PAYE for non-exec director?


Postby raymondr@emwlaw.com on Wed Feb 16, 2005 2:57 am

My client has previously been advised to run payroll for fees paid to a non-exec director (not an employee, but a consultant in simple terms).

I do not agree with that and consider that the income and NI liability belongs to the non-exec.

Anyone disagree?
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Postby Sherlock on Wed Feb 16, 2005 4:11 am

A non-executive director is likely to have two separate functions with the company. His role as a director (attending meetings etc.)is that of an officer of the company, and fees should be paid subject to PAYE and NIC.

If the non-executive director provides consultancy services, then these should be the focus of a separate consultancy contract. Only then can the company safely pay the director gross. It should be noted that, in some instances where an accountant or lawyer is involved, then the payment can be made into the firm's or partnership's accounts as gross fees.

Another complication can arise where a non-executive director has several directorships and has incorporated his or her own personal service company. The IR 35 provisions then come into play.
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Postby raymondr@emwlaw.com on Wed Feb 16, 2005 4:35 am

Most helpful. Thanks, Sherlock
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Postby Jeremy Rees on Wed Feb 16, 2005 4:37 am

If the director (and his company) are non-resident does that change the situation re PAYE and NIC at all?
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Postby johnfkavanagh on Wed Feb 16, 2005 12:54 pm

With all due respect to Sherlock, I am not sure that "IR35" is of any relevance in the circumstances outlined by the querist. The fees of non-executive directors do not fall within IR35 as the Revenue acknowledges: see http://www.inlandrevenue.gov.uk/ir35/faq_qanda/director_q2.htm

Furthermore, the "IR35" provisions could only apply if the relationship between the consultant's company and the client company would have the characteristics of employment but for the interposition of the consultants' company. If IR35 could apply to the services as supplied by the consultant through a company, it is surely the case that a consultant who offered those same services on his own account rather than through a company would be in an employment relationship with the consequence that PAYE would apply to the consultancy earnings as well.

It is rare for an individual, say X, to provide services as a non-executive director to the client company, Y Ltd, through the medium of a company of his, X Ltd, since that would involve X Ltd being the director, not X, in which case PAYE would not be in point. Neither do I think that Y Ltd would usually have this kind of arrangement in mind. Corporate company secretaries are, of course, much more common, but I think in the normal course of events, the services of a non-executive director will be supplied personally by him or her and the fact that those fees may be channelled into a company does not affect the PAYE position.

The arrangement to which Sherlock refers is Extra-Statutory Concession A37. This relates to fees which members of any kind of professional partnership (not just lawyers and accountants) earn as office-holders; note that sole practitioners are not within the concession. While such fees are strictly within Schedule E and therefore PAYE, the concession treats them as falling within Schedule D Case II if certain conditions are met. One of the conditions is that the fees concerned are only a small part of the profits of the partnership so a practice consisting largely of a portfolio of non-executive directorships would not qualify for the concession.

While I agree that, in principle, it is perfectly possible to be a non-executive director of a company and also to provide consultancy services to that company in a manner which is consistent with self-employment rather than employment, it is frequently the case that what amounts to a service contract is represented (or perhaps I should say, misrepresented) as a contract for services. It is not impossible that the Revenue's view (if it may be dignified with such a description at this stage) may have some merit in the circumstances of the case. It goes without saying that the written terms of any consultancy agreement will not save the fees from being treated as earnings for tax purposes if the conduct of the parties is consistent with an employment relationship.

The answer to Jeremy Rees' supplementary question depends on whether by "his company" he means the company of which the director is a non-executive director (and consultant) or the company through which he provides the services.

If it is the former, one would have to consider whether the company has sufficient "tax presence" for the PAYE regulations to apply (see Oceanic Contractors v clark). That said, and with apologies for what may appear to be a tautology, one would normally expect a non-executive director to attend board meetings in the country where the company was resident on the grounds that companies are normally resident for tax purposes where the board meetings are held!

If it is the latter, I see no reason why PAYE should not apply if, as one would expect, the duties are performed in the UK for a UK company.

John Kavanagh
UK Tax Consulting Ltd
Chartered Tax Advisers
www.uktaxconsulting.co.uk
mail@uktaxconsulting.com
Tel: 020 7060 1660
Fax: 020 7060 1663
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Postby Jeremy Rees on Thu Feb 17, 2005 1:06 am

Thanks for your help
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