Introduction

Do you have directors (including non-executive directors) to whom you make gross payments? If so, you could be exposed to a costly compliance risk.

The Financial Reporting Council's Combined Code on Corporate Governance recommends that at least half of the board, excluding the Chairman, of all listed companies other than smaller companies should comprise independent non-executive directors (NEDs). Smaller companies (those below FTSE 350) should have at least two independent NEDs. More and more companies are appointing NEDs, many of whom regard their 'independence' as being sufficient justification for raising invoices for gross payment of fees as though they were self-employed.

Increasingly we are seeing the company treatment of fees for these additional services being challenged by HMRC as part of PAYE reviews, and by acquirers as part of the due diligence reviews on acquisition.

The correct tax and social security position can become complex especially when non-UK tax resident executive directors or NEDs attend board meetings in the UK.

Employment taxes

A directorship (including non-executive) is considered by HMRC to be an 'office' for tax purposes. Both tax and NIC rules treat income from an office in the same way as they treat income from an employment. Consequently, office-holders' earnings are liable to tax and Class 1 NIC. The payer of employment income is responsible for the operation of PAYE and for accounting for any tax and NIC due to HMRC.

HMRC will review the tax and NIC treatment of payments to company directors. Where errors have been made, or payments have not been subjected to PAYE, HMRC will collect any tax and NIC due from the payer. They will also charge interest and could charge a penalty of up to 100% of the tax due.

Concession

If the directorship duties are provided through a partnership or limited company it is possible, by concession, to pay fees gross. However, the concession is fairly limited and agreement must be obtained first from HMRC and additional reporting requirements may arise.

NEDs' additional services

It is not uncommon for NEDs to provide a company with consultancy services in addition to directorship services. Unless there is a separate formal contract or agreement in place for the provision of consultancy services, which are clearly distinguished from the directorship (and the duties and fees payable), HMRC will regard all fees as arising from the office.

How can we help

Whether you are engaging an NED for the first time, or already have a NED within your company, it is important to ensure you have the right contracts in place and are applying the tax and national insurance rules appropriately. We can also advise on the correct position for non-UK tax resident NEDs.

With our HR solutions and employment tax services teams we are able to provide advice and guidance on both the tax position and the contracts.

Please note

We have taken care to ensure the accuracy of this publication, which is based on material in the public domain at the time of issue. However, the publication is written in general terms for information purposes only and in no way constitutes specific advice. You are strongly recommended to seek specific advice before taking any action in relation to the matters referred to in this publication. No responsibility can be taken for any errors contained in the publication or for any loss arising from action taken or refrained from on the basis of this publication or its contents.

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