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Interrelation of 3x Companies with same Director

Is it appropriate to pay for services against invoice vs PAYE?

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Company A owns a Freehold commercial investment property.
Company B is the Management company for Company A only whose function is to charge and collect rents and service charges. Rents are remitted to Company A and service charges are retained with Company B to operate the building expenses.
Company C provides day to day property management services to a number of clients, including Company B. Company C issues a quarterly invoice to Company B for services rendered.

All three Companies share the same Director, although the Director is a shareholder of Company C only.

Company C is setup to pay its Director via PAYE and Dividends.

Is it material that all three Companies share the same Director and on that basis are there any implications for Company C to receive a management fee from Company B for services rendered without IR35 issues with respect to Company B?
Essentially could HMRC insist that Company B should have PAYE setup to pay the Director instead of contracting out day to day management to Company C?

Thank you

 

Replies (17)

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By Anonymous.
02nd Jul 2020 12:50

I'm not sure what the problem is. Maybe I am missing something. What is it that leads you to have concerns?

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Replying to Anonymous.:
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By mikedain
02nd Jul 2020 13:05

Anonymous. wrote:

I'm not sure what the problem is. Maybe I am missing something. What is it that leads you to have concerns?

Thanks. We would just like to make sure that there is no basis for HMRC to potentially claim that Company B should operate PAYE to the Director instead of contracting out day to day management to Company C, seeing as all three companies share the same Director.

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Replying to mikedain:
By Tim Vane
02nd Jul 2020 13:30

Is there something you are not telling us? Is the director being remunerated directly for other work he is doing for Company B? You need to explain what you are expecting HMRC to take objection to.

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Replying to Tim Vane:
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By mikedain
02nd Jul 2020 14:18

Tim Vane wrote:

Is there something you are not telling us? Is the director being remunerated directly for other work he is doing for Company B? You need to explain what you are expecting HMRC to take objection to.

No - not withholding anything! I am just wondering if there is any weight to a potential argument by HMRC along the lines that instead of the Director doing day to day management with his Company C hat on, that role is essentially being done as part of his Directorship of Company B, and as such Company B should be paying salary via PAYE instead of contracting such services to Company C? (company C is operating PAYE but B is not). A contract for services exists between B and C.

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Replying to mikedain:
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By the_drookit_dug
02nd Jul 2020 15:09

Does Company C not have employees who undertake the work, or does the director himself provide all the services?

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Replying to the_drookit_dug:
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By mikedain
02nd Jul 2020 15:41

the_drookit_dug wrote:

Does Company C not have employees who undertake the work, or does the director himself provide all the services?


Company C's only employees are himself and wife who are equal shareholders of C and are paid via PAYE and dividends. Essentially the Director of all three companies is doing 'the work' but with Company C hat on.
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By Matrix
02nd Jul 2020 15:22

I agree there is an issue since in the first instance any remuneration for the Director’s services should be payrolled. It depends if this is separate from his role as Director, what the contract with C says, whether C provides the services to others, if it is a PSC etc but it could be challenged.

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Replying to Matrix:
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By mikedain
02nd Jul 2020 15:44

Matrix wrote:

I agree there is an issue since in the first instance any remuneration for the Director’s services should be payrolled. It depends if this is separate from his role as Director, what the contract with C says, whether C provides the services to others, if it is a PSC etc but it could be challenged.


B does not have any employees nor are any dividends issued, in fact B does not make a profit. C does the day to day management, not only for B but also for other non-related clients. As such it is understood that PSC does not apply to C.
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Replying to mikedain:
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By Matrix
02nd Jul 2020 17:32

Well, the Director is an employee and his remuneration should be payrolled (subject to the extract below) which is why I thought you raised the issue, along with IR35 for the payments to C. Sorry your reply doesn’t stack up with your previous posts. What are your concerns with the set up then? I thought I was the only one agreeing that there could be an issue!

https://www.gov.uk/hmrc-internal-manuals/employment-status-manual/esm4022

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Replying to Matrix:
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By Tax Dragon
02nd Jul 2020 17:34

No I think there could be too.

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Replying to Matrix:
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By mikedain
07th Jul 2020 12:18

Forgive me, mention of IR35 is a red herring. As C carries out management services for B and other non-related clients it is understood that IR35 does not apply. In any event, C does operate PAYE.

My question is: as A,B & C share a common Director, it is reasonable for the Director to be paid for management services provided to B via payroll of C, or could HMRC legitimately argue that these services would fall under the Director's duties of B and therefore B should setup payroll to remunerate the Director, instead of the current situation where C invoices B? The question only really arises in my mind as all three Companies share the same Director.

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Replying to mikedain:
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By Tax Dragon
07th Jul 2020 12:55

Seems a reasonable question to me, but why does the answer matter? What is the possible tax impact? HMRC normally care only if there is a tax loss or where they are the police for regulations e.g. NMW/NLW, s716B of ITEPA 2003, etc.

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Replying to Tax Dragon:
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By mikedain
08th Jul 2020 09:31

Tax Dragon wrote:

Seems a reasonable question to me, but why does the answer matter? What is the possible tax impact? HMRC normally care only if there is a tax loss or where they are the police for regulations e.g. NMW/NLW, s716B of ITEPA 2003, etc.


I suppose in reality there is no tax loss but personally I don't know if HMRC would take issue (or not) with the Director being paid via payroll of C versus them insisting that the Director should have run payroll at B instead - and potential penalties etc that could come along with that. I infer from your answer that as there is no tax loss there shouldn't (or won't?) be an issue with the current structure?
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Replying to mikedain:
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By Tax Dragon
08th Jul 2020 09:37

I was really trying to ask: "why doesn't B run a payroll?"

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Replying to Tax Dragon:
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By mikedain
08th Jul 2020 10:03

Tax Dragon wrote:

I was really trying to ask: "why doesn't B run a payroll?"


Really because payroll is run for C within which the Director is remunerated not only for the building management work done for B but for building management for other clients too. It's just an unnecessary hassle to run payroll at B as well as C. If we MUST then we will - this is what I am getting at. Sorry for the convoluted direction this has taken on my part!
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Replying to mikedain:
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By Tax Dragon
08th Jul 2020 12:14

If it's a real life issue, take real life advice. There are real life factors that may impact on the real life answer. (You haven't for example even told us the ownership of the companies, which I would imagine could be a relevant point. And before you give it - no, I'm not asking for that information. It's pointless to try to get the advice you need here.)

A couple of possible issues (as well as those I've already hinted at) might include deductibility in C of the salary that it sounds should be paid by B and, if B funds that cost, it's paying its employee via a third party, so does Pt7A kick in? If the contracts are right, those issues might reduce or even go away, but that just shows why you need real life advice.

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Replying to mikedain:
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By Matrix
08th Jul 2020 13:03

Why is there no tax loss? I thought the profits in C are extracted as low salary and dividends rather than all payrolled?

If this really isn’t tax driven then either set up a payroll scheme or recharge the salary to B.

I agree that bespoke advice is required.

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