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
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.
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.
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
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
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
Smith & Williamson LLP: Regulated by the Institute of
Chartered Accountants in England and Wales for a range of
investment business activities. A member of Nexia International.
The word partner is used to refer to a member of Smith &
Williamson LLP The Financial Conduct Authority does not regulate
all of the services or products discussed in this
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