Can a director provide services to his own company?

If you are the director of a limited company, you may be tempted to provide yourself some services to your company rather than hire a third-party freelancer and then bill the company for those services. However, invoicing your own business can have legal and tax implications that you should be aware of. Let's go over the potential pitfalls and the steps that can be taken to avoid them.

Conflict of Interest

The first issue you need to be aware of is the potential conflict of interest you might create between your duties as a director and your interests as a self-employed contractor. As a director, you have a fiduciary duty to act in the best interests of your company and its shareholders, which means that you should not enter into transactions that are detrimental to the company or that give you an unfair advantage over other shareholders. However, as self-employed contractor, you may have an incentive to charge your company more than the market rate for your services or to provide substandard services that do not meet the company's needs. This could expose you to legal action from the company or other shareholders for breach of fiduciary duty or unfair prejudice.

To avoid any conflict of interest, you should make sure that the terms and conditions of your invoices are fair and reasonable and reflect the market value of your services. You should also document the nature and scope of your services and keep records of the time spent and the expenses incurred. And then you should make sure that you obtain the consent of other company directors as well as other shareholders, if any, before billing your company. You disclose any potential conflicts of interest. Your objective is to prevent HMRC from challenging the validity of your invoices and tax your self-employment income as disguised payments for your work as a director. Which means that you would have to pay income tax and National Insurance contributions (NICs) at higher rates and that your company would have to pay employer's NICs as well.

Director's Duties are always Employment

Another pitfall you might run into is since director's duties are always considered to be employment, you cannot bill the company for any work related to your duties as a director of that company. If you decide to bill the company for services that you provide, you need to ensure that those services are distinct from your duties as a director and that they are not part of your employment contract with the company, be it explicit or implicit since a director does not have to have an employment contract. For example, if you are a director and an accountant, you should not bill your company for accounting services that are within your director's role, but only for additional services that are outside your role.

And again, as stated above, the more documentation you have the better. Having an employment contract with a very specific scope will help as well as making sure that any service you provide are not only outside of that scope but also approved by another director or shareholder.

Finally, and this is valid for any business but even more so in this case, make sure that bookkeeping is kept tidy and bank accounts kept separate.

Conclusion

As we have seen it can be difficult to segregate duties and billing your own business might leave you vulnerable to challenges from HMRC. But if you have to do it, you can still mitigate the risks by following the guidance mentioned above and in particular by making sure that all transactions are not only at arm's length, with fair and reasonable terms, but also fully disclosed to all shareholders.