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Director Salary

Hi All,

There are 4 directors who are also shareholders of a limited company. However none of them want to pay themselves as employees through PAYE but instead as self employed contractors. My understanding is that the directors have to be employees of the company and thus have to be paid via PAYE and the contracting option does not exist.

Can someone please confirm this for me or advise accordingly.

Many thanks guys...

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28th May 2012 13:22

directors often have two roles
Hi Khalm0,

The position is this:

A directorship is an "office" and fees paid to a director for performing the duties of that office count as employment income and so are subject to PAYE tax and NI.

If the director carries out work for a company in addition to their role as an officer, e.g. a director of a taxi firm who also drives a cab, the latter is a separate function from the former. They can do this work on a freelance (self-employed) basis and be paid gross - assuming of course their working/contractual arrangements meet the usual criteria for being self-employed.

In short - pay fees for directorship under PAYE and consider whether a separate contract for freelance work is appropriate.

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28th May 2012 13:39

Shocker they don't want to

pay PAYE (oops sorry, they dont want to paid under PAYE)....this sounds like a suggestion from someone down the pub....

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28th May 2012 14:44

I thought....

......the idea of being a tax advisor is to guide and assist clients to pay the "right amount of tax" etc taking account of their circumstances, intentions and wishes. Surely it's not to hand over as much tax as possible because we don't like or agree with their ideas.

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30th May 2012 17:07

Where did that come from?

tonycourt wrote:

......the idea of being a tax advisor is to guide and assist clients to pay the "right amount of tax" etc taking account of their circumstances, intentions and wishes. Surely it's not to hand over as much tax as possible because we don't like or agree with their ideas.

The suggestions seem to be to pay the "right amount of tax".

I don't think anybody suggested  they should pay as much tax as possible.

The idea we didn't agree with was that the directors wanted to be paid as if they were self employed whereas there was no evidence produced by the OP that they were self employed.

 

 

 

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31st May 2012 12:44

May be I jumped the gun....
....but I don't think so. I read Khalm0's question as one of concern that a director could not carry out work for their company on a self-employed basis. They can. My trouble was Justso's response (apologies if I misunderstood) seemed to suggest that the directors were skating on thin ice with the idea or worse. May be I read too much into it.

In fact the question was perfectly reasonable and one which has been put to me by clients several times over the years. And it seems from the repsonses so have others.

All I'm saying is that when a layman asks us a question, while it might seem ridiculous or something we disapprove of, we should not dismiss it out of hand or be high handed. We should answer it as best we can, and if it’s not a good idea then we should explain why or how they could achieve the same result in a better way. That's what I would expect if I were the client.

It's easy to forget that in spite of the Taxman's mantra "Tax doesn't have to be taxing" it is complex even for us so called experts. So I'm sorry if I offended anyone I just believe in trying to offer the best service possible to my clients.

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31st May 2012 14:33

Accountants attitude

tonycourt wrote:
....but I don't think so. I read Khalm0's question as one of concern that a director could not carry out work for their company on a self-employed basis. They can. My trouble was Justso's response (apologies if I misunderstood) seemed to suggest that the directors were skating on thin ice with the idea or worse. May be I read too much into it. In fact the question was perfectly reasonable and one which has been put to me by clients several times over the years. And it seems from the repsonses so have others. All I'm saying is that when a layman asks us a question, while it might seem ridiculous or something we disapprove of, we should not dismiss it out of hand or be high handed. We should answer it as best we can, and if it’s not a good idea then we should explain why or how they could achieve the same result in a better way. That's what I would expect if I were the client. It's easy to forget that in spite of the Taxman's mantra "Tax doesn't have to be taxing" it is complex even for us so called experts. So I'm sorry if I offended anyone I just believe in trying to offer the best service possible to my clients.

I think the vast majority of accountants know that directors can invoice their company as self employed if they are genuinely self employed. The problem is that a lot of clients think that a simple declaration of self employment makes them self employed.

