Q. I am a contractor and recently saw an article which suggested there may be financial benefits if I had a contract in place between myself and my limited company. Unfortunately, I cannot find this article anywhere now. Could you please explain the advantages and disadvantages of doing so?
A. Most contractors who operate as directors of their own limited companies do not have contracts in place between themselves and their Personal Service Company. If you do have a contract in place it should be a contract of employment, if anyone suggests anything other than this, I would seek independent legal advice to ensure what they are suggesting does not constitute tax avoidance.
Having a contract of employment in place may support your status as an employee of the business and I have heard it suggested that this will mean you can pay yourself redundancy upon closing the company. Unfortunately, it is not that simple and there is a wealth of case law that supports the position that sole directors and shareholders or those with controlling shares in the company are not employees regardless of the presence of a contract of employment and therefore cannot be made redundant.
This issue came to the fore when the Coronavirus Job Retention Scheme was announced. Initially, the guidance referred to employees and so there was much debate in the contracting world about whether directors of Personal Service Companies would qualify. Having a salary in place on its own would not necessarily mean that you are an employee of the business. Fortunately, later updates to the guidance confirmed that the sole directors and shareholders could furlough themselves and claim a grant of 80% of their salary costs up to £2,500 per month under the scheme.
So in summary, there are no obvious financial benefits to having a contract of employment in place with your business. Before considering any other contractual arrangements, I would strongly suggest that you seek legal advice.