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Understand your obligations

13 December 2016 by Robert Salter

Directors' tax: Understand your obligations - read more

Non-resident directors of UK companies must ensure they are fully tax compliant

Many UK-based companies have directors who visit the UK for relatively short periods of time and who are not regarded as tax resident in the UK, known as ‘non-resident directors’ (NRDs).

However, companies cannot assume that no UK tax issues arise for these individuals. A harsh tax regime and increasing HMRC interest makes this issue important for UK-based businesses and their directors.

Remuneration of NRDs

All NRDs of UK companies are ‘office holders’ per UK legislation and any income received in respect of this UK role should be subjected to PAYE as UK source earnings. This would be the case even if the fees were paid by an overseas entity, for example. Moreover:

  • Double tax agreements between the UK and overseas jurisdictions usually give the UK the primary right to tax director fees paid by a UK company.
  • HMRC does not accept that the core duties of a director can be undertaken via a personal service company type arrangement – unlike the situation in some countries – because you are engaging the individual personally to be an office holder of the company (and hence PAYE should be operated by that employer). 
  • If a specific amount is paid for UK director duties (for example, salary or fees), this amount is subject to UK tax and NICs. If there is no specific amount paid, it is more difficult for HMRC to apportion an amount as subject to UK tax. However, where the director is an executive, HMRC could try to argue a percentage of the overseas salary relates to the UK director role. In practice though, it is difficult for HMRC to say a specific amount would relate to the UK director duties in this scenario, as it is largely a commercial decision.

The employer’s obligations

The employer’s tax reporting position for travel and accommodation costs will depend upon the precise manner in which the costs are incurred. For example, if the costs are paid directly by the company, they should be reported on Form P11D (Statement of Benefits and Expenses).

Alternatively, if the company reimburses the individual for the expenses they have directly incurred, the company is settling the individuals’ ‘pecuniary liability’ and the reimbursement of these expenses might be subjected to PAYE/NIC via the UK payroll, rather than being reported on Form P11D.

Although the UK company may not always directly pay the travel and accommodation costs that are incurred by the NRDs for attending meetings in the UK, as they may claim expenses via the overseas company, the PAYE/P11D reporting obligation remains with the UK entity, as they are the beneficiary of the NRD’s services.

To simplify the personal reporting obligation of NRDs, one practical approach is to consider including the accommodation and hotel costs on a PAYE settlement agreement (PSA) with HMRC.

Under such agreement, the company would settle the taxable benefit of these items on an annual basis by direct settlement with the tax office on a grossed-up basis. This eliminates the need of the company to report such items via the PAYE system or on Form P11D.

Potential tax relief

HMRC takes the view that the accommodation and travel expenses of a non-resident director performing a UK director role are taxable in the UK in the first instance. This is regardless of whether the costs are borne in the UK or overseas, because the UK is treated as the regular place of work when performing the director role.

Nonetheless, HMRC has provided specific guidance in respect of the accommodation and travel expenses of directors. Although the UK employer should continue to report the director expenses (on Form P11D or via the payroll), directors may be able to treat these items as non-taxable, subject to certain conditions. These include only coming to the UK to perform a task of ‘limited duration’ or a ‘temporary purpose’, and spending less than 40% of their director role at a workplace. These conditions only apply in narrowly defined circumstances.

If the above relief is not available to the NRDs, relief may still be available per specific UK tax legislation for the travel costs to the UK (and back) for some NRDs. However, the accommodation costs would still be taxable.

National Insurance

The National Insurance position is potentially complex. It can depend upon a number of factors, including: whether the NRDs have ongoing social security obligations in other countries; where they are living and what other employment/self-employment roles they have (and in which jurisdictions these roles are undertaken); the manner in which the other jurisdiction treats directorships (i.e. are such activities treated as employment or self-employment per that country’s domestic legislation?); and the terms of EU and country-by-country social security agreements.

Generally, NRDs who come to work in the UK from a European Economic Area (EEA) country, or from countries with which the UK has signed a social security totalisation agreement, would usually be liable to social security in the home location rather than the UK. However, where it is established that the social security obligation exists outside the UK, it is important for companies to ensure that:

  • An A1 Certificate or Certificate of Coverage is obtained from the overseas social security authorities to demonstrate exemption from employee and employer NICs
  • The UK company investigates whether it has any obligation to account for overseas social security contributions on the NRD’s earnings that it pays.

There are also additional concessions for NRDs who come to work for a UK company from outside the EEA – or from a country with which the UK does not have a social security totalisation agreement. For example, where the only work the director does in the UK is to attend board meetings and they meet certain conditions relating to the number of visits to the UK. However, care should be taken with this concession, for example where the NRD is also a director of another UK company.

Tax returns

HMRC guidance states that any director of a UK company (including NRDs) is expected to file a UK tax return. This initial obligation to UK tax return filing applies even if the individual has no UK taxable income, because there is no remuneration for the UK director’s duties and/or taxable benefits-in-kind, such as travel and accommodation, are accounted for via a PSA.

In practice, if there is no tax liability arising on an NRD’s annual tax return consistently, HMRC may in due course write to the individual and state that they do not need to file an annual tax return – at least until their circumstances change. However, individual NRDs cannot simply assume that this will be the case.

Instead, they need to ensure that they initially register for self-assessment tax filings, assess if they have a UK tax obligation and complete UK tax returns on an annual basis and then (if appropriate) agree with HMRC that they do not subsequently need to file an annual tax return.

If the NRDs do not follow the correct process – ignoring a tax return that was formally issued by HMRC or do not officially notify HMRC of their obligation to file a self-assessment tax return – significant penalties can arise.

Action points

Tax compliance for directors is a complex area and is increasingly high profile from a HMRC perspective. Failure to fully comply with the complex tax, PAYE and social security obligations that arise for NRDs can create considerable stress for the individual involved and create unnecessary costs for the business. These areas can also have knock on effects to other areas of the business, for example, by damaging the wider corporate relationship between the company and HMRC, and critically, reputational risk.

Companies need to make sure that they understand their tax reporting obligations, obtain the correct documentation (A1 or Certificates of Coverage) and ensure that their NRDs also understand their UK tax obligations. If necessary, company secretaries should arrange for specialist support to be provided from the internal tax and HR functions or external advisors to ensure that these obligations are fully reviewed and assessed on a regular basis.

Robert Salter is Senior Manager, Expatriate Tax on behalf of Blick Rothenberg

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