UK income tax and national insurance contributions to an employee who undertakes a full time university course. It has to be at least one academic year long and they have to be in tuition for at least 20 weeks.

The exemption does not cover any work the employee does for the company as this must be kept separate from the "grant" and be assessed for income tax and nic in the usual manner.

But I think there is a problem and it comes from the fact that it is your daughter you may be considering this for. Whilst I don't think the proposed "income shifting" regulations will strictly apply to this situation there is a real risk that HMRC will ask some searching questions about such an arrangement being entered into for a member of the family.

We can argue, and as an adviser I would strenuously argue it, that as she is an employee the company is perfectly within its rights to sponsor her with a sizeable grant and take advantage of the exemption in order to finance her studies.

The statement of practice 4/86 and recently updated gives no indication about the circumstances of such payments being made to a "connected person", but see sections 211 to 215 of ITEPA 2003 which does make reference to this and as far as I can see, if you did this HMRC are within their rights to ask if, in all the circumstances you would do the same thing for an unconnected person?

This issue covers the same ground as the old company car trick to a son or daughter at university. Some employers in closed companies still do this without recognising the dangers, they take on a company car, give the car to a son or daughter who pays no benefit in kind tax because they are not employees and can then drive around making no contribution. The company claims the costs against profits for corporation tax purposes and everyone wins, except that nowadays the car is supposed to be declared as the parents company car because it is given to a "connected person" and is deemed to be the parents benefit as one derived from employment.

So, good point to raise but anyone thinking this will give them bit of a bonanza should consider it carefully. The only saving would be against corporation tax for the company and there is a danger it will be reversed on investigation so it may be safer to fund the grant from post tax income.

Anyone else been involved in such arrangements who can throw more light on the subject?

Ian Whyteside

Scooby7 · PayPerShop Newbie Joined: 25 Feb 2008 Posts: 3

Thanks for that Ian - It is a tricky one, but I'm not yet ready to throw in the towel!

Firstly, My salary is �8,200 and my wife's �6,500 (has been for the last 10 years) so under EIM20101 we count as lower paid (unless HMRC can lump all household income together). If we do pass the "low pay" test then the benefits code doesn't apply.

Secondly "a scholarship gives rise to a chargeable benefit where it is provided for a member of the family or household of a director or employee by reason of the employment of that director or employee" - this relates to the scholarship being paid by reason of the director's employment, whereas in my case, the scholarship would only be paid by reason of the student's employment (and I understand that their salary is taxable and separate from the grant). As my daughter will have worked for me for 3 years when she goes to college, and she does have a real role in the company, I think we have a good argument.

Also, my understanding of EIM30002 is that it applies when a grant is paid to a student who has no connection with the employer, and the suggestion might be that employee's children could be given preference over other "members of the public". This is a different scheme, where a qualification is that they must be an employee.

Thirdly it should be possible to claim that the award of a scholarship is fortuitous and not by reason of the employment of the director as the scheme will be open to any employees with at least 2 years of employment who go to university to study a full time course of more than 1 year and is in no way conditional on the employment of either parent. Perhaps one day someone unrelated might be in a position to benefit from the scheme, but it would seem unreasonable to penalise my daughter because she happens to be the first.

Finally, there's always the case of "Qui audet adipiscitur" (who dares wins!) - my experience iof selling properties to connected parties is you file the CG34 and wait for them to stand toe to toe!

How do you rate my chances?! Wink

Ian Whyteside

Well you've certainly got more chance than some others if your courage is taken into consideration!

You make some very valid points and I confess that I have not taken the time to examine the manual on the matter.

The fact that your daughter is a genuine employee and has been for three years lends considerable weight to the idea that she is entitled to benefit from this concession and if there was a condition of service which made it look as though any other employee would similarly benefit this may provide enough of a case. Employers of closed companies do not have to prove that they HAVE given something to an unconnected person in order to establish that they WOULD, merely that there is evidence of a good chance that it would happen.

It would be down to the commissioners to determine if, in all the circumstances, they believe it would happen.

My opinion is that if I was your adviser I would argue the point strenuously that the person is your employee first and a daughter (a connected person) second for the purposes of the grant or scholarship.

Secondly I would argue that her conditions of service clearly give her an entitlement to a grant and that since these are general conditions they would apply to another, unconnected, person as well. I would further argue that it would be wrong to deny her a rightful payment simply because of this.

The problems are that, as you say, EIM30002 clearly makes a distinction in that concessions apply only if the person is unconnected so that HMRC can discount grants which appear to have been given only because the person is a family member.

The argument that the grant is fortuitous is an important one but HMRC will argue that since there is no actual evidence of a grant being given to an unconnected person then this proves it would not be. Their argument works sometimes and not at others, taxpayers often have to wait for a commissioners deliberations before finding out!

I feel there is a further problem in determining the amount you would give. Clearly you and your wife take low salaries in order to maximise the dividend take from the company but there is a danger, is there not, that if the grant is in excess of her normal salary, or in any case in excess of the salaries taken by you and your wife HMRC will use this to open an investigation in order to check the efficacy of your argument.

I don't blame you for examining this closely and I feel there is scope for using it to help fund the costs of study and use corporation tax relief to assist.

One thing you should do, though, is not spend any tax savings until you are sure HMRC will accept your arguments, just in case they want the money back!

Ian Whyteside

Scooby7 · PayPerShop Newbie Joined: 25 Feb 2008 Posts: 3

Thanks Ian - I learnt some time ago that tax law is all about interpretation, and if HMRC don't agree with your interpretation, the worst they can do is make you pay it back (excluding obvious fraud)

I don't think they can really have a go at the grant amount vs salaries, My mileage allowance often exceeds my salary, but as I told HMRC when they queried it "I'd like to get paid more, but frankly I'm not worth it! - my fiduciary duty to the company and its shareholders prevents me from taking a higher salary" to which their reply was "Eh?" Rolling Eyes

Don't change e-mail address - I may be contracting your services in a couple of years time! Wink