Many UK companies appoint non-UK resident individuals as either executive or non-executive directors who typically spend a relatively small amount of time in the UK – only visiting to attend board meetings. Failure to correctly report their income and benefits in the UK can result in penalties and, due to the seniority of people involved, can cause reputational damage for both the company and director in question.
The following four areas highlight in more detail where compliance risks may arise.
1 UK income tax
A director, either executive or non-executive, is considered an office holder and is therefore taxed as if they were an employee of a UK company. Duties undertaken in the UK in association with the directorship can't be regarded as “incidental”, and relief under a double tax treaty is rarely available. As a result, non-resident directors could have a charge to UK income tax if they attend even a single board meeting in the UK during the tax year. The UK company will be obligated to operate Pay As You Earn (PAYE) in respect of the earnings in accordance with Real Time Information (RTI) reporting provisions (directors are excluded from HMRC’s STBV Appendix 8 Annual Payroll arrangement).
Where the directorship is part of a wider employment role with the group, the position may be more complex. You will not only have to monitor their time in the UK, but also differentiate the work performed as a director versus as an employee, and then consider the UK tax treatment of such work. Furthermore, where there’s no defined income specific to the directorship role, HMRC may seek to charge income tax on a proportion of total earnings (which can capture all remuneration arrangements and benefit plans), with the assumption that it must relate, in part, to the directorship. Therefore this also requires consideration.
Whether a tax liability ultimately arises will depend on the director’s total taxable income and if they’re entitled to receive the benefit of the UK personal allowance. A US citizen, for example, is not entitled to the personal allowance, with the result that all income arising in the UK will be taxable.
2 Social security
Directors, as office holders, are again treated as employed earners for National Insurance Contributions (NIC) purposes. The rules around social security are complex and will depend on the non-resident director’s personal circumstances.
Where a non-resident director is coming to the UK from an EU member state, or a country that has a social security agreement in place with the UK, they may remain liable to social security in their home country – and a relevant form A1 or Certificate of Coverage should be applied for confirming this.
Or, HMRC does have a concession in place for non-resident directors who only attend board meetings in the UK but cannot obtain an A1 or Certificate of Coverage, where if certain conditions are met, no liability to National Insurance will arise.
3 Travel and accommodation costs
If you have directors travelling to the UK, you should consider whether the costs and expenses associated with that travel are taxable or can be exempted. This can be a particularly complex and challenging area in relation to non-resident directors.
In determining whether travel and accommodation costs could be treated as an allowable expense, consider whether the workplace is a permanent or a temporary workplace. In this context, different considerations may arise in relation to an executive director performing their duties as part of a wider role versus the position of a non-executive director where the UK workplace is almost always considered permanent.
Other specific exemptions in relation to travel expenses to and from the UK may also apply for non-domiciled directors, subject to certain conditions.
4 Other considerations
There are further considerations where the fees of the non-resident director are passed on to an appointing company or in cases when acting as a director on behalf of a professional practice. Any arrangements where the fees are invoiced by a personal service company of the director will require careful review from both UK and overseas perspectives.
How to stay compliant
HMRC is aware of complex compliance issues in relation to companies who appoint a non-resident director to the board of a UK company – with information relating to directors readily available to check from various sources such as Companies House, company accounts, and the corporate website. As part of a compliance review, HMRC will therefore often review the position of short-term business visitors (STBVs) and any non-resident directors.
As a result, the UK company should ensure that it's meeting its Pay As You Earn (PAYE) and National Insurance Contributions (NIC) compliance obligations. And it should be comfortable that, for any non-resident directors who perform duties in the UK, travel is being monitored and the associated income reported correctly.
Failure to do so could have both financial and reputational impacts.
For more insight and guidance, get in touch with Katy Bond.