The comments were made on AccountingWeb. I don't think the contributors would have been disrespectful to their clients if they were talking to them directly.

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By khalm0
28th May 2012 14:53

Hi Guys, thanks for your replies. Makes sense but I just wanted to confirm with someone before I told them the position.

Tony, in line with what you have said, there is no service outside of directorship, and in line with justsotax, they are trying to avoid paying taxes.

Something definately smelt fishy when they suggested it!

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28th May 2012 15:08

@tonycourt...
I am quite happy to advise clients to arrange their affairs in a tax efficient manner....but that is quite different from arranging their affairs in order to evade tax through a completely artifical structure which is likely to fail under any numder of anti avoidance rules.

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28th May 2012 15:52

Just to be clear

It's apparent from Khlam0's later postings that this case is unusual in that the directors/shareholders of the OMB have no other role in the company apart from their director's duties. Therefore you're entirely right to say that PAYE must be applied to their director’s fees. However had this been a more typical OMB there would be no hint of evasion if they were to divide their roles between statutory duties as an officer and their work in carrying on the companies trade. In fact there are non-tax reasons why this is a sensible thing to do.

Whether or not the "other work" is carried on in a freelance capacity is a matter of fact. However it would not be unreasonable for the directors to alter the terms of their work so that it could be categorised as a self-employment, if that's what they really want. For example if an engineer who runs his business through a company decides that he only wants to work "in the trade” when he wants, under his own control, with no guarantee that the company would offer him work, and as a consequence is prepared to forego all employment rights, he’s entirely within his rights to do so.  HMRC accept this principle although, but quite rightly would, if they were aware of it, take a close look at the arrangement to make sure the job was being carried out on a self-employed basis.

In essence there was nothing in khalm0's original post to suggest the directors were trying to evade tax. More likely they had, as you said, heard a story down the pub. The story though was based on a perfectly sound idea, but perhaps just misconstrued.          

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28th May 2012 16:09

I must have missed the point I guess...but
why set up a limited company (tax efficient/ltd liability etc) only to then volunteer to be self employed (pay NIC etc) - at the moment the only reason i can see why you would do that is to claim travel expenses to and from the ltd co, as you now claim your base is at home (or something).....

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30th May 2012 11:29

Dividends

If they are all shareholders, and you have sufficient reserves, is there any reason why you would not take a dividend? A director does not have to take a salary for their directorship.

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30th May 2012 11:48

WORRIED

khalm0 if you are the accountant for these guys and you are asking how this works you want to make sure you have a current professional indemnity insurance poicy in place, because for accountants in practice  this is pretty simple stuff and you are trying to do it incorrectly.

Small salarie of £650 a month and dividends is the way to go. But talk to someone who can do this with there eyes shut before you end up in  a pickle

Good luck

 

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30th May 2012 11:52

The firm that I used to work for looked after a limited company whose directors / shareholders were psychotherapists.

They took a salary for director type functions (admin essentially), and charged the limited company as self employed psychotherapists.

I recall HMRC did question  it, but they were allowed to carry on.

SA

 

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30th May 2012 14:04

Clarification

Can someone clear this up for a layman please?

I'd have thought that generally

- directors do not have to have a contract for employment with their own business

- if they do have an employment contract, they are subject to Mininum Wage rules like anyone else.

The opening example seems an odd ball case that would fall right into the IR35 sights.

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30th May 2012 14:16

 
 

If you are a company director you are an ‘office holder’ in law. You are not entitled to receive the National Minimum Wage for the work you do as an office holder.

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By Halex
30th May 2012 14:08

contract of employment

Directors can and often should have a contract of employment for their own company. Remember the ltd company is a separate legal entity to the owner.

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30th May 2012 15:14

Again...why would you

want to provide some services as a self employed person!?!?!?!?

 

If it was indeed because the services were separate from the company then wouldn't you do this via another Ltd Co.....tax efficient etc.....bizarre!

