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 different 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, then 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.
Typically, people get it horrendously wrong, and it ends up costing them more. Quite apart from that, HMRC is very good at spotting these things – after all, they see them every day!
If you get caught, then 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
If a company pays an invoice from a self-employed person, it won’t deduct tax. Instead, the self-employed person reports the income on their tax return, paying tax and national insurance once they make their submission. The company also records the payment in its accounts.
It’s a bit different if the person involved is registered for the Construction Industry Scheme (CIS). When a contractor pays a sub-contractor through CIS, they will deduct the tax at source, and submit a CIS return to HMRC.
Again, trying to get around having tax deducted from invoices through CIS is, at the very best, avoidance – but may well be seen as tax evasion by the authorities. The strong advice here is to not mess with CIS!
The legal implications
At this point, we have to draw a distinction between directors and shareholders. Shareholders own the company; directors manage the company as officeholders. Often, these are the same people, but not always.
Legally, a shareholder can invoice a company with no problems at all. However, directors are office holders and as such tax law dictates that they must be paid through PAYE. Trying to get around this is a big mistake.
The larger the company is, the more reporting requirements it has. This means larger companies have to report transactions with related parties which, in this case, means major shareholders.
But in most cases, there is no law that says you can’t invoice a company you own, especially if the two businesses are in unrelated fields.
Can you invoice your own limited company as a subcontractor?
So, can you invoice your own limited company as a subcontractor? Well, the answer is “yes”, but…
It can be useful to separate businesses for marketing purposes, and to make sure that you keep activities apart. Just be very careful to demonstrate that these activities really are separate. You might need to explain to HMRC!
It is also an area that is fraught with rules that may well trip up the unwary, and end up with a tax investigation and penalties. Above all the best advice is to make sure you take qualified and experienced advice before you decide to work your business in this way, 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.