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Markel Tax

23 Jan 2019

Directors providing services to their own company: can it work?

Petrol Services Ltd (PSL), the appellant, carried on a business of running a petrol station business. The business had two directors, Mr Odedra and Mr Badiani, who, together with their spouses held all shares (25% each). 

There were no written contracts between the directors and PSL, but there were contracts entered into in 1999 between PSL and each director’s PSC. These were termed ‘Consultancy Contracts’ intended to be contracts for services under which the directors’ PSCs would provide services to PSL in parallel to the appointments as directors.

One of the main issues with the arrangement in this case was that the ‘services’ provided on a consultancy basis did not extend beyond what might reasonably be expected to be provided by directors of a close company. The omission of a precise description of the services from the consultancy contract meant that the wording used was more consistent with the duties of a director: commercial consultancy contracts would specify the services to be performed by a consultancy.

In addition, the degree of financial responsibility and management was significant; though the PSCs were required to put forward proposals for approval by PSL, no such proposals were provided because all of the decisions were taken by the directors in their capacity as directors, when they were supposedly providing the consultancy services.  There was no evidence that there was any separation between what the individuals were doing in their capacity as directors of PSL and what they were doing in a consultative capacity via their PSC.
While it is possible for a contractor to hold a directorship in a company and in addition provide separate consultancy services to the same company via their own PSC, to be effective, one must be able to show a distinction between the duties undertaken as a director and the services provided as an independent consultant, effectively demonstrating that the payments to the PSC are completely divorced from the office of director. 

In this case, the Tribunal found the argument that the two men operated businesses independent and separate to that of PSL unconvincing. The judge’s comments suggest that the split contract arrangement would be more effective if the consultancy services provided were different in nature to PSL’s business. Here, there was no such distinction between the work undertaken by Mr Bediani and Mr Odedra, and all payments were deemed to have arisen from the gentlemen’s offices or employments with PSL. 

It is worth noting that even if HMRC’s argument that the income resulted from the office holding was unsuccessful, it was their contention that the contracts for services actually were more reflective of contracts of service (ie that each of the PSCs would fall within IR35 in their own right), a point with which the Tribunal agreed, not least because the contracts required personal service, oversight by PSL of the services provided by the consultants, and they were without a doubt ‘part and parcel’ of the appellant’s business. 

This case highlights that in order for a split contract arrangement to be effective, it is important that there are terms in place to set out the appointment as director and the contract for services covering the consultancy element of the services. Each contract must define the services / responsibilities to be provided under that contract, and the day-to-day operation and administration of the two roles is crucial: it must be clear in what capacity work is being undertaken. Significantly, where the company’s and PSC’s businesses are different in nature, a more robust case can be put forward. In addition, the consultancy contract should be considered to ensure that the engagement would fall outside of IR35 on its own merits.

If you are considering entering into a split contract arrangement, Markel Tax can help. In the first instance, it would need to be established that the consultancy services intended to be provided by the PSC can be separated from the statutory duties of director, and also that these will not be caught by IR35.  We can review the proposed arrangements and, if comfortable that the consultancy services are outside of IR35 and both roles are separate and distinct, we can provide a contract for services and a director’s services agreement setting out the consultancy and office holder responsibilities. 
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