Director allowed to invoice company for his services?

I have a question which I require answer on behalf of my client.

A person who is director of the company and had withdrow cash from company's bank account for personal use over the period of 2 years.

He said that these payments are in return of services he provide's to company.

His total cash outlay come to £22,000 in last 2 accounting years of the company (2011 and 2012).

Company has made trading loss during the year and accounts are yet to submit to company house.

He is sole director of the company but there is a management committee who control the business affairs. Management committee allowed him to take payments in this form.

He is submitting invoices to company's account regularly.

He provide services to other companies and get paid from them as well.

 

My question is, what will be treatment of these payments?

Short description: 
Director's Payments
Exclude from most read etc: 
0

Comments

johngroganjga's picture

Not good news, but in my

johngroganjga |

Not good news, but in my opinion those payments should have been subject to PAYE and NI.  They should be accounted for as directors' remuneration.

He said that since he has

Abutalib |

He said that since he has more than one source of income, he consider this as self-assment payments and this is why he has not registered this company for PAYE.

Is this right treatment?

johngroganjga's picture

No.

johngroganjga |

No.

Is there any minimum limited

Abutalib |

Is there any minimum limited he can withdraw without being register for PAYE?

Paula Sparrow's picture

It is possible

Paula Sparrow |

To be both a director and a supplier to the company.  However, unless the company's trade and the trade carried on by the director are completely different...for example, the company sells widgets, and the director provides carpentry services to the company, HMRC's default position is that all the payments derive from the directorship and are subject to PAYE.  It all very much depends on the circumstances and the contracts in place between the company and the individual.

johngroganjga's picture

Yes but it's well under the

johngroganjga |

Yes but it's well under the amount you mention here.

Frankly I would get the company to register for PAYE immediately and deal with all payments correctly going forward.  In the meantime just put the payments made to date in directors' remuneration and ensure that the director puts them on his return as self employed earnings (presumably he is registered as self-employed if that is what he considers himself to be?).  The test is whether he has been paying Class 2 NI. 

What services?

Alexdon |

What services does he supply to the company? Is he a shareholder? 

If the services are those of a Director, HMRC will seek to have it treated as employment. They are not keen on office holders avoiding NI payments.

Don't forget if the situation stays the same you need to show transactions with directors in the notes to the accounts!

.

ireallyshouldkn... |

Not being funny but this sounds messy, it might be a job for someone more experienced.

This type of work is often the most technical vs something that actually went right in the first place. 

Remember under CA 1985

The Innkeeper |

it was illegal to pay a director gross. The provision was not re enacted in CA2006 I suspect because HMRC feel that they have enough ammunition to shut such a scheme down

Director provide consultation

Abutalib |

Director provide consultation services to the company. The comapny's main business is not consultancy service, they build houses etc.

There are managers who control the business and this person gave them consultancy only.

and yes, he is share-holder of the company.

I'm not sure that I agree with some of the above comments

Justin Bryant |

The bit in the manual that supports split contract (self employment) planning is in EIM00730 as follows:

http://www.hmrc.gov.uk/manuals/eimanual/eim00730.htm

“...It is possible for an employee or office holder to tender for work outside their normal duties, not as an employee or office holder but as a self-employed contractor. Any amounts payable in those circumstances will fall to be taken into account as Trading Income in arriving at the profit from the self-employment. They are not employment income....”

An example would be a taxi driver working for his tax driver company of which he is a director -so there is no need for it to be a different type of work etc.

Directors Allowed to Invoice Company For His Services

Wayne Pulman |

I agree with Justin.

The section of the employment manual is the basis of Split Contract planning and has robust QC's opinion to confirm that it is perfectly acceptable.

Clearly great many different views, but most of them reflect HMRC "spin".

 

 

 

@ Abutalib (OP)

fawltybasil2575 |

Unless there are other facts not supplied by you, your case is one where the chances of, and indeed the likelihood of, HMRC's disputing the arrangement ( ie the consultancy fee arrangement between the company and the director) are minimal.

The client is the sole director, who owns shares in the company.  We are not told whether there are other shareholders, and I surmise that there are none ( please clarify the point).

There is no legislation which prevents a director from receiving self-employment income from a company in which he is a director ( regardless of whether the directorship is an "office" or alternatively whether he has a contract of employment).

