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Directors: Payment as consultants didn’t save tax

18th Apr 2019
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Two directors of a trading company charged consultancy fees through separate consultancy vehicles in a bid to avoid PAYE and NIC. What could possibly go wrong?

The first tier tribunal (FTT) considered the situation above in the case of Petrol Services Limited (TC06907) and found many things going wrong.


Mr Odedra and Mr Badiani were the two directors of PSL, a company which ran two (initially five) petrol stations. The shops at the stations were sub-let, with the tenant being responsible for collecting payment for petrol sold. The station’s carwashes were also sub-let. As a result, PSL had no need for employees other than the two directors.

PSL’s shares were held (25% each) by the two directors and their respective wives.

Odedra also had a partnership with his wife (J&J), while Badiani and his wife each owned 50% of the shares in a company (JL). In 1999, these two entities signed consultancy agreements (the 1999 contracts) with PSL:

  • PSL would pay a monthly fee and reimburse expenses incurred on its behalf
  • the consultants would devote such time and attention and ability to the business of PSL as may reasonably be necessary for the proper exercise of the consultant's duties of up to 15 hours a week. They would advise and assist PSL as required in all branches of its business… comply with the reasonable directions of PSL and use their reasonable endeavours to promote the interests of PSL.

In practice, the work done by Odedra and Basiani consisted of:

  • Purchasing of petrol, including negotiating favourable supply contacts
  • Determining the selling price for the petrol – important because of keen local competition from other petrol stations and supermarkets
  • Collecting and checking the takings for petrol sales from the shop tenant
  • Collecting rent and inspecting premises, and where necessary arranging repairs
  • On occasion, handling rent and rate reviews and planning applications

The two usually spent between 20 and 40 hours a week on these activities, beyond the 15 hours called for by the consultancy agreements.

HMRC argument

HMRC claimed that the payments made were de facto payments of employment income and that the 1999 contracts ought to be re-characterised as contracts of service (ie employment) motivated by the saving of tax.

Determinations were issued under Regulation 80 of the PAYE Regulations to collect PAYE, which PSL should have deducted between 2011/12 and 2014/15. Directions were also made under section 8 of SSCA 1999 to collect NIC from 2009/10 to 2014/15.

Directors’ argument

PSL appealed against the determinations, arguing that the two were “non-executive directors”, and the services required under the 1999 contracts are not those that one would expect a non-executive director to perform.

Tax mitigation, said PSL, was not the motive: the contracts were established in 1999 when there was an independent 50% shareholder whose interests had to be protected (although no indication was given as to how that investor was supposed to be protected by these arrangements!).

FTT points

The question of whether payments received by the holder of an office (such as a director) are earnings is one of fact rather than of law. Even if an individual is a “non-executive” director, any remuneration received by virtue of that office is taxed as earnings.

Earnings paid to a third party, even where there is no tax avoidance motive, are still taxable on the earner. The charging legislation “is silent as to the identity of the recipient”.

The judge was not convinced that the services the two individuals provided were not those expected of a non-executive director. He commented: “It is normal in the case of closely held companies for the directors to perform all tasks however lofty or lowly they may be.”

It is entirely possible for an individual to have their own independent business (say as an accountant) while also holding an office as a director. In such a case, professional fees paid by the company are not earnings from the directorship. However, “this does not normally occur where the individual is a competitor of, or in the same line of business as, the company”. 

Odedra and Badiani did not have any independent business of that nature, and in fact, the entirety of what they did was to conduct all of PSL’s activities which would normally be done by the company’s directors.

The two individuals were “part and parcel” of PSL’s business – nobody else performed any activities of the company’s business other than them.

The 1999 contracts required oversight by PSL – effectively Odedra (as director of PSL) was overseeing Badiani (as contractor) and vice versa. This satisfies the condition of “control” set out in the case of Ready Mixed Concrete [1968] 2 QB 497 as being indicative of a contract of service.


The appeal was dismissed and the Reg. 80 determinations were upheld in full, so tax of £116,771 and NIC of £70,625 are due.

It stretches credibility a little too far to suggest that PSL had no directors who actually did anything worthy of remuneration and that all its routine trading activities were carried out by external consultants – who just happened to be the (unpaid, non-executive) directors.

There are tax-efficient ways of paying a director – but this isn’t one of them.

Replies (1)

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By Justin Bryant
02nd May 2019 10:17

Para 16 is odd in that HMRC should have raised the usual quasi sham/mislabling argument (i.e. that they were dressed up as self-employed but were really paid in their capacity as employees/de facto directors) that has been mentioned here several times recently as an easy way to defeat this kind of unrealistic dressing up of payments etc. or simply applied normal self-employment/employment tax case law.

Since that argument wasn't deployed the judge (in para 24) seems to have been forced to use the "realistic" ratio of Arrowtown to do down this planning, which is not really appropriate on the facts of this case (that phrase in Arrowtown was in the context of share rights with no realistic right to income and there is nothing analogous here).

The "realistic" ratio in Arrowtown cannot be a panacea to do down any tax avoidance scheme based on a realistic view of what a judge thinks the real deal was, otherwise Julian Ghosh QC would have argued the Rangers' loans were not loans but were really salary but he abandoned that argument of course as it was hopeless (many here nevertheless seem to believe that that was how HMRC won in Rangers).

Also, the corollary of Judge Gething (who incidentally is a she not a he) being right about how widely the "realistic" ratio of Arrowtown can be applied would be that IR35 cases could simply be decided on an Arrowtown realistic view by the judge of the facts (compared to and essentially ignoring the actual contract terms), which cannot be right.

That such Arrowtown interpretation is wrong in going too far re Ramsay (i.e. simply disregarding non-commercial steps etc.) is confirmed at paras 104 & 186 here:

And see also para 136 re parties being allowed to contract as they like to potentially save tax.

Anther example of a judge misapplying Ramsay to his view of the "realistic" facts/deal (instead of correctly applying quasi sham/mislabling case law) is here:

The limitations of Ramsay re tax avoidance are explained quite well here:

Also, this case shows that transactions between connected persons may be on terms that are not overtly commercial but it does not follow that they are not real and are not capable of giving rise to real economic consequences.

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