Can directors trade with their company and make a personal profit?
Updated: Feb 28, 2021
From time to time directors who possess certain specialist skills or contacts may be given the opportunity to earn some extra cash using their personal expertise. Even if the company will do the majority of the work, there may be opportunities to partner with the company on a freelance basis and get paid off the payroll.
Business opportunity Any transaction between a director and their company is a related party transacstions and should be structured as an "arms-length" transaction. This means all efforts should be made to treat the transaction the same as would be done with an unrelated third party. In disputes, HMRC will want to treat any payment made to a director by his company as salary, which would attract PAYE tax and NI (employees’ and employers’) liabilities. Making a personal profit UK Tax law doesn’t say anywhere that profit made by directors in dealings with their companies automatically counts as employment income. In addition, there is nothing in UK law that prevents directors from entering into contracts with their companies outside of an employment arrangement and making a profit from them. it is important to add that under the Insolvency Act 1986, if a company enters administration or liquidation, the actions of directors in the period before insolvency will be investigated to find out if directors have acted wrongfully or unlawfully on transactions with the company. In particular, if the directors have given a preference to related creditors ahead of other creditors.
Before entering into a contract with your company, you must first clear it with the other directors (if any) to avoid a conflict of interest under company law. Failure to do so could mean your company has a right to some or all of the profit you make. There is nothing to prevent you from trading with your company and making a personal profit from it but 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 contract and paperwork to evidence the commercial terms of the arrangement.
Beware: Entering into a joint venture with your company is legal and nothing in law stops you from doing so. However, using your position as a director to personally make a profit that should belong to your company can create problems with HMRC. in addition, in the event of insolvency care should be taken not to give preferential treatment to ant related party creditor to the detriment of other creditors.