The self-employment case is much less likely to be challenged by HMRC where, as in this case, the director receives other (identical in nature) self-employment income.  You advise that he receives similar consultancy fee income from other customers, hence that is a considerable plus point.

The approval by the management committee of the consultancy fee payments is a possible plus point - in reality, if the client is the sole shareholder ( or controlling shareholder), their agreement thereto could be of little significance - if however he is a minority shareholder it could be a more significant plus point.

The possibility of HMRC's disputing the arrangement increases significantly where they suspect avoidance of National Insurance( by dressing up remuneration as self-employment income).   But, unless I have missed something, your client could probably legitimately avoid National Insurance by withdrawing income as dividends instead of remuneration ( especially if he is the sole shareholder).  I do however hesitate somewhat here, as you refer to the company's losses, but do not indicate the amount thereof - in simple terms, if there were profits  (before deducting the £22,000 consultancy fees) of (say)£14,000, then that £14,000 could have been withdrawn as dividends and thereby avoided National Insurance - a similar amount could of course alternatively have been withdrawn as salary below the LEL.  

Whilst again it is difficult to be more precise without knowing the loss figures, the facts indicate that the director will have a personal tax liability on his consultancy self-employment in a period in which there are company losses - the fact that this outcome is (at present) substantially less favourable than if the consultancy fee payments had not been paid  is another factor which would assist in disproving any HMRC contention of artificiality re the payments to the director.

In some respects my above comments are of necessity over-simplified, but overall I see only a small possibility of challenge by HMRC, and even less chance of a successful challenge.  I submit that the payments should be shown in the Financial Statements as Consultancy Fees, with details thereof ( as Alexdon correctly stated) being disclosed on those Financial Statements.

I hope this helps.

Basil. 

@basil

Abutalib |

@basil

Here are answers to your questions.

There 1 other share holder along with this person. Both share holders are 50/50 basis. He has taken other person's approval about providing services to company and charging for his services.

He has paid tax on his self assessment income. His income from this company is £22,000/- and from other sources, it was £28,000/-. His last account has submitted tax return and paid tax on that income accordingly.

Now, I am taking him over as my client, I want to know if he is going right in term of taking money out from the company and showing it his self assessment income.

His company has recently submitted accounts and there is no mention of any transection with director. company's accounts show a loss of couple of hundred pounds which include that £22,000/- as payment to self-employed workers. There are 3 other people who provide services to this company and they are not on payroll, they send invoices and receive payments.

 

BKD's picture

But, Justin

BKD |

My understanding of HMRC's words in the guidance referred to is that they deal with cases where the individual derives income from another source, and is entitled to treat that income as his own rather than derived from his employment/office. In this case, though, we're dealing with income received directly for services provided to his 'employer' company. I would be very surprised if HMRC, on enquiry, did not attempt to apply PAYE to the payments.

@BKD

The Innkeeper |

I agree

Management committee?

Vaughan Blake1 |

Without a PAYE scheme they too must be self employed. 

Having a director who receives PAYE fees for the directorship and invoices for "consulting" is quite common.  A sole director/shareholder with no PAYE fees is pushing the point somewhat!

Management committee

Cloudcounter |

Vaughan Blake1 wrote:

Without a PAYE scheme they too must be self employed. 

 

Or unpaid, perhaps?

BKD/Innkeeper

Justin Bryant |

I would respectfully disagree and that is not what HMRC's above guidance says if you click on the link and read it in full.

You might be thinking of the situation of sole proprietors or partnerships in professional business (for example as a solicitor or accountant) providing director services to their clients.

Assuming the terms under which you are appointed do not treat you as an employee of the person making the appointment, then any fees or payments made to you personally are not subject to PAYE, but that is not what the above HMRC guidance is about and that guidance confirms that I am correct in my view.

If you are not thinking of that of alternative situation described above, then what is your justification for saying I am wrong?

 

BKD's picture

Then we agree to disagree

BKD |

It is possible for an employee or office holder to tender for work outside their normal duties,

The question in this case is - are the services invoiced to the company outside his normal duties as a director? We're not given much information, but the inference is that they are not.

