Key Points
What is the issue? Non-resident directors of UK companies working in the UK are subject to PAYE. UK companies cannot rely on the directors being in the UK for less than 183 days, nor can they include them under PAYE relaxations for regular short-term business travelers. The NIC position differs significantly and needs separate consideration. Care should be taken with the costs of travel, accommodation, and subsistence expenses for non-resident directors.
What does it mean for me? Many companies fail to recognize the PAYE reporting obligations for non-resident directors working in the UK. UK companies with non-resident directors should review their payroll compliance concerning these directors’ UK duties.
What can I take away? Applying the correct tax and NIC treatment to non-resident directors is crucial. The rules are complex, and UK companies can easily miss the issue or reach the wrong conclusion.
Implications of POEM, CMC, and PE
Place of Effective Management (POEM) and Central Management and Control (CMC)
- POEM: Refers to the place where key management and commercial decisions necessary for the conduct of the entity’s business are made.
- CMC: Focuses on where the high-level control and management of the company takes place. For a company to be UK resident, CMC must be in the UK.
Having non-resident directors performing their duties in the UK can lead to the company being deemed to have its POEM and CMC in the UK, which may alter the tax residence of the company.
Permanent Establishment (PE)
- PE: A fixed place of business through which the business of an enterprise is wholly or partly carried on. This includes a place of management, a branch, an office, or a factory.
If the activities of non-resident directors in the UK are significant, it could create a PE, subjecting the company to UK taxation on the profits attributable to the PE.
PAYE Obligations
Non-resident directors working in the UK create PAYE obligations for UK companies, regardless of the duration of their stay. Companies must ensure compliance to avoid liabilities such as income tax, employee and employer NIC, the apprenticeship levy, and potential HMRC interest charges and penalties.
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UK Income Tax
Non-resident directors are considered office holders, making their earnings from UK duties liable to UK income tax under PAYE. Double tax treaties generally do not protect non-resident directors from UK tax. Consequently, arrangements like HMRC’s EP Appendix 4 cannot be applied.
Establishing Liable Earnings
For commercially remunerated directorships, determining UK taxable earnings is straightforward. For unremunerated directorships within an overseas group, a proportion of total remuneration may need to be allocated to UK directorship duties.
If duties are performed both in the UK and overseas, an ITEPA 2003 s 690 direction can allow tax to be operated under PAYE only on the estimated UK workdays. Directors must record actual UK workdays and submit a personal UK tax return to reconcile UK taxable earnings.
Additional Duties and PAYE Compliance
If non-resident directors also perform duties under a separate employment within the overseas group, it must be determined if a Short Term Business Visitors Arrangement or PAYE Special Arrangement can apply. If not, a proportion of the overseas salary may need to be taxed in the UK.
National Insurance Contributions (NIC)
NIC applies if the non-resident director is gainfully employed in the UK. Social security agreements may limit NIC liability to the director’s home country. HMRC concessions may apply, exempting NIC if the director’s UK visits are limited.
Non-Resident Directors’ Expenses
UK companies must correctly treat expenses for non-resident directors. Tax relief is available for expenses related to temporary workplaces. However, expenses for permanent workplaces are taxable and liable to NIC. Proper reporting to HMRC is necessary, potentially involving PAYE, form P11D, or a PAYE Settlement Agreement (PSA).
Mitigating Risks
To mitigate the risk of changing a company’s tax residence due to directors’ activities in the UK, companies should consider:
- Reconstituting the board: Adjust the board composition to reduce UK-based members.
- Deferring decisions: Postpone major strategic decisions until all board members can participate.
- Modern technology: Use virtual meetings cautiously, considering the CMC test of residence.
Summary
The complexities of PAYE and NIC for non-resident directors, along with considerations for POEM, CMC, and PE, make compliance challenging. Exercising reasonable care and maintaining suitable records are essential for UK companies to meet their obligations and avoid penalties.
