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Director's fee query

Director's fee charged by company

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Husband and wife clients are both directors of a small limited company (company A) providing consultancy services. Both directors carry out consultancy work for the company. The wife is the 100% shareholder (50/50 shareholding on incorporation, with the husband gifting his 50% shareholding to the wife shortly after incorporation).

The husband is also a director of a number of other companies, including Company B and Company C. Company C is 100% owned by Company B and the husband is paid a salary from Company C.

The husband wishes Company A to invoice Company B for a "Director's Fee". This income would be treated as trading income of Company A and would not be paid on to the husband as PAYE income.  He has asked if this is possible.

My immediate reaction was that it would not be possible, and having reviewed the relevant conditions in EMI02505, which I believe are not met, I plan to tell him it is not possible. https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim02505

- the profits of the appointing company are within the charge to income tax. The profits of Company A (the appointing company) are not within the charge to income tax.

- by virtue of an agreement with the appointing company the director is required to account for the payment of the director’s fees to that company. I am not aware of any such agreement being in place when the director was appointed or subsequently.

There are also two further conditions shown in EIM02505:

- Condition A - Company A has no agreement (as far as I am aware) with Company B to appoint the director, and therefore Condition A is not met.

- Condition B - Company A is controlled by the wife, and Company B is controlled by the husband. As they are both controlled by connected persons, Condition B is not met. 

Just wanted to check I haven't missed anything? When the director first asked the question, I thought it sounded very dodgy and the above appears to confirm this.

Replies (3)

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By Matrix
14th Jan 2021 14:09

What is the perceived benefit of doing this?

I would benchmark this by determining if any management charges are on arms length terms, would the company charge the same amount to a third party?

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Replying to Matrix:
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By sparkler
14th Jan 2021 14:22

Thanks for your reply, Matrix.

If Company A receives a Director's fee from Company B, which Company A can treat as trading income, the eventual profit can be taken as a dividend by the wife (100% shareholder of Company A and a basic rate taxpayer).

The husband is a higher rate taxpayer on his PAYE salary from Company C and would rather his wife received a dividend payment from Company A than he received a director's fee which would add to his overall PAYE income.

While the fee itself sounds reasonable, and I'm sure could be argued to be on arms length terms, the whole point of the exercise is to effectively hive off some money from one of the husband's other companies to avoid him paying tax.

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Replying to sparkler:
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By Matrix
14th Jan 2021 15:30

Why doesn’t he just transfer some shares to her?

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