I consider the taxi driver example to be a poor example.  If the individual contracts directly with others to provide taxi services I can see where self-employed status could apply - but again in that case the services are being provided to a 3rd party. If on the other hand he is driving on behalf of the company I think it would be hard to avoid PAYE since his services are to the company, just as they are in the OP's situation.

I never said PAYE was an inevitability - I said that I would be susprised if HMRC did not see it that way.

It doesn't bother me if you stand by your position, but unless you or someone else can provide some case law to the contrary it won't make me move from mine.

BKD

Justin Bryant |

 Any taxi driver who owns his own cab is almost certainly self-employed and here's some case law supporting my view in other areas:

http://www.bailii.org/cgi-bin/markup.cgi?doc=/uk/cases/UKFTT/TC/2013/TC02837.html&query=Maureen+and+Hepburn+and+v+and+HMRC&method=boolean

 

 

 Also,

BKD's picture

Justin

BKD |

With respect, that case dealt with a quite different issue - whether the income belonged to the individual or her company. Nice try, though.

BKD

Justin Bryant |

That case is relevant and supports my view, but let's just agree to disagree as you say.

@ OP (Abutalib)

fawltybasil2575 |

Thank you for the additional information per your post at 14.52 yesterday.  As frequently occurs, one really needs materially more information to more precisely determine whether one's initial views should be altered.  I can think of numerous questions which might be relevant but will restrict them to the following:

[1]    Is your client in anyway "qualified" (by experience or formal qualification)?

[2]    What wording appears on the invoices?

[3]    Approximately how many hours per month are devoted to (i) your client's duties as a director and (ii) his Consultancy Fee work for the company.

[4]    Are the Consultancy Fees a fixed monthly amount or variable (for example by reference to hours worked)?

[5]    Specifically what type of "Consultancy" work does your client carry out (both in relation to the company at issue and for other customers)? 

[6]    Re the other shareholder, is he perhaps a de facto director?

[7]    Is the other shareholder the spouse/partner of your client?

[8]    Please clarify the figures in your post yesterday.  I understood from your initial question that the Consultancy Fees were £22,000 over a two year period.  From your later post, however, I am not sure whether perhaps £22,000 was an annual figure.  In addition, does the figure of £28,000 represent the total Consultancy Fees for that period, including the £22,000, or are the total fees for that period £50,000 (£22,000 plus £28,000)?

[9]    What type of "services" do the other Consultants carry out (and have they any formal qualifications and/or are they qualified by experience) ?

As regards the question in [3] above, I am not suggesting that the information which you supply will decide matters one way or the other - even if, for example, it were established that directorship duties occupied 35 hours per month and Consultancy Fee work 140 hours per month, it would be improper to seek to apportion the amounts paid to your client on a time basis - it would be perfectly in order for the company to pay your client solely for consultancy fee work and nothing for directorship duties (or indeed vice versa). 

Quite frankly, I remain of the same opinion as per my post yesterday.  I interpreted the comment in your original question of "these payments are in return of services he provides to company" (supported by your later comments) as being made to him in his consultancy role (albeit the matter is not free from doubt).

If I interpret your original question and later post correctly, you act only for the company director, not for the company itself.  The distinction is of course important in terms of your obligations as accountant - in other circumstances, if you acted solely for the director, with all the shares being held by other parties, there would be less downside risk to the director since (albeit from the facts known thus far, I consider it extremely unlikely) any successful contention by HMRC of the director's having effectively received "net pay" (of the amounts received by him) the liability would attach to the company, not to your client - in this particular case, of course, your client owns 50% of the shares, hence the matters is not quite so straightforward.

In relation to the Company Accounts seemingly seen very recently by you, and noting there being no disclosure in relation to the Consultancy Fees, this represents an omission from the Accounts (this would appear to imply there having been prepared by an unqualified accountant). 

On the assumption that your Letter of Engagement includes (expressly or impliedly) the preparation of Self-Assessment Tax Returns, and to cover off the possibility that the client might seek to later accuse you of wrongful advice, you must ensure that you obtain adequate written evidence, both from the director and from the company, of the nature of the monies received at issue. 

In respecting and valuing the views of other contributors holding contrary views, I  remain entirely confident of your client's view that the monies received by him were Consultancy Fees as part of his Self-Employment, on the basis of the information received thus far : your responses to the above questions are unlikely to affect my judgment materially, but will enable me to comment further.

