Employed and Self Employed?

Employed and Self Employed?

Didn't find your answer?

I have a client who has for many years been self employed as a consultant. This has never been questioned by HMRC. One of his clients is the family company. Historically he has not been a shareholder or director. The company was pretty much owned 100% by his father. As well as consulting for the family business he also consults for other (admittedly not a great deal) and also runs an engineering business.

As his father aged he was passed the company shares (purely for family reasons) and was made a director. His consultancy income has continued unchanged but he now also acts as a director of the company, along with his brother.

HMRC are arguing that as he is a director the income MUST be chargeable under PAYE. I am fully aware of the methods for deeming status but don't want to discuss those at present. If we assume his original consultancy work is 100% self employed and the any new directors roles are 100% employed do HMRC have any right to displace the original self employed basis of working and assume ALL income is not in respect of his directorship?

His services offered on a consultancy basis can and have been performed by other in the past and will continue to be so in the future. There is also no mixing of the roles (ie both roles are totally independent of each other and do not cross).

All the more frustrating as HMRC have actually agreed that they have no problem at all with the historic self employment!!
Martin Wardle

Replies (6)

Please login or register to join the discussion.

avatar
By m.wardle2
07th Jun 2007 09:28

Thanks
Cheers everyone. Some really good points here!

Thanks (0)
avatar
By stephenkendrew
06th Jun 2007 16:21

Exactly Paula!
That is, of course, precisely what HMRC did in the Demibourne case....

and in Brabyn v Barnett, one of the main reasons why Mr Barnett (working for his father) was self-employed was, in the words of the Judge, the "cogent factor" that he had always been treated as self-employed.

Have a look at HMRC's manual (NIM12011) :-
"It is perfectly possible for a director of a company to provide services quite legitimately to that company in a separate capacity."

Thanks (0)
avatar
By NeilW
06th Jun 2007 12:07

Difficult one.
Of course HMRC would argue that line wouldn't they.

There is no reason I know of why you can't have two engagements with the company. There are many contractors (and one barrister!) who have self-employed contracts with their company for the consultancy work, which they treat as separate from the nominal director role.

I wouldn't say the situation you put forward is unheard of.
I don't think the particular point has been tested in court, but I'd be interested to hear if it has.

I would argue that the income from the consultancy role is not 'earnings' as defined in the Taxes Acts. They are not emoluments of the office so I can't see how they can be classed as earnings if the individual is self-employed in that role.

Thanks (0)
avatar
By User deleted
06th Jun 2007 12:52

It is possible
I would suggest that he has dual contracts with the company. One for consultancy services (which the Revenue have already indicated they are happy with it being self-employed) and one for Directorship duties.

This should solely relate to Director duties only and should inlcude defined payments for attending board meetings. For example, £250 per board meeting of which 4 are held each year. This way a total of £1,000 would go through the PAYE system as this is the amount he is entitled to as a director and therefore chargeable to PAYE.

You should ensure that there is a separate contrcat for each engagement and that the consultancy services and director duties are not both inlcuded on one contract even if the separate duites are defined. This gives the Revenue less chance of recovering any tax and NIC as they cannot argue that the payments fall under the same contract.

Thanks (0)
avatar
By Paula Sparrow
06th Jun 2007 14:46

When it's the other way around....
.... so that an employee changes to self employed without any identifiable changes in the terms of engagement, the Revenue will argue that there is no change in status - so why does the same principal not apply when a self employed consultant also becomes an employee?

If there is an identifiable business which stacks up against the usual status issues, this really should not be a problem. The Revenue manuals admit you can have a separate business apart from your directorship, but rarely do Inspectors accept the argument.

If the Inspector is being stubborn, your only recourse may be the Commissioners.

Thanks (0)
avatar
By markfaherty
06th Jun 2007 16:08

Directors, Consultants & Professional Partnerships
Generally a company director holds an office; any emoluments/earnings arising from a directorship are therefore chargeable under what was Schedule E as employment income and subject to Class 1 NICs.

Please note, however, the following extract from HMRC Employment Status Manual:
"ESM1096.
Consultants and other professionals [February 2006]
It is perfectly possible for an employee or a director of a company to provide services quite legitimately to that company in a separate capacity. For example, the individual could be carrying on an established business as a solicitor, estate agent, accountant or some sort of consultant whereby services are supplied to the company on terms similar to those given to other customers. In these cases the payment for the services would not be income from an office or employment assessable under Schedule E/chargeable as employment income or subject to Class 1 NICs." Quoting this should help the Inspector quell his enthusiasm; there's nothing better than pointing out their own rules to them.

There is another exception to this rule under extra statuory concession A37 - see http://www.hmrc.gov.uk/manuals/senew/SE02501.htm .This is where a director charges his fees to the company in his professional capacity as a partner in a professional firm.

In most other circumstances all income received by an employee or office holder is considered to be by virtue of their employment and taxed accordingly.

Thanks (0)