Director fee for consultancy

T

trg

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Hi, if a directors current account has become overdrawn at year-end can it be cleared by the director issuing the company a fee for consultancy?

Assume this is taxable income to director?

Are there any other tax-efficient ways to resolve the problem? Salary and mileage at civil service rates are 2 I know of

Thanks
 

Hi,

Directors fees are subject to PAYE in the same way as salary.

Unless you are talking about the director invoicing the company. In which case the invoice would have to be raised by the director for goods or services provided as part of a trade entirely separate and distinct from the activities of the company, and at an arms length value. This would be very difficult to prove, particularly if you are talking about "consultancy", and I've never seen it actually accepted in practice.

As for mileage expenses at the civil service rates, these can and should be paid to the director, for all business mileage incurred by him. Payment of mileage expense should be substantiated by records such as diaries / logs containing the details of each business trip, date, location visited, purpose of visit, duration of visit, distance travelled etc... If you're asking if it's a good idea to just make up a contrived mileage expense claim to reverse the overdrawn balance, I doubt you'll find anyone here who'll advise you to engage in tax evasion.

The alternative you haven't mentioned is to just let the balance lie. The director has 6 months from the year end to repay the overdrawn balance, failing which the company is liable to pay over a withholding tax equal to 20/80ths of the overdrawn balance, when they file their Corporation Tax return.

This is only a withholding tax however, and the company can have it repaid to them (or take a credit for it against tax owing), in the period when the director repays the loan. So if you know that the director will repay the loan in the relatively short term, then the most tax efficient way to do things may well be to just pay the withholding tax and claim it back next year when the loan is repaid.

However, there is potentially a liability to tax on the company, if the loan is treated as interest-free to the director. In this case there is a PAYE liability, as the interest foregone is treated as a BIK on the director. This may still be preferable than the alternative; it means the company only pays PAYE on (say) 12% of the loan, rather than recording it as salary of the director and paying PAYE on the whole lot.
 
Overdrawn Directors current account is a serious matter, aside from the revenue aspect. If the account is overdrawn by more than 10% of the companys net assets, at any stage during the year, it is an offence and if audited, the auditor is obliged to report this to the director of corporate enforcement.
 
I have seen a company with 3 directors, one took salary while the other 2 charged in consultancy fees. This was inspected by the Revenue and there was no problem with it. I think Revenue wanted to desk audit it as it was linked with termination payment (and the sums involved were quite large).

It is important to note that the 2 directors that charged in consultancy fees were engaged in property and were VAT registered in their own names i.e. they were returning this under their own trades.
 

That's very interesting Paddy: do you know was there a distinction between what the guy taking the salary did to earn his salary, and what the guys charging consultancy were doing?
 
None. It was extraction of the profits 33.33% each and Revenue had no problem with it, from the company point of view anyway (albeit we don't act for the 2 directors who charged in consultancy fees, but I'm sure we would have heard about it if there was problems with it).

They were more concerned about the cessation date (for allowability to CT deduction of the termination payment), which they were satisfied on.
 

Did they actually conduct an audit so, or was this just a couple of queries from the customer service area of the local tax office upon cessation?

You say they were more concerned about the cessation date, so did they actually query the consultancy invoices, or was it just not really raised as an issue?

Sorry for tearing the This post will be deleted if not edited to remove bad language out of this, and I'm not doubting what you've said - I'd just be amazed if an Auditor didn't have a serious problem with the treatment you've described!
 
Hi Mandlebrot,
thanks for the reply. Firstly there is no request being made by me for tax exasion advise. Nor do i think i was being suggestive really. The phrase i used was efficient, this of course should be extended to be compliant with corporate enforcement.

Anyway - if the invoice must be at for an activity distinct from trade of company then this would not be a runner, he is only qualified for the activity of the company. I was thinking along the lines of a management fee, the proceeds would be taxabale in the directors personal income tax of course.

You say you have never seen it accepted in practise - does this mean that you have seen it rejected?

I may be being simplistic but from Revenue point of view I assumed that if they werent at a loss, which they are not, then there would not be a problem.

I am aware that it can be left lie assuming it doesnt contravene corporate enforcement rules and that will be considered, thanks for the information regarding the loan/BIK, very helpful.

You say that you would be amazed if an auditor didn't have a serious problem with the experince that Paddy199 describes - could you say why?
 

Hi Trg,

The reason I'd be amazed if an inspector didn't have a problem in the scenario Paddy describes is because the nature of the transaction based on what Paddy posted, was remuneration for their conducting of their duties as directors of the company. Paddy has even confirmed that there was no difference in what the "consulting" directors did, compared to the salaried director.

I mean, consider what the function of a director is - they manage and direct the affairs of the company, make judgements and decisions. The financial reward for this is in the form of salary, fees, bonuses, all subject to PAYE. how can you then turn around and say, "well I didn't actually do anything in my capacity as director to merit a salary from the company, but in my capacity as a "consultant" I provided 100k worth of wisdom to the company...". I don't see how that can stand up to objective scrutiny.

Take a different scenario, say a guy has a restaurant trading as a Ltd co. and down the road he operates a greengrocers as a sole trader. Now if he sells fruit and veg to his restaurant company, invoices at the going rate and is paid accordingly, this would I'm sure be fine. But there's a big distinction between goods and services.

Another important reason why an Inspector would have a problem is because under the PAYE system the tax would be payable immediately, whereas if the directors treat it as self employed income then they will have until 31st Oct to pay it. So they effectively have a loan of the tax for many months...

Also, if money is paid to the director as consultancy, they will no doubt claim expenses against this income, whereas it would all be taxable under PAYE. at the same time they may well be getting paid mileage expenses and subsistence out of the company for driving around carrying out their "worthless" directors duties... huge potential for abuse.
 
Just to clarify, the company I spoke about is a property company. It bought a piece of land back in the 90's and sold it in 2009. The company trade was to buy and sell property at a profit but it sat on it alot longer than was initially envisaged. The directors who charged in consultancy fees had their own property trades.

With that said, Revenue requested the invoices, examined them and were satisfied with the arrangement. I dealt with the company affairs but I did not work on any of of the 3 directors returns.
 

Thanks Paddy,

All I can say is, I'm amazed! (Particularly after having informally spoken to a couple of Inspectors to confirm I'm not imagining what Revenue's stance on this is.)

So I'd still advise the OP or anyone else considering invoicing for services provided by a director to a company, that they are on extremely shaky ground.
 

What about a doctor who is also a director of the company but also working as self employed non resident doctor for the company and operating for the company. Are these two separate different responsibilities or not so in this scenario can the doctor be remunerated as a director and paid consultancy fees?
 
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