Again, I trust my views are of some assistance.

Basil.

 

 

 

 

I think that

tonycourt |

I'm with Basil and Justin; assuming that the paperwork is in order and there's  agreement from the management committee are in order.

I think the "normall duties" point BKD makes is valid where:

  • the director has an employment contract which requires him to provide the duties which he is now billing for, or
  • it relates to his normal duties of a director required by the CA  because they are always treated as employment income

 

@basil and all others

Abutalib |

@basil and all others

first of all many thanks for taking time and giving your advice here.

basil, here are answers to question which you have raised.

[1]    Is your client in anyway "qualified" (by experience or formal qualification)?

My client is qualified and experienced in his filed. His business is not taxi driver or any sort of legal thing nor in IT sector.  

[2]    What wording appears on the invoices?

The wording appear on invoices are "charges for consultancy".

[3]    Approximately how many hours per month are devoted to (i) your client's duties as a director and (ii) his Consultancy Fee work for the company.

He work about 2-3 days per week consulting this company's business.

[4]    Are the Consultancy Fees a fixed monthly amount or variable (for example by reference to hours worked)?

The fees are not fixed. they keep changing.

[5]    Specifically what type of "Consultancy" work does your client carry out (both in relation to the company at issue and for other customers)? 

As far as I know, he said the word "consultancy services"

[6]    Re the other shareholder, is he perhaps a de facto director?

The other share-holder does not take any payment from company.

[7]    Is the other shareholder the spouse/partner of your client?

As stated earlier, this company has only 2 share holder at 50/50 basis. Half is to my client and other half is to her wife, who is also qualified in the same field but she dont take any payment out of company.

[8]    Please clarify the figures in your post yesterday.  I understood from your initial question that the Consultancy Fees were £22,000 over a two year period.  From your later post, however, I am not sure whether perhaps £22,000 was an annual figure.  In addition, does the figure of £28,000 represent the total Consultancy Fees for that period, including the £22,000, or are the total fees for that period £50,000 (£22,000 plus £28,000)?

Total amount £50,000/- on which he has paid taxes on his self assessment. 

[9]    What type of "services" do the other Consultants carry out (and have they any formal qualifications and/or are they qualified by experience) ?

Other people who work in this company are also qualified and experienced and they also provide services to this company. They receive money on regular basis but again, they are not on PAYE.

I am in process to taken over this company and the director's personal tax matters collectively. They are not my client yet but he want me to be his accountant for him self and also for his company.

I saw his papers and they all look fine but this point is something which I am unable to deal. I do not want to loose this client and on the same time, I do not want to involved in any kind of issues later on.

Things which I have mentioned above, are the things which he is telling me so far. I am not able to made decision to take him as client or not take him.

I hope you understood my point.

Abu

@ Abutalib (OP)

fawltybasil2575 |

To reply to your last post :-

(1) I recommend that more detail be shown on the consultancy fee invoices issued to the company, by the director, especially if the invoices issued by the other consultants show more detail - the intention of course is to show that all the consultants ( including the director) are in all respects treated the same way, by the company. The nature of that "detail" will of course depend upon the terms of the consultancy fee arrangement between the company and the director.   For the same reason, written documentation of the consultancy fee arrangements for all consultants, including the director (if not already in place), are advisable.

(2) I note that the director's wife is the other 50% shareholder. Whilst you do not mention whether you will be asked to act as accountant to the wife also, it will simplify matters if you act for her as well.  I was not sure, from your post, whether the £50,000 is the total income figure for the director for one year or alternatively for two years.  If it is for one year, then of course he will be paying tax at 40% on part of his income - if such be the case, then it is even more important that you take a "composite view" approach to the taxation positions of the three units (ie husband, wife and company) - it is standard practice to permanently consider the overall tax liabilities on a global basis, necessitating "tax-efficient" ( to include "National Insurance efficient") apportionment of the global income between (i) each unit(h/w/c) and (ii) different tax years.

(3) I don't think you have mentioned on what basis the "management committee" receive income from the company ( one poster surmised that perhaps they might render services for no pay).  This is a separate matter but you may wish to comment.

Basil.