The world of business is ever-changing, and with gig working it is not unusual for people to own several limited companies, be partners in a partnership, and do self-employed work as well.

It’s also much more common for people to be working in different sectors or capacities. Often, it’s much simpler to explain to clients if that is done using different entities.

So, in this post, we wanted to give you the lowdown on:

• The difference between a limited company and self-employed
• Why would you want to invoice your limited company?
• The tax implications
• The legal implications

The difference between a limited company and being self-employed

The starting point is to understand what the difference is between limited companies and being a self-employed individual. What many people don’t realise is that a limited company is an entity in its own right.

Although you may own all the shares in a company, the money in the bank account isn’t yours, it belongs to the company. Now admittedly, you have the power to make the company give you the money, but it is still owned by the business and not you.

Contrast that with the bank account of a self-employed person. It may have their name or the name of their business on it, but it is owned by the individual.

Why would you want to invoice your limited company?

There are all sorts of reasons you might want to run a distinct limited company and as a result, invoice your company separately. The first one is for marketing purposes.

Perhaps you are a carpenter part-time, and you also own a recording studio. You feel it would be confusing for customers to be buying cabinets from a recording studio, or booking recording time with a carpenter!

To avoid any confusion, you set up a limited company to operate the studios, and carry on working as a self-employed carpenter with your original customers. When the recording studio needs a shelf putting up, you charge it from one business to the other.

Or, you may have a company that is set up by several individuals to run an advertising agency. Each of the shareholders has a specialism and in the early days, the business doesn’t have enough money to pay a wage. So, they carry on working on their own account, but hold shares in the company.

Consequently, when they do an hour of copywriting, web design, or account management, they each invoice separately.

The absolute worst reason to invoice your own limited company is in some kind of misguided attempt to avoid (or evade) tax.

Quite apart from the expense of getting it wrong, HMRC is very good at spotting these things – after all, they see them every day! When you get caught, you will undoubtedly receive a penalty and have to pay the tax you avoided anyway – plus interest.

The tax implications

So, what are the tax implications? Well, each taxpayer is responsible for their own taxation. This means that:

• A self-employed person will fill in a Self Assessment return to deal with their income
• A limited company will submit a Company Tax Return and pay Corporation Tax

In most cases a company pays an invoice and won’t deduct any tax or National Insurance. Instead, the self-employed person or business that sent the invoice will report the income on their tax return, and pay tax and NI on it that way.

We say ‘in most cases’ because there are some instances where a business pays an invoice and does deduct tax and NI. Brace yourselves because it does get a bit technical.

If they’re a contractor and paying a subcontractor’s invoice under CIS

If the person involved is registered for the Construction Industry Scheme (CIS) it’s a bit different. A contractor paying a sub-contractor under CIS deducts the tax ‘at source’ (i.e., they take it out of the invoice amount before they pay it).

The contractor then submits a CIS return to HMRC to tell them about the deduction, and pays the amount on behalf of the subcontractor.

If the contract is ‘within Ir35’

IR35 sets out to tackle disguised employment, that is, an individual using the tax advantages of working as a business for a client, rather than as an employee for an employer. If a contract is  ‘within’ IR35, the client must deduct tax and NI from the invoice before paying the worker. They then pay this deduction on to HMRC as if it were for an employee.

So, can you invoice your own limited company? Well, the answer is “yes”, but…

It is possible to carry out self-employed work for a company that you are director of. In fact it can sometimes be useful to separate businesses for marketing purposes.

Just be very careful to demonstrate that these activities really are separate.

Can you show at which point you’re acting as a self-employed person, and at which point you’re acting in your capacity as a director? You might need to explain to HMRC!

It is an area which may well trip up the unwary, resulting in a tax investigation and penalties. Above all, the best advice is to make sure you take qualified advice, otherwise you could find yourself in hot water.

Check out our freelancer resources and guides for more tax information, or to get help on other issues.