Do you have any Non-Resident Directors of your UK company?

What is the issue?

While many individuals travelling to the UK for business purposes are ultimately exempt from UK income tax by virtue of a Double Taxation Agreement (DTA) that the UK has with their home country, the position for those who are a non-resident director (NRD) of a UK company is not so straight forward.

The majority of DTAs allow for remuneration deriving from duties performed as a board member to be taxed in the country that the duties are performed, with no exemption available. This means that if an individual who is non-resident for UK tax purposes comes to the UK for as little as one board meeting, the remuneration relating to this is taxable in the UK (and potentially also subject to UK social security – more on that later).

From a company’s perspective, this means that they are unable to rely on simply tracking visits to the UK and including the individual on the Short Term Business Visitor report for the year alongside their qualifying employees. Any NRD with taxable UK remuneration will need to be added to the UK payroll with PAYE (and NIC, if due) withheld in line with the usual RTI regulations (and on 100% of income in the first instance in the absence of an application to HMRC to reduce this in line with the estimated percentage of UK income – a ‘section 690 application’). Any taxable benefits (commonly accommodation and subsistence while in the UK – travel to and from the UK may be exempt) will also need to be reported on a form P11D.

It is common for directors to have a wider group role and act in both an employee and director capacity, and not be specifically remunerated for their directorship duties. Where this is the case, HMRC will expect the percentage of the individual’s total remuneration package that relates to UK duties (potentially including non-cash benefits, bonuses and equity plans) to be subject to UK income tax (and therefore PAYE).

While it is likely that relief will be provided in the NRD's home country by virtue of a DTA, there will likely be cash flow issues arising from dual withholding (and the question of which party should bear this), as well as potential unrelievable taxes should the UK taxes exceed the equivalent due in the home country. This can present unwanted admin for both the NRD and the business, as well as additional hidden costs with payroll and tax compliance.

As usual with global mobility taxation, the social security treatment does not always follow the income tax, and this is one of the rare occasions where contributions can be due in two countries at once. For countries where the UK has a bilateral social security agreement with (i.e. the US, Canada, all EEA countries and many major economies) this is simplified by being able to obtain a Certificate of Coverage/A1 to exempt UK NIC from being due.

For those countries where no agreement exists (Australia and South Africa notable exceptions) UK NIC may also be due unless the conditions of a specific exemption are met. This exemption can only be obtained where visits to the UK are two nights or less and only for the purpose of attending board meetings. They must also attend no more than 10 board meetings a year (or a single board meeting of up to two weeks). Unless the terms of the concession are met in full, then NIC remains due, and all UK directorships need to be considered.

Why should I be concerned about it?

Simply, HMRC activity in this area. This is for two reasons:

1. It is perceived to be an ‘easy tax take’ due to either the lack of awareness of the UK tax issues arising from non-resident directors, or where there is knowledge, businesses willing to turn a ‘blind eye’ (or more generously, take on the risk of non-compliance), and

2. The publicly available information to them on Companies House.

This second point has come as a shock to many clients that I have spoken to. Unfortunately, this is true. Each company must keep an up-to-date record of statutory directors with Companies House. And part of that information includes the nationality and residence of each Director (example below – other well known craft beer brewers are available).

As a standard part of any PAYE compliance check, HMRC will check Companies House for any NRDs and cross-reference these with the payroll records to see if PAYE and/or NIC has been withheld.

With ever more sophisticated technology, and record sharing across government agencies such as HMRC and Border Force, it is becoming far more difficult for NRDs to go ‘under the radar’ and far easier for HMRC to have line of sight of these individuals.

Both anecdotally, and in practice with clients, we are seeing an increase in HMRC scrutiny with NRDs. As ever, ensuring that your own house is in order before HMRC do can save both financial cost with having to backpay underpaid taxes (alongside potential penalties and interest) as well as potential embarrassment and reputational damage for non-compliance with some of the most senior and high-profile individuals within the organisation. This will also fall under the remit of any Senior Accounting Officer (SAO) for qualifying businesses as well as falling foul of the Corporate Criminal Offence (CCO) regime for willful evasion.

What should I do about it?

The first step, if you are a UK Ltd company with a non-resident director, is to understand whether they come to the UK to attend any board meetings or as part of their wider role. If the answer is yes, then it is worth asking the question of how strictly necessary in-person attendance is for any board meetings. As UK income tax exposure is limited to UK presence, any board meetings attended remotely and/or outside the UK would be outside the scope of UK income tax (however consideration will also need to be given to where the central management and control of the business is for corporate tax purposes).

Where physical attendance at board meetings in the UK is unavoidable, the NRDs total remuneration package should then be assessed to understand the potential exposure to UK income tax (and PAYE) and social security, and whether any steps can be taken to mitigate this.

For any NRDs with a wider group role that are not remunerated separately for board duties, it is recommended that an element of the remuneration package is ringfenced and paid separately. So long as this amount is commercial and in line with amounts paid to other board members, the amount related to UK board duties can be clearly identified, stripped out, and subject to PAYE (and NIC if due). This can help reduce the risk of HMRC challenging that a wider part of the remuneration package is taxable in the UK.

Even once the above is in place, ongoing monitoring of your NRDs (alongside your wider business visitor population) is therefore crucial in ensuring that your business maintains compliance with the PAYE regulations.

How can we help?

While a further level of complexity alongside managing your business traveller population, the added seniority and higher profile (and assumed greater remuneration package) makes this an even more important issue to get right.

We can help by:

· Reviewing your existing NRDs and analysing past-compliance (and managing any correspondence and disclosure process with HMRC).

· Reviewing NRD remuneration and assisting with any restructuring and planning to mitigate income subject to UK income tax, PAYE and NIC.

· Applications to HMRC to limit PAYE withholding in line with expected UK duties and ongoing payroll compliance with RTI regulations.

· Self-assessment tax return filing for NRDs with taxable UK income.

· Liaison with home country advisors to manage any foreign tax relief and dual withholding issues arising.