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February 19, 2019

Payments to Directors Liable to PAYE - Petrol Services Limited v HMRC

Directors claiming to provide services outside the scope of PAYE to their companies should consider the case of Petrol Services Ltd v HMRC in which the First-Tier Tribunal (FTT) found that payments to two directors were effectively remuneration liable to income tax and NICs under PAYE.


  • Petrol Services Ltd (PSL) carried on a petrol business.
  • The company had two directors who didn’t receive remuneration directly but did have separate “consultancy agreements” under which they were entitled to a set amount each month and required to work up to 15hrs per week.
  • In practice PSL had no employees and the petrol stations were sublet to shop and carwash tenants who paid rent and collected payments for PSL.
  • The two directors usually worked together to purchase petrol, set prices, collect takings/rent, inspect the premises, insure the business, arrange repairs, and conduct occasional rent reviews/applications which amounted to between 20-40hrs of work each week.
  • Both directors and their wives had been 25% shareholders since 2007.

The Case

HMRC contended that the directors had a “contract of services” (like employees) which meant that income tax and NICs should have been collected on PSL’s payments under PAYE.

HMRC provided evidence from third party notices, attempting to show that the directors had contracted with PSL’s suppliers in their capacity as officers of PSL and not as contractors.

The directors claimed they had a “contract for services” which was separate to their directorships and taxable as the income of their respective businesses. They claimed a contract of services couldn’t exist because:

  • Directors are only entitled to remuneration as agreed by shareholders through an ordinary resolution and PSL’s shareholders never passed such as resolution.
  • The agreements set out a range of services that wouldn’t normally be expected of a director.

The Decision

The FTT ruled in favour of HMRC but dismissed the information HMRC obtained from PSL’s suppliers as “insubstantial”.

The FTT held that PSL's payments were effectively remuneration on which PAYE should have been operated.

It did not matter that the remuneration was paid to the directors’ businesses; it was still taxable on them as earnings following the principles of the Supreme Court in Rangers v HMRC.

The FTT also dismissed the directors’ specific arguments on the basis that:

  • A formal resolution for directors’ remuneration isn’t required where all the members of the company either directly agree or implicitly accept it.
  • It is normal for directors of closely held companies to “perform all tasks however lofty of lowly they may be”.


HMRC’s own manual at ESM4022 and EIM00730 acknowledges that a director can provide separate services to the company they are director of.

However, in practice the closer the services are to the duties expected of a director (given the size of the company) and/or the actual services of the company itself, the more difficult it will be to maintain that payments to a director aren't remuneration and within the scope of PAYE.

Related Articles

Ackroyd v HMRC – Nothing Personal (29 March 2018)

HMRC rematch with Tottenham Hotspur on Termination Payments (13 December 2017)

Rangers v HMRC – EBT Struck Down by Supreme Court (27 July 2017)

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