UK Fact-File Part 6:
Individual Business Employment Issues

6.5 UK Business Owner Employment and Invoicing Rules

The employment by a business of its owner

A sole proprietor is the business owner and there is no distinction between the business and a sole proprietor. In a partnership, the partners have equal (or as apportioned) ownership stakes in the business and each is responsible for their own tax affairs – income is apportioned between the partners.

With a limited company the directors and employees of the company are separate from the company itself, which is a legal entity in its own right. The company employs the employees and the directors. The company pays corporation tax and employer’s national insurance contributions – the directors (one or more of whom can be the owners of the business) pay income tax and national insurance in accordance with the specified contribution rules.

Benefits in kind provided by a company are generally taxable. There are some exceptions, including the provision of workplace canteens and crèches, the provision of a mobile phone for non-company use and the reimbursement of expenses. Where a company provides benefits such as a company car, medical insurance, preferential loans or a mobile phone for company use, then these benefits are normally declared on a form P11D by the employer. The taxation of the benefits will usually be collected via PAYE, or via self-assessment should this apply. There may also be liability by the employer to pay class 1A NICs in addition to the NICs already payable.

Taxation of these benefits in kind also applies to company directors. If a sole proprietor purchases a car or phone and the use of the item is both business and personal, then there will be liability for tax on these benefits in kind.

Invoicing your business

A business can use the services of an umbrella company to facilitate payment to independent contractors who carry out work for the business but are not employees (which can, presumably, include the owner of the business, although professional advice should be obtained with regard to this point). The umbrella company will charge a fee for their services but must pay the contractors via the PAYE system, deducting income tax and national insurance contributions (otherwise they would be breaking the law). Utilizing an umbrella company may allow a proprietor the option of not having to establish a limited company. The fees charged by an umbrella company can be treated as a business expense in addition to the wages paid to the contractors.

There is a dispensation from HMRC in that umbrella companies do not have to see receipts (though each individual should retain them as they may be required by HMRC). So-called Managed Service Companies no longer enjoy tax advantages.

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