You may wonder how we can justify writing a whole series of articles about how to claim expenses against your tax. Surely, you will say, there can be no possible mystery about this topic? If you incur a business-related expense, this comes off your profit, and you only pay tax on the net amount?

Anyone who thinks like this obviously doesn't know a lot about our tax system!

It's a common complaint that our tax system is one of the most complex in the world, possibly the most. But we prefer not to complain about this, but to see it as a positive: it gives us a lot of opportunities for tax planning, as we'll demonstrate in this and all the rest of the articles in the series.

The majority of accountants aren't specialist tax advisers. They've too much else to think about to be specialists in everything. The effect of this is that tax-planning advice tends to go in fashions, fashion being the refuge of those have no time to think for themselves. And there's no doubt that directors' remuneration and salaries, as means of taking money out of the business, are right out of fashion at the moment.

The reason for this, quite simply, is that National Insurance (NI) is a very heavy burden on anything paid out as earnings, with a maximum rate, applying up to approximately the basic rate threshold for income tax, of 25.8%. That's why dividends, which normally speaking don't give rise to any NI, have become much more popular. Typically, a director will take a small remuneration, perhaps equivalent to the personal allowance, with the rest of his income coming out of the company in the form of dividends.

Like fashionable clothes, though, the current mode suits some people better than others.

If your company is paying marginal rate corporation tax, which applies if your profits are more than £300,000 divided by the number of companies that exist under common control, you could try asking your accountant to do the sums. You may well find that remuneration is no more expensive, in global terms, than dividends.

The reason for this, perhaps surprising, conclusion is that dividends only pass on, to the recipient, credit for corporation tax at an effective 20% rate. Don't ask us why: that's just the rules. So there's a 'leakage' of tax between the marginal rate, currently 27.5%, and the rate you get credit for, 20%. This leakage is pretty similar to the marginal rate of NI (which is mainly the employer's contribution) for a person whose earnings are in the higher-rate band.

The conclusion is that, counter-intuitively and unfashionably, remuneration may be no more expensive in tax terms, as a profit-extraction method, than dividends, and could therefore be preferred, on one of the following grounds:

The big action point arising from all this is: don't be lazy and just follow the fashion, and don't let your accountant fob you off with any particular method of profit extraction simply because this was the way it was done last year. The counter-intuitive solution may just be the right one.

When we talk about directors' remuneration as a way of extracting the profit from the company, this could be taken as implying that the amount of remuneration the directors decide to pay themselves is entirely up to them, with the taxman having no particular interest in the issue.

Generally speaking, it seems that this is true. However, HM Revenue & Customs has been known, on occasion, to query how much remuneration is being paid, saying that an excessive amount is not tax-allowable.

Undoubtedly, it has the law on its side, as far as the basic principle is concerned. Directors' remuneration, like any other expense, has to be 'wholly and exclusively' for the purposes of the trade of the company to be allowable. Any amount that is paid in excess of that director's real market value to the business can be re-categorised as, effectively, a dividend.

We'd be interested, incidentally, in knowing whether anyone has tried this rather interesting idea. How about acknowledging that the remuneration concerned is excessive and should therefore be treated as a dividend? If you think about it, this could just be one way round the problem we have highlighted above, about dividends, normally speaking, having to be paid pro rata to the individual's shareholdings. However, the difficulty, of course, with this is that it depends on judgements of value, which may be food for disagreement between the taxpayer and the Revenue.

In our view, in what is probably a majority of situations, the Revenue is unlikely to have a very strong argument against remuneration on the grounds that it is 'excessive', because, unless the remuneration is significantly greater than the profit available, one could state that, almost by definition, a fair amount of remuneration is the amount that would bring the company profit down to zero.

This may seem like a bold assertion, but, if you think about it, without the directors, most companies would not be making any profit at all, so you could say that, by definition, the value of the directors' services is equal to the pre-remuneration profit. If anyone were having trouble with a tax inspector on the grounds of purportedly excessive remuneration, we'd love to hear from them.

Now let's have a look at the one-off timing benefit we mentioned above, as being one of the advantages of a remuneration. This is the situation that applies where remuneration and salaries are paid after the accounting period to which they relate.

Actually, we think this is a very common situation in practice, and it doesn't just apply to company directors and owners/managers: sometimes the other staff of the business are rewarded for a good year's trading by bonuses or other payments made in the following period, once the accounts have been drawn up.

The tax rule that applies here is the one relating to the timing of tax deductions. If remuneration relates to a year, and is paid no later than nine months after the end of that year, it can be claimed as a deduction for the earlier period, rather than the period in which it was actually paid.

You may say that this simply shifts the taxable profit from the earlier period to the later period: but if you do a similar provision against the profits next year, and the year after that, and so on, the tax benefit is effectively a quasi-permanent one. And in any event, why pay tax sooner than you need to?