Client is director and owner of two personal service companies. Instead of taking a salary from company A, he wants company B to invoice A for his time.
He is aware that director's fees should go through the payroll and IR35 issue, but is still keen to pursue, at least in theory, what services B could charge A for. My starting point is that the fees are non-directorial and project based.
Can anyone put more meat on these bones? Thanks in advance.
Replies (6)
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I've put similar charges through in a number of companies in the past and simply shown them as management charges in the other operating income section of the P&L.
These have never been challenged or queried by HMRC. I have always been careful to disclose them in the related party note and to specifically mention that the management charge includes payment for the services of a director if applicable.
Provided there us a genuine basis for a charge (i.e. director actually does do work for company B that he is not otherwise paid for) then I don't see why there is a problem.
I'm just answering the question posed, I'm not saying that HMRC condone or agree it, nor am I saying that Andy should advise his client that this is best practice.
Andy has clearly already advised his client otherwise but the client does not wish to follow that advice. Therefore I am sharing my experience of similar situations to assist Andy with his query.
As John has also said, if there is a genuine reason for the charge then there should be no problem. Incidently I have also in the past had clients invoicing recharges of all sorts of expenses including salaries and provided that VAT is charged on these recharges, this isn't a problem. In fact, I have actually spoken to officers of HMRC and they have stated that this is not an issue.
Salary v fees
Andy
As I see it in company A the director has 2 distinct roles.
1) as the director/ manager of the company and
2) as a consultant (of company B) supplying skills to company A
There is nothing to say that he needs to take a salary from company A in his role as a director and if the fees that Co B are charging Co A are purely for time spent on consultancy work (and not any administrative work) then I would not in principle have an issue with this. Obviously the clearer the invoices are as regards specific project work/ direct costs the better.
Where it gets a bit murkier is when you get to company B.
From an IR35 basis (in relation to Co B) you are looking at whether the consultancy income in Co B would fall foul of IR35.
Starting with the 3 main tentants:
1) true and unfettered right of substitution
2) Mutuality of obligation and
3) direct supervision and control.
Now this is where it is going to get a bit more theorectical.... In my opinion as long as the director of Company A agrees that the contract (for services) that he has with company B ensures it does not fall within IR35 then " the world is a happy place".... however I cannot imagine that there is in fact:
1) a written contract in place between Co A and Co B.
2) any intention of the director of company A allowing anyone else to provide the service than the director of Company B
3) ... I am not even going to start thinking of how you would or would not be in direct control of yourself [ sorry I realise I could be getting rather silly now].
Is there a particular reason that your client feels the need to have 2 personal service companies?? We have had this situation before where a client had, prior to coming to us, set up 2 companies as he had 2 separate types of consultancy he offered. He did not actually realise that he could conduct both from the one Ltd company vehicle.
Once we had discussed this with him he ended up with one company :saved on bookkeeping/admin time for himself and accounting fees for Company 2 from us.
We spend a lot of our time in and around IR35 - so if you want to discuss further then drop me an e-mail/ PM me. I'd be happy to chat further.