Careful consideration required for directors invoicing their business

It is commonplace for us to see directors invoicing for their services through their own limited company/personal service company (PSC). While this consultancy-based service may be allowed in some cases, generally director remuneration should be taxable through standard payroll procedures.

As an example, this particular topic has appeared in several Due Diligence reviews undertaken by our Employment Tax team from both a buyer and seller perspective. Given the sensitivities and possible liabilities, it has been known to ‘sink’ a deal.

So, why is the process of a company director invoicing the business for additional work a possible red flag?

Basically, a director is an office-holder and their pay must be through payroll unless in exceptional circumstances. As an office-holder, the responsibilities cannot be discharged to another party. Any payments in connection with that office-holder’s duties are subject to Pay As You Earn (PAYE) under Income Tax Earnings and Pensions Act (ITEPA) 2003 s5. Section 5 (s5) will take precedence over any other legislation including either chapter 8 or chapter 10, which are the chapters relating to IR35. 

The risk and liabilities will not be limited to payments made after the IR35 changes were introduced in the private sector in April 2021. As s5 takes precedence, the liability will extend to at least four years for PAYE and six years for National Insurance Contributions (NICs).

It is often argued that the individual is providing consultancy services which are separate from their director duties. Whilst it can be, under certain conditions, possible for a director to provide consultancy services which are separate and distinct from their director duties, those consultancy services will need to be very different from the duties as a director.

In practice this is hardly ever likely to be possible for an Executive Director as their duties will all be associated with the director’s office. Whilst difficult, it can be possible for a Non-Executive Director to carve out a separate consulting role, this is always likely to be reviewed closely by HMRC and extreme care should be taken. Anything which is ongoing for an extended period of time is unlikely to meet the tests required. 

If you’re aware of director’s work being invoiced from a personal service company, it is strongly advised to revisit these arrangements as a matter of urgency. We can help with any disclosure that may need to be made to report any historical failure.

If you need any assistance in relation to director duties and they’re appropriate treatment, please get in touch with a member of our Employment Tax team or your usual Azets advisor.