Many director-shareholders look for tax-efficient ways to receive income. Some companies have attempted to save both employees and employer’s National Insurance by paying directors as consultants.
A HMRC tribunal ruling has clarified when directors can and cannot act as consultants to their own companies, and what that means for tax. Petrol Services Ltd v HMRC [2018] UKFTT 773 (TC) highlights the risks of getting it wrong. In this case, HMRC successfully argued that the directors were employees, not independent consultants, and their income should have been taxed under PAYE.
The case
Petrol Services Ltd had two directors, each owning 25% of the company alongside their spouses. The business operated petrol stations, but had no direct employees., tenants ran the sites and collected payments.
Instead of drawing salaries, the directors had consultancy agreements and were paid fixed monthly fees outside of payroll. Their work averaged 20 to 40 hours per week and included fuel purchasing, pricing, and rent collection. This was an attempt to save both employees and employer’s National Insurance.
HMRC challenged this setup, arguing the directors were acting in their official capacity, not as independent contractors. The tribunal agreed, ruling the payments were employment income and subject to PAYE.
When is a director a genuine consultant?
For a director to be treated as a consultant for tax purposes, two key conditions must be met:
- The services must be clearly separate from their normal director duties
- Those services must also be offered to other clients, not just the company
For example, a director who is also a practising solicitor may provide legal services to the company, if they also serve other clients and the work is distinct from their board role.
From our experience these conditions are rarely met in practice. We would recommend seeking advice prior to paying any directors as consultants as there are significant tax consequences for getting this wrong.
If you would like to discuss this in more detail relating to your business, please feel free to book a free online meeting.
