Directors and payments made off-payroll

Directors and payments made off-payroll

From time to time we see a Director of a company invoicing for their services to that company through their own intermediary company, commonly referred to as a Personal Service Company (PSC). This is problematic on the basis such payments derive from the office holder duties, notwithstanding the fact that they are invoiced by the individual’s PSC.

So, why is the process of a company director invoicing the business in this way a possible red flag?

By means of background, a Director is an office-holder and tax statute provides payments for office holder duties are earnings and must be paid through payroll and subject to appropriate income tax and national insurance deductions. For an office-holder, this responsibility cannot be discharged by the company to another party. Any payments in connection with that office-holder’s duties are subject to Pay As You Earn (PAYE) by the entity to whom the services are provided and not the intermediary.

A case for separate consultancy services?

It is often contended that the individual is providing separate consultancy services in addition to their director duties. Whilst it may, under certain conditions, be possible to provide consultancy services which are separate and distinct from the director duties, in practice this is hardly ever likely to be possible for an Executive Director as their duties will all be associated with the Director office.

We would expect that for such a Director the role will be all-encompassing and that in it he or she is expected to provide all of the services that are required to meet the needs of the business. Whilst the role may be covered by a Service Agreement it may not be formalised. However HM Revenue & Custom’s starting point is that it is inappropriate to carve out a separate consultancy strand.

For completeness, whilst difficult it may be possible for a Non-Executive Director (NED) to provide separate consultancy services on the basis the office holder duties of a NED are more limited and therefore more easily defined. However, any such structure is always likely to be reviewed closely by HMRC and extreme care should be taken. 

We are here to help

If you are aware of any directors’ work being invoiced from a personal service company, it is strongly advised to revisit these arrangements as a matter of urgency. Any arrangements which have been in place for some time should be reviewed to establish any historic risk and potential PAYE exposure.

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