Kevin Read considers a recent HMRC victory on directors working as consultants to their own companies and discusses how in other circumstances directors may be successful in avoiding PAYE or benefit tax charges.
Director-shareholders of private companies are always interested in tax-efficient ways of withdrawing income from their companies. The recent case Petrol Services Limited v HMRC [2018] UKFTT 773 (TC) has highlighted one method that will not usually be successful, as the First-Tier Tribunal (FTT) confirmed.
Contracts of service
Petrol Services Ltd (PSL) had two directors, who together with their wives were 25% shareholders. The company ran petrol stations but had no employees. Instead, the shop and car wash at the petrol stations were let to tenants, who paid rent and collected payment for the fuel on behalf of the company.
The directors were not paid any remuneration directly by the company; instead, each had a separate freelance consultancy agreement with the company, under which they were required to work in exchange for a fixed payment each month. These amounts were paid gross to them rather than through the payroll (as directors’ remuneration normally would be). Examples of the work they undertook included buying petrol, setting prices, and collecting rent. Their average weekly working time was apparently between 20 and 40 hours each week.
HMRC argued that the directors had a contract of service, so they should have been liable to income tax and National Insurance contributions (NICs) collected via PAYE by the company. HMRC also supplied third-party notices showing that the directors had contracted with the company’s suppliers in their capacity as officers of the company, not as contractors.
Independent consultant?
So, from a tax perspective, can a director of a close company also be a consultant for that company? If the services provided are what a close company director would be expected to perform, then ‘no’ is the answer. All earnings will be from their duties as a director and taxable via PAYE.
If the consultancy work is clearly distinct from their duties as a director, then the arrangement may be OK. The key test is whether similar services are offered to other clients, not just the close company. This did not apply in the current case, so all the earnings resulted from the directorships.
However, to take a different scenario, if there are three directors of a small manufacturing company and one of them is a solicitor who runs his own part-time practice, it would be reasonable for the solicitor to provide legal services to the company on a consultancy basis and bill for the work accordingly.
Directors can only bill their companies as independent consultants if:
- the services provided are outside the realm of their normal duties as a director; and
- they also provide those services to other clients.
Is it genuine?
The tribunals also often need to consider contrived arrangements to provide cars (and sometimes private fuel) to directors, the aim being to avoid a benefit charge and Class 1A NICs.
A good example was the 2012 case DJ Cooper v HMRC [2012] UKFTT 439 (TC), which concerned two relatives (D and P) who were the directors of a family company (L) and were also members (along with D's wife and son) of a partnership. The partnership had been set up to provide ‘administrative services’ to L, but this really consisted of providing cars for the use of the partners. The arrangement was intended to avoid car benefit charges and, by having some private use of the partnership-provided cars, allow the cars to be ‘individually pooled’ for capital allowances purposes, meaning that a balancing allowance would potentially be available on eventual disposal.
The FTT judgement was that the partnership would not have existed, commercially, without the company (its only customer). There was no commercial rationale for the partnership to provide cars to its partners, nor for L to pay the partnership an amount sufficient to enable it to recoup the capital costs of the cars and the car fuel it provided to its partners. Accordingly, the cars and the car fuel were provided by reason of the employment of D and P and resulted in taxable benefits.
On the other hand…
In contrast, had the partnership been a proper, independent business, there would have been no reason why the cars couldn’t have been supplied by the partnership rather than the company, with benefit charges thus being avoided.