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31st May 2012 13:27

@Tony....my initial comments were perhaps

a little blunt, but my approach is to understand what the client is trying to achieve and why.  And then to explain the available options, benefits, drawbacks, etc.  I am happy for a client to ask a ridiculus question, but presume that given that he has asked me for my opinion/advice then he is open to receiving an honest response with the appropriate advice/opinion.

 

This scenario may be applicable to several clients - but having gone to the trouble of having a Ltd Co, why then be paid on a self employed basis.  I haven't suggested you can't do it....but would certainly question why you would want to do it because i want to make sure you have the right advice and understand the potential issues.

 

 

 

 

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31st May 2012 14:17

is it not just about paying as little tax as possible?

@justsotax ... you state " .... but my approach is to understand what the client is trying to achieve and why"  Surely they have explained that to you and you know what it is they want?

My presumption would be that they want to pay as little tax as possible.  By having a Ltd and being self-employed presumably they can utilise the reliefs to their best advantage.  For example, all expenses for the car can be claimed by the self employed person and they pay their share of the private mileage.  If the car is owned by the company there is a BIK liability.  Surely this applies to a number of areas.  Others do this through an LLP structure.

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31st May 2012 14:42

IR35

I don't have any directors being paid for their duties via self-employment, so no actual experience of this, but wouldn't this put the company at risk of paying PAYE/NI on the self-employed earnings?

I have seen similar concerns regarding taking on the duties of FD for clients companies, so why would this be different for your own company?

Could IR35 apply, and if so, how do you get around it?

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31st May 2012 14:51

@mcfarlanetoms...perhaps i have missed something...

but you can easily avoid a BIK charge on a car by recouping a mileage rate of 45p mile instead....!?  As touched on in an earlier comment perhaps this is just merely to ensure that the director can effectively claim travel on what would have been an 'ordinary' commute...but now because his base is his home (being self employed) he claims this when going to the Ltd Co premises....fine (if a little contrived) - mind you doesn't change the question as to whether he is actually self employed.

 

Nevertheless, if a client is happy to go to that trouble, and pay for 1 set of Ltd Co accounts, 4 sets of self employed accounts as well as the SA returns for each director then I guess i should be more than happy ... (I just wonder....is that cost effective?! does he save enough tax to cover the extra hassle/expenditure........)   

 

 

 

 

 

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31st May 2012 15:16

My experience

Many taxpayers are obsessed about saving a few pounds of tax no matter what the hassle or what they have to pay in accounting fees.

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By cfield
04th Jun 2012 09:53

Small exceptions limit

Some posters have asked what would be the point of billing your own company on a self-employed basis. Obviously none if the bills are quite high, but if they are fairly low (and the client has no other self-employed earnings) it could be possible to utilise the small earnings exception and pay no Class 2 (or Class 4) NI.

Meanwhile the fees would be deductible by the company against corporation tax (provided they are reasonable and qualify as trading expenses) so this would offset the tax payable by the director.

However, you would have to take into account the knock-on effect on dividends, for the fees would be taxed at 20% PLUS an equivalent amount of dividends would be shunted into the higher rate bracket and taxed at 22.5%.

Therefore, you would have to compensate by reducing dividends, which would be necessary anyway in many cases as distributable profits would be lower.

Someone else suggested you could claim more expenses against the fees as they would not be subject to the strict PAYE rules. Whilst this may be true, you have to be very careful with travel expenses as in practice it could be difficult for the client to claim he/she is based at home, especially if he is travelling to company premises or some other regular place of work.

Indeed, locums and other medical practitioners have had their travel expenses attacked by the taxman for this very reason.

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04th Jun 2012 12:30

partnership

why not just go into partnership (LLP or general) with the LTD, and then take as much as you want, in any way you want?

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By khalm0
10th Jun 2012 17:06

Hi Guys,

 

Thanks for all the responses.

 

@ Tom7000,  I was not planning on processing it like this. it was the first time I have had this requested by a client and my instinct was that it is not right. I just wanted to get confirmation with others that my view was correct before I responded to the client which I have now done.

 

Thanks again!!

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