Deciphering the tax status of resident and non-resident directors Deciphering the tax status of resident and non-resident directors

Deciphering the tax status of resident and non-resident directors
16 Nov 2017

Despite what many people think, the law concerning tax and National Insurance. Contributions (NICs) draws no distinction between executive and non-executive directors (NEDs). A director is an ‘office holder’ and, therefore, any income received for performing directors’ duties is generally taxed as earnings.

People also frequently become confused with how ‘IR35’ provisions interact with the fees paid to directors if their services are provided by a limited company. What is important to note in this context is that if an individual is the ‘office holder’, IR35 is not taken into consideration. Income from directors’ duties is taxed as employment income under first principles.

In the case of directors of UK companies who are based overseas, however, things become even more unclear, particularly if they only visit the UK for short periods of time each year.

Is a UK director’s remuneration subject to UK tax?

Yes it is. NEDs and directors of UK companies are ‘office holders’, as are charity trustees and company secretaries. As a result, their remuneration is subject to UK tax. Office holders are covered by UK Pay-As-You-Earn (PAYE) legislation. Directors’ fees are subject to income tax because tax legislation states that officeholders and employees should be taxed in exactly the same way.

An ‘office’ is legally defined as a “permanent, substantive position, which has an existence independent from the person who fills it, which is filled by successive holders”. After initially being drawn up, the definition was amended in a later tax case with the proviso that a given post need not be permanent or prolonged, although it must last longer than the tenure of a single individual.

Fees received by office holders are also potentially subject to NICs because office holders fall under the definition of ‘employed earners’ in relation to NIC legislation. This means that non-executive and executive directors’ fees are potentially subject to PAYE and NICs unless an exemption applies, and they should be paid through payroll. It is the responsibility of the company that engaged the director concerned to deduct the necessary tax.

Should non-resident directors be treated differently?

As directors are office holders for the UK entity, it is necessary to consider if there is a requirement to deduct UK PAYE. Double tax treaties do not usually offer any protection, although they should be checked. Of course, if individuals are not remunerated in any way either by UK or overseas entities in relation to their directorship - as is often the case with charity trustees - there should be no UK tax liability.

If a director’s pay is not split between their UK and overseas duties, Her Majesty’s Revenue & Customs (HMRC) could take the view that a proportion of their total pay relates to their UK directorship role and apply PAYE to it. This calculation would be based on the time the director spent working in the UK.

Prior to the start of the tax year, employers can also ask HMRC for a ‘Section 690 direction.’ This requests that the UK director only be taxed on a percentage of their income based on the projected number of days they are expected to spend in the UK. Without such an agreement, employers run the risk of failing to deduct PAYE, submitting incorrect returns and being liable for any tax, interest and penalties due.

Will UK NICs/social security be payable for UK resident and nonresident directors?
NICs/social security are payable for UK resident directors. But the situation is more complicated for non-resident directors, although it may be possible to use a concession.

As an administrative concession, HMRC allows a non-resident director of a British-registered company to have no liability in terms of UK social security (Class 1 NICs) on earnings received if:

• The director only attends board meetings in the UK;
• The director attends a maximum of 10 board meetings in any tax year;
• Each visit lasts no more than two nights at a time;
• The director only attends one board meeting in a tax year and the visit lasts no more than two weeks.

Their earnings would be outside the concession under the first two points if 11 board meetings took place during the tax year, even though each visit might only last one night. Directors should also refrain from averaging out the time spent visiting the UK to see whether earnings fall within the concession as each visit is required to last no more than two nights. Similarly the director’s earnings are not exempted from Class 1 NICs if they attend only one meeting and their visit to the UK lasts for three weeks.

In addition, a non-resident director who comes to work in the UK from a European Economic Area country or from a country with which the UK has a Social Security Agreement, is exempt from paying UK NICs if they are paying tax elsewhere. Providing they have an A1 or Certificate of Coverage for the relevant period, employer NICs would not be payable on the director’s fees.

Finally, the state of play in other instances can depend on how the other relevant jurisdiction treats company directors and whether they are considered employed or self-employed.

What is the situation relating to accommodation and travel costs?
UK accommodation and travel expenses need to be considered when assessing a non-resident director’s tax position. Travel expenses are often paid for attendance at board meetings and, if they run over a couple of days, accommodation and food might also be included. HMRC is likely to consider all of these expenses taxable. It makes no difference whether the costs are borne in the UK or elsewhere.

While directors may argue that they are homebased as they undertake a significant amount of preparation there, the definition of a ‘homebased’ worker is very tightly drawn. HMRC will often argue that the director’s work base is where board meetings are held.

If the director visits other locations when travelling in the UK, normal employee rules apply. If they are unable to claim tax relief under the normal rules for travel costs, there is potentially a specific form of relief available for travel costs to, and from, the UK. But accommodation costs in this scenario would still be taxable. As such, they would either be processed via payroll or included on the P11D, depending on the method of payment.

What is your exposure as an employer?

The engaging company can be held liable for PAYE and NICs payments for non-executive and executive directors that HMRC deems should have been deducted, plus interest and penalties. If the director has accounted for tax on their earnings under self-assessment, there may be some scope to mitigate this situation, although it is likely to be difficult for the most recent year. Any offset is also unlikely to meet all of the liability.

What should you do now?

HMRC is increasingly targeting directors and employers in cases where they can see that no PAYE has been applied. Therefore, it is advisable to keep the situation under regular review and, if in any doubt, seek specialist advice.

 

Susan Ball is a partner and heads up Crowe Clark Whitehill LLP’s Employers’ Advisory Services. She has over 25 years experience of working in employment tax, investigations and rewards. Susan heads a multi-disciplinary team, advising on a full range of employment issues for organisations in the commercial and charity sectors.

Her team was highly commended in the Forum for Expatriate Management’s “Tax Provider of the Year” awards for expatriate tax in 2013. It was also part of a wider group that won the LexisNexis “Best Tax Investigations Team of the Year” for 2012 and 2014.

Despite what many people think, the law concerning tax and National Insurance. Contributions (NICs) draws no distinction between executive and non-executive directors (NEDs). A director is an ‘office holder’ and, therefore, any income received for performing directors’ duties is generally taxed as earnings.

People also frequently become confused with how ‘IR35’ provisions interact with the fees paid to directors if their services are provided by a limited company. What is important to note in this context is that if an individual is the ‘office holder’, IR35 is not taken into consideration. Income from directors’ duties is taxed as employment income under first principles.

In the case of directors of UK companies who are based overseas, however, things become even more unclear, particularly if they only visit the UK for short periods of time each year.

Is a UK director’s remuneration subject to UK tax?

Yes it is. NEDs and directors of UK companies are ‘office holders’, as are charity trustees and company secretaries. As a result, their remuneration is subject to UK tax. Office holders are covered by UK Pay-As-You-Earn (PAYE) legislation. Directors’ fees are subject to income tax because tax legislation states that officeholders and employees should be taxed in exactly the same way.

An ‘office’ is legally defined as a “permanent, substantive position, which has an existence independent from the person who fills it, which is filled by successive holders”. After initially being drawn up, the definition was amended in a later tax case with the proviso that a given post need not be permanent or prolonged, although it must last longer than the tenure of a single individual.

Fees received by office holders are also potentially subject to NICs because office holders fall under the definition of ‘employed earners’ in relation to NIC legislation. This means that non-executive and executive directors’ fees are potentially subject to PAYE and NICs unless an exemption applies, and they should be paid through payroll. It is the responsibility of the company that engaged the director concerned to deduct the necessary tax.

Should non-resident directors be treated differently?

As directors are office holders for the UK entity, it is necessary to consider if there is a requirement to deduct UK PAYE. Double tax treaties do not usually offer any protection, although they should be checked. Of course, if individuals are not remunerated in any way either by UK or overseas entities in relation to their directorship - as is often the case with charity trustees - there should be no UK tax liability.

If a director’s pay is not split between their UK and overseas duties, Her Majesty’s Revenue & Customs (HMRC) could take the view that a proportion of their total pay relates to their UK directorship role and apply PAYE to it. This calculation would be based on the time the director spent working in the UK.

Prior to the start of the tax year, employers can also ask HMRC for a ‘Section 690 direction.’ This requests that the UK director only be taxed on a percentage of their income based on the projected number of days they are expected to spend in the UK. Without such an agreement, employers run the risk of failing to deduct PAYE, submitting incorrect returns and being liable for any tax, interest and penalties due.

Will UK NICs/social security be payable for UK resident and nonresident directors?
NICs/social security are payable for UK resident directors. But the situation is more complicated for non-resident directors, although it may be possible to use a concession.

As an administrative concession, HMRC allows a non-resident director of a British-registered company to have no liability in terms of UK social security (Class 1 NICs) on earnings received if:

• The director only attends board meetings in the UK;
• The director attends a maximum of 10 board meetings in any tax year;
• Each visit lasts no more than two nights at a time;
• The director only attends one board meeting in a tax year and the visit lasts no more than two weeks.

Their earnings would be outside the concession under the first two points if 11 board meetings took place during the tax year, even though each visit might only last one night. Directors should also refrain from averaging out the time spent visiting the UK to see whether earnings fall within the concession as each visit is required to last no more than two nights. Similarly the director’s earnings are not exempted from Class 1 NICs if they attend only one meeting and their visit to the UK lasts for three weeks.

In addition, a non-resident director who comes to work in the UK from a European Economic Area country or from a country with which the UK has a Social Security Agreement, is exempt from paying UK NICs if they are paying tax elsewhere. Providing they have an A1 or Certificate of Coverage for the relevant period, employer NICs would not be payable on the director’s fees.

Finally, the state of play in other instances can depend on how the other relevant jurisdiction treats company directors and whether they are considered employed or self-employed.

What is the situation relating to accommodation and travel costs?
UK accommodation and travel expenses need to be considered when assessing a non-resident director’s tax position. Travel expenses are often paid for attendance at board meetings and, if they run over a couple of days, accommodation and food might also be included. HMRC is likely to consider all of these expenses taxable. It makes no difference whether the costs are borne in the UK or elsewhere.

While directors may argue that they are homebased as they undertake a significant amount of preparation there, the definition of a ‘homebased’ worker is very tightly drawn. HMRC will often argue that the director’s work base is where board meetings are held.

If the director visits other locations when travelling in the UK, normal employee rules apply. If they are unable to claim tax relief under the normal rules for travel costs, there is potentially a specific form of relief available for travel costs to, and from, the UK. But accommodation costs in this scenario would still be taxable. As such, they would either be processed via payroll or included on the P11D, depending on the method of payment.

What is your exposure as an employer?

The engaging company can be held liable for PAYE and NICs payments for non-executive and executive directors that HMRC deems should have been deducted, plus interest and penalties. If the director has accounted for tax on their earnings under self-assessment, there may be some scope to mitigate this situation, although it is likely to be difficult for the most recent year. Any offset is also unlikely to meet all of the liability.

What should you do now?

HMRC is increasingly targeting directors and employers in cases where they can see that no PAYE has been applied. Therefore, it is advisable to keep the situation under regular review and, if in any doubt, seek specialist advice.

 

Susan Ball is a partner and heads up Crowe Clark Whitehill LLP’s Employers’ Advisory Services. She has over 25 years experience of working in employment tax, investigations and rewards. Susan heads a multi-disciplinary team, advising on a full range of employment issues for organisations in the commercial and charity sectors.

Her team was highly commended in the Forum for Expatriate Management’s “Tax Provider of the Year” awards for expatriate tax in 2013. It was also part of a wider group that won the LexisNexis “Best Tax Investigations Team of the Year” for 2012 and 2014.

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