Can Directors Act as Consultants in Their Own Businesses?

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For private company directors who are also shareholders, finding tax-efficient ways to take money out of their companies is always on their minds. A recent legal case, Petrol Services Limited v HMRC [2018] UKFTT 773 (TC), shed light on one approach that usually doesn’t work out, as confirmed by the First-Tier Tribunal (FTT).

The case was about Petrol Services Ltd (PSL), a company running petrol stations with two directors who were also 25% shareholders, along with their wives. The company leased out the shop and car wash at its petrol stations to tenants who handled fuel payments and rent collection on behalf of the company.

In this scenario, the directors didn’t receive direct salaries from the company. Instead, they had separate freelance consultancy agreements with the company, stating fixed monthly payments for their services. These payments were made directly to them rather than going through the company’s payroll, as is the usual practice for directors’ remuneration. Their work involved tasks like buying petrol, setting prices, and managing rent collection, and they worked an average of 20 to 40 hours per week.

HMRC argued that the directors were essentially under a formal employment contract, making them subject to income tax and National Insurance contributions (NICs) through PAYE via the company. HMRC supported this argument by presenting third-party notices that showed the directors’ engagement with the company’s suppliers in their role as officers of the company, not as independent contractors.

So, can a director of a closely-held company also act as a consultant for that company from a tax perspective? Generally, the answer is ‘no’ if the services provided align with what a typical director of a closely-held company would do. In such cases, all earnings would be seen as part of their directorial duties and taxed accordingly via PAYE.

However, if the consultancy work is different and clearly separate from their regular directorial duties, the arrangement might be acceptable. The key point is whether similar services are provided to other clients, not just to the close company. In the PSL case, since the directors’ consultancy work didn’t meet this criterion, all their earnings were deemed to result from their directorships.

To illustrate a different scenario, think of a small manufacturing company with three directors, one of whom is a part-time solicitor running an independent practice. In such a situation, it would make sense for the solicitor-director to offer legal services to the company on a consultancy basis and bill for the work accordingly.

Directors can bill their companies as independent consultants if:

  1. The services provided are different from their usual directorial duties.
  2. They also offer these services to other clients.

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