Tax Doctor:
John F Kavanagh
CTA FRSA MIoD Cert PFS

Have you got a tax question? Post it on the Tax Tips Forum and it may be answered either by John Kavanagh or one of the other Forum contributors.

February 2005

Q:

One of our non-executive directors also provides professional consultancy services to the company. It has been suggested to us that we should be applying PAYE and NIC to all of the payments we make to him for the work he does for us. Is this correct? What difference would it make if we paid him through his limited company?

A:

It is important that the services provided as a non-executive director and as a consultant are considered separately because different rules apply.

Consultancy fees

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. In those circumstances, the fees for that work will not be subject to PAYE or NIC.

However, it is the nature of the consultancy contract which determines the tax and NIC treatment. If the true nature of the consultancy engagement is consistent with employment, you will have to account for PAYE tax and NIC on the fees paid. It would be highly advisable for a separate consultancy agreement to be drafted and its terms should be adhered to strictly. The written terms of any consultancy agreement will not save fees from being treated as employment income for PAYE and NIC tax purposes if the conduct of the parties is in fact consistent with an employment relationship.

Non-executive director's fees

A company director is an office-holder and individual holders of offices are subject to PAYE and NIC in respect of their fees and honoraria for the services they provide to the company in that capacity. There is one exception and that is when a partner in a professional practice acts as a non-executive director when, subject to certain conditions, such fees can be paid by the client company without PAYE and NIC deductions (subject to authorisation from the client company's tax office). The conditions are that:

• the directorship is a normal incident of the profession and of the particular practice concerned;
• the fees are only a small part of the profits; and
• under the partnership agreement the fees are pooled for division among the partners

This practice is authorised by Inland Revenue Extra-Statutory Concession A37.

Note that professionals who do not operate through the medium of a partnership are not within the concession, whatever profession they follow. It is a common misconception that fees paid to non-executive directors who are accountants and lawyers are not within the PAYE and NIC provisions.

Using a limited company to provide consultancy services

If a non-executive director provides consultancy services through the medium of a limited company, the client company will not have to account for PAYE or NIC on the payments it makes. If the nature of the services provided by the limited company is such that there would be an employment relationship but for the interposition of the limited company, the ‘service company' legislation (sometimes know colloquially as ‘IR35') could apply. This would not immediately affect the client company but it would mean that the service company would have to account for PAYE and NIC on the relevant part of its income.

Using a limited company to provide the services of a non-executive director

While the author finds it difficult to see how a company can effectively contract to provide the services of one of its employees as a non-executive director, given the fact that the statutory obligations of a company director are personal to that individual, it appears to be accepted that this is a possibility (an alternative is for the service company itself to be appointed as director, although such arrangements are rare). In this case, there is a mismatch between the service company rules for tax and NIC and while the service company would have to account for NIC on the non-executive director's fees under the service company legislation, it would not have to account for PAYE tax.

John F Kavanagh CTA FRSA MIoD Cert PFS
Director, UK TAX CONSULTING LIMITED
Chartered Tax Advisers

UK Tax Consulting Limited was founded in 1999 by John Kavanagh who has 20 years of experience in nearly all aspects of taxation gained partly within the Inland Revenue but mostly in public practice. The company provides specialist tax consultancy and compliance services to private clients, businesses and to other professional firms, especially accountants and lawyers.

John qualified as a Chartered Tax Adviser in 1990. He worked for a ‘big 4' firm of accountants for 7 years, spent several years as a specialist tax partner with a top 30 firm and more recently was a board director of a specialist tax consultancy firm in the City.

John F Kavanagh

Your attention is drawn to the disclaimer on this site, which applies to the content in this section.

<< back to Tax Doctor index | go to Tax Tips Forum >>