Are you a UK business with overseas based directors? Are you aware of the compliance obligations?
With many UK companies now operating internationally, there is often a desire to appoint directors who are based in overseas locations as they possess knowledge and experience in areas where the business wishes to grow. This does however bring added complications from a UK tax and National Insurance perspective, which many companies are not aware of. HMRC are placing an increased focus on this area, particularly via ‘Know Your Customer’ meetings, and with senior management typically being some of the highest paid, it is easy to see why HMRC would pursue and scrutinise the processes and policies adopted in such a complex area which could result in the substantial recovery of tax and NI.
In short, the rules state that any income received by a director, both executive and non-executive, in respect of performing their role when in the UK (for example, attending board meetings), are subject to UK PAYE. As such, it is important for businesses to be familiar with HMRC’s rules and have a structured, consistent approach for tracking the appropriate data as well as a consistent basis for determining the value of a director’s income which relates to UK duties (a letter of appointment will typically contain a remuneration clause). A common misconception is that the tax treaty between the UK and the country the director is resident in will exempt their UK attributable income from income tax in the UK, however this is not necessarily the case. Any expenses incurred as a result of the director being in the UK (such as flights, accommodation, subsistence costs) may also be taxable in the UK depending on the particular facts and circumstances and therefore the company’s policy in this respect should be reviewed too.
Another important area to consider is National Insurance as this can be very complex. Any income paid to a non-resident director of a UK company in respect of UK duties is exposed to UK NIC, however there is a concession providing certain criteria are satisfied (including the number of board meetings attended and the duration of each visit) whereby UK NIC is exempted. Notwithstanding, should the director be resident of a country by which the UK holds a social security agreement, it may be possible to apply for an A1 certificate or Certificate of Coverage which enables the individual to continue to contribute into their home country social security scheme. It is therefore evident that proactive and thorough planning is important to mitigate any risk of non-compliance.
HMRC have invested heavily in digital technology in recent years, thereby giving them the ability to better link records and tie in with other Government agencies. Whilst this helps HMRC identify key areas of potential non-compliance, they always have access to Companies House records (which are available to the public) meaning identifying non-UK resident directors is a relatively straightforward task.
To find out more about the Payroll and Employment Taxes team, click here.