Non-resident directors - Are you getting their UK income tax and NIC position right?

It can be difficult for your business to correctly manage the UK income tax and NIC withholding and reporting obligations for internationally mobile employees, but the complexity and risk profile increases when it comes to complying with the requirements for non-UK resident directors (NRDs).
 

Business or personal demands

For many reasons, it is common within international groups for directors to be employed and paid by one company, but to hold directorships in several of the group’s businesses across a range of countries. Costs relating to remuneration or travel and subsistence costs may be borne in or cross-charged to the UK, but even where they are not, UK reporting obligations will arise, which are likely to include operation of PAYE and NIC