Non-Executive Directors (NEDs) are valuable and powerful individuals in a listed company. They provide an impartial opinion and constructive challenge to the executive directors.
NEDs are often appointed for their business knowledge and reputation. This means they frequently hold a NED position in several organisations at once and provide their services through their own company – in which they hold a material interest. Whilst NEDs play a key role, the tax treatment of such appointments is often misunderstood.
What is the default position?
Although NEDs act independently for organisations, they are taxed in the same way as an employee. This is because they are viewed as ‘officers’ of the organisation and any fees paid for their duties should be subject to PAYE and national insurance (NICs) through the payroll.
Is it different for personal service companies?
Where NEDs act for a number of unrelated organisations, they often set up their own personal service company (PSC) and invoice for their services through this entity.
Historically, it’s been mistakenly thought that fees can be paid gross if they’re invoiced through a PSC. However, this is not true.
The reformed off-payroll working rules (commonly referred to as IR35) were introduced to public sector entities in 2017. From April 2021, they were extended to include medium- and large-sized entities in the private sector.
Following on from the amendments to IR35, the assessment of the employment tax status is now the responsibility of the organisation that engages the individual, whereas previously this was undertaken by the individual’s PSC. The rules also place responsibilities on the deemed employer, to make sure the right tax and NICs are paid to HMRC.
When assessing employment status for IR35, the business engaging with the NED can use the HMRC tool ‘check employment status for tax’ (CEST) to help them decide. It is important to note that where the individual is an ‘officer’ of the company, (which a NED is), the tool will determine that the engagement is inside IR35. That means PAYE and NICs will apply to payments made to the PSC.
What about travel expenses?
It’s very common for organisations to meet the cost of travel expenses for NEDs to attend board meetings. In some cases, the costs of accommodation and subsistence are also met.
Many NEDs will say that they are home-based and therefore these costs represent business travel, not ‘home to work’ travel. But HMRC is likely to challenge this position, particularly if most of a NED’s time working for an organisation is at the location where the board meetings take place.
The focus must be on the location where they spend their time working for the specific organisation, rather than where they are based for ‘working in general’ (for example, if they work for multiple organisations).
So, the location of the board meetings, if that’s where the NED is engaged most of their time for the specific organisation, is likely to be viewed as their permanent workplace. In this case, associated expenses would also generally be taxable. If the company is reimbursing a NED for these costs, they must be processed through the payroll – along with any fees paid to them – and subject to PAYE and NICs.
Providing consultancy services
Any fees associated with NED duties are considered employment income and subject to both PAYE and NICs. But there can be cases where the NEDs also provide consultancy services, either directly or via a PSC.
For consultancy, the employment status tests must be considered. If this work is seen as self-employment rather than an employment engagement, then any fees will not be subject to PAYE and NICs.
Documentation must be carefully drafted, as HMRC will often challenge it. The key point is that the consultancy work must be entirely separate and distinct from the NED duties.
It’s important to note that NEDs are a key area of HMRC scrutiny and investigation. So, it’s vital that organisations adhere to compliance obligations and make sure any engagement has been reviewed and taxed correctly.
For advice or further information, please speak to our employment tax specialists Aisling McCartan or Tom Golding.
