You’ve been given the opportunity to earn some extra cash using your personal expertise. Although your company will do the majority of the work, can you do your bit on a freelance basis and get paid off the payroll?
Business opportunity
One of our subscribers (we’ll call him A) recently got into a dispute with HMRC. It wanted to treat a payment made to him by his company as salary, which would have resulted in PAYE tax and NI (employees’ and employers’) liabilities. Our subscriber argued that the money he received was payment for his share of profit from a personal project in which his company was just one of the participators. That way, because of the way the deal worked, he would have less tax and NI to pay.
The project
A friend of A’s owned a plot of land with planning permission for residential properties. He had no experience of construction, but knew A did. They hatched the following plan. A would use some of his personal savings towards the construction costs and his company would pay the rest. The company would build three houses on the land and sell them which would be its share of the deal. A and his friend (who would also be paid for the land), would get a property each.
Completing the deal
When the project was complete the properties were allocated as agreed. A lived in his property for a year and then sold it to his company for around £100,000 more than he put in. He declared it as a capital gain from the sale of his home. HMRC accepted that it was his home for tax purposes, but that because of A’s relationship with the company – he was a director – the profit he made must be earnings (HMRC couldn’t argue that it was a dividend because none were declared by A’s company).
The right to make a personal profit
A’s accountant correctly pointed out to HMRC that tax law doesn’t say anywhere that profit made by directors in dealings with their companies automatically counts as employment income. Also, there’s nothing in law to prevent directors from entering into contracts with their companies outside of an employment arrangement and making a profit from them. HMRC conceded.
Trap. Before you join in a contract with your company, you must first clear it with the other directors to avoid a conflict of interest under company law. Failing to do so can mean your company has a right to some or all of the profit you make.
Tip. There’s nothing to stop you trading with your company and making a personal profit from it. However, to prevent any company law issues or disputes with HMRC, the terms of the trade should be similar to those that you would agree with a company with which you have no connection. That includes each party involved producing the same sort of paperwork to evidence the normal commerciality of the arrangement.
A warning on sharing profit
Working with your company on a joint venture is OK in law and you’re fully entitled to do it. But personally making profit that should be your company’s will land you in hot water with HMRC. For example, there are anti-avoidance rules which prevent you from gaining a tax advantage by taking stock from your company at cost price or less and personally selling it at a profit.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.