Am I being fair to my partner, or will she lose money?

Question

My partner and I both have good degrees, and should be able to figure out simple arithmetic, but ...

We work through our own company, which we share equally.

I purchased an item which I will use for both personal and company use.

I suggested that I claim it as an expense and we split the cash equally, as an expense, to get the cash out of the company, where it would otherwise attract a high tax rate.

She claims that I will be getting a free item and she will only be getting half the price of the item.

As I see it, I paid the full cost, and it doesn't matter if that is 1 cent or $1,000,000, we are each getting the same amount, irrespective of what I spent.

She has an advanced math degree (which leaves her with a blind spot for arithmetic & bookkeeping, imo :-).

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[Update] can we please stop discussing the legality of this? I am well aware that unless the item is 100% for company use, then I should not be claiming 100% of its value. E.g. it costs £200, and if I am using it 50/50, then I should claim only £100 and that is what I will do. Thank you all for pointing that out; it was my mistake not to state that originally, but I did not want to complicate the question.

Now, back to the arithmetic. Am I in any way swindling my partner if I claim that 50% of the cost, pay 20% personal tax on that, and let the company pay 40% on the remaining half, and offer her half of what I get on expenses?

Can someone please explain to us, as if to a five year old, which of us is correct?

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To clarify, this is from my comment to Kate, below:

Is there any way that my partner could lose money (as she imagines) if I claim expenses from the company (at 20% tax to me) and give her half, as oppose to leaving the money in the company (and paying 40% tax if we disburse it as salary or dividend)?

Answer 1

Here’s my layman’s accounting:

Start: Mawg £0, Mawg’s wife £0, Company £0

Buy item: M -£200 + item, W £0, C £0

After the claim: M -£100 + 0.5item, W £0, C -£100 + 0.5item (assuming shared ownership of item between M and C)

After splitting the claim: M -£150 + 0.5item, W £50, C -£100 + 0.5item

The item was worth £200, so M’s ‘book value’ on this series of transactions is -£50, W’s is +£50.

Here’s the tax situation you’ve set out: You’re paying 20% tax on the £100 claim and giving your wife “half the price of the item”, so your wife pays no tax on this. The company saves 40% tax on its own half-share in the item, but that doesn’t increase its equity. We’ll look at the no-purchase case separately.

So after accounting for tax: M -£170 + 0.5item, W £50, C -£100 + 0.5item, compared to C having to pay £40 on £100 worth of profit without the purchase. You should probably account for your own tax in the no-purchase case as well, but that’s another can of worms, so let’s just say you bought your share out of after-tax savings. :)

The company is owned 50-50 between M & W, so C’s expense is irrelevant. Besides, when you add the money to the item value, C’s equity is unchanged by the claim initially. If the item depreciates over time to £d, then:

After depreciation: M -£170 + 0.5d, W £50, C -£100 + 0.5d (compared to -£40 with no claim)

Notional bottom line after accounting for the company’s equity: M -£220 + 0.75d, W 0.25d (compared to -£20 each otherwise).

You’d start with d=£200 (so M -£70, W £50) and end with d=0 (so M -£220, W £0). Even if you compare it to the no-purchase case, it looks like your wife comes out ahead.

You can adjust the numbers if the item ownership isn’t shared between M and C, but is exclusively owned by one or the other.

I’ve left the legalities to you to sort out, as requested.

Answer 2

Companies pay for things their staff are allowed to use, quite regularly. For example, providing a laptop or tablet to a staff member who can also use it to watch Netflix or play games, ie personal use. Logo'ed clothing that people can wear even when they are not at work. Trips to conferences that are in locations people want to go to. So don't get too hung up on the fact that you will also use it personally.

When it comes to fairness, I find the "I'll give you half my reimbursement" a very strange strategy. Either the company needed to buy you a laptop or it didn't. If it didn't, then you're cheating, and offering to share your cheating gains with your partner is just weird. If it did, then there are no gains, the company bought something, period. You don't have a gain. You bought something and were reimbursed for it. End of story. Perhaps the unfairness is that the company is buying you a phone/tablet/Porsche and not buying your partner one? If that's the issue, talk about that with your partner.

Now, the math. Let's say the company bought you a winter coat. This is something that has no value to your partner. Let's further imagine you have no other expenses and the company revenue is 200. (All this still holds if there are 10,000 of other revenue and 9,000 of other expenses, it just means a little more adding and subtracting.)

The totally legal way: Company pays you salary of 100 and your partner salary of 100. Company deducts salaries, people pay tax on them. You use your after-tax salary to buy an 80 coat. Partner has 80.

The iffy way, depending on the item: Company pays 80 for the item and deducts it as it would salary. Company uses the other 120 to pay each of you 60. You each pay tax on that and end up with 48. You give your partner 40 because you like the coat and appreciate her agreeing to have the company buy it. Now you have 8 and the coat, she has 88. I think you are even. But as a pair, you are each 8 ahead from the other way. This is because you received (effectively) 80 of income without paying 16 tax on it, because you got it in the form of an item you don't exactly own, but can use as though you own it.

Note that the company tax rate is irrelevant. You would pay each other taxable salaries from the before tax company income. Company tax rate applies to retained profit that you will eventually release as dividends and that are taxed to the recipient differently from salary.

Answer 3

focusing just on the math:

I am well aware that unless the item is 100% for company use, then I should not be claiming 100% of its value. E.G it cost £200, and if I am using it 50/50, then I should claim only £100 and that is what I will do. Thank you all for pointing that out; it was my mistake not to state that originally, but I did not want to complicate the question.

Now, back to the arithmetic. Am I in any way swindling my partner if I claim that 50% of the cost, pay 20% personal tax on that, and let the company pay 40% on the remaining half, and offer her half of what I get on expenses?

Can someone please explain to us, as if to a five year old, which of us is correct?

I am not sure there is a 20% tax on you. Imagine this the item comes in a two pack. Buy one for £120 or get two for £200. You offer to pay £100 and the company pay £100. Your partner agrees in advance to this plan. The company spend £100, and gets something it can use, and you spend £100 and get something you want. The company doesn't pay taxes on the £100 it spent, and saved £25.

I don't see where you the person will pay 20% tax. If the company is reimbursing you the person, then you don't owe tax on the reimbursement.

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Based on the original question which seemed to describe fraud:

When you have the company pay for the full item: The company owns it, they store it, and it is used to help the company make money. The accountant/bookkeeper will add the item to the list of company assets. Then overtime the value of the item will be depreciated depending on the laws of your jurisdiction. Of course any business decision regarding purchasing an item should be done following the rules of your joint venture.

But you are proposing that you can use the item for yourself. The % split you wanted to avoid talking about.

As for the math part. You are proposing that you fraudulently remove the money from the company. You then use your half of the money to help defray the cost of the item. And they can spend their half on whatever they want.

So you will be getting an item for half price. Your partner may also be concerned that the item will somehow never be used for business.