In these days of austerity, HMRC is doing its best to ensure that the correct amount of tax is paid under the tax legislation at the right time. One of the areas under scrutiny is the remuneration of non-executive directors (NEDs). Under the legislation, a director (whether or not he/she is a NED) is an office holder of a company and therefore income received for carrying out directors’ duties has to be taxed as earnings. This is not a new development but in the past HMRC has not focused on this area: HMRC does not accept that NEDs can be self-employed and therefore its position is that they should be treated in the same way as executive directors for PAYE and NI purposes. The exception is when a NED also provides consultancy services to the company of which he/she is a director: where this is the case, the nature of the arrangement will determine the tax treatment of any fees.
For some time many NEDs used personal service companies (PSCs) to issue invoices for their non-executive services to companies, thinking that this meant that fees could be paid without deduction of PAYE and NI to the PSC. However, HMRC has never agreed with this approach due to the fact that the NED was usually personally appointed to the non-executive director role rather than the PSC. This was a matter of debate for some time. However, since 6 April 2013, under IR35 (Chapter 8 Part 2 s49(1)(c) ITEPA 2003, contained in Finance Act 2013), where NEDs are individuals and are appointed as directors or where their PSCs are appointed as corporate directors but the NEDs perform the non executive duties personally, the IR35 rules apply. If IR35 applies, the PSC is under an obligation to deduct PAYE and NI from all gross payments received by it in relation to the NED’s duties. HMRC also has the right to use IR35 to establish whether any fees received for consultancy work should actually be taxed as fees deriving from the NED’s non-executive duties.
Compliance activity by HMRC in this area is set to increase. Companies and NEDs would therefore be well-advised to seek specialist advice on their tax position now before this is decided for them by HMRC. MBM Commercial is happy to recommend tax specialists to advise on this area. If you have any questions in relation to executive or non-executive appointments, please get in touch.