(as published in the Gibraltar Chronicle) 

The main rule is that only costs incurred wholly and exclusively for the production of the company’s income can be deducted from the company’s sales to arrive at taxable profit.

Some costs are specifically not deductible, for example:

One tax break to bear in mind is that expenditure on repairing or improving the frontage of premises (subject to certification from the Town Planner) entitles the claimant to a potential double relief on the expense.

The Income Tax Act states that all deductible expenses must be apportioned between chargeable and non-chargeable income on a pro-rata basis.  Taking this literally would mean that if, say, 30% of your income is non-taxable investment income, tn 30% of your costs could not be set-off against your sales to work out taxable profit.  I mentioned in a previous article that this was being looked at and now understand that the apportionment will only apply to deductions of a general nature, and that direct expenses should be allocated against the income they relate to.  Where to draw the line between general and direct costs will give the more argumentative of us bean counters something to talk about for a while.

Firstly, a dividend is a distribution by the company of profits which have already been taxed (assuming those profits were taxable).  It is not a cost of the company and, therefore, will not reduce the company’s taxable profit.  In contrast, a director’s fee or salary is a deductible cost of the company and will reduce the company’s taxable profits.

When you receive a dividend it is taxed on you as part your personal income.  However, there will probably be a tax credit attached to the dividend, which relates to any tax already paid by the company on the profits distributed to you by that dividend.   This would reduce the personal tax to be paid over on that income.  

With a director’s fee or salary, the gross amount is taxable and the tax should be deducted by the company through the PAYE system.  Moreover, directors' fees or salary attract social insurance, so if the company does not pay you any fee or salary, as soon as it starts to do so it has to pay employer’s social insurance (maximum of £1,714 per annum).  You will also have to pay employee’s social insurance, although if you are already paying contributions you should be able to obtain an exemption.