NEDs: Are you treating the tax and NIC position of NEDs correctly?

The Institute of Directors defines the role of the non-executive director (NED) as to provide independent oversight of a company’s operations and constructive challenge to the executive directors on the board.

The role of an NED is, therefore, normally not full time and, due to their skill sets and specialist knowledge, individuals will typically hold a number of NED positions and may also separately provide consultancy services. So it is not uncommon for NED’s to operate through personal service companies (PSCs) in which they will hold a material interest. This can lead to a complex and commonly misunderstood tax position for the NED and the company.

The basic position

Despite the fact that NEDs and executive directors can operate with a degree of autonomy, HMRC takes the view that the directors fees paid as remuneration for their services as officers of the company should be taxed in the same way as an employee. In other words, directors’ fees should be subject to income tax under PAYE and both employers and employees Class 1 NIC should apply. Therefore, a NED’s directors fees paid to a NED personally should be subject to wage withholding tax operated via the payroll and paid over to HMRC in the normal way.

Services provided via a PSC

In some cases, the NED’s personal service company (PSC) is appointed as a corporate director of the engaging company but the NED will personally perform the non-executive director duties.

In this case, where the engaging company is not “small” for the purposes of section 382 of the Companies Act 2006 and has a UK presence (or is a public sector body), it is not exempt from having to consider the off-payroll working rules (commonly known as “IR35”) and whether they apply to the engagement of a NED.

Under the engagers are responsible for determining whether the services provided by individuals via a PSC would be in the nature of employment if the individual was directly engaged, and if so, the body paying the PSC must operate PAYE and NIC on the relevant payment.

The HMRC tool known as “Check Employment Status for Tax” (CEST) can be used to help engagers to make a status determination for IR35. Where the individual is an ‘officer of the company’ (a NED is an ‘officer’) CEST will determine that the engagement is inside IR35 and therefore PAYE and NIC should apply.

What about other services?

In some cases, the NED may also provide consultancy services as well as directors duties. The engager must carefully apply the employment status for tax tests to the provision of consultancy services – each engagement must be considered on its own merits. If it can be demonstrated that the NED is on business on his own account providing such consultancy services and he is remunerated separately for these services, then those services may fall outside IR35 and related payments made without tax and NIC deductions. However, great care must be taken in making such a status determination and we would recommend that professional advice is sought whenever NEDs are engaged in this way.

For more information speak to Caroline Harwood or your usual BDO Employment Tax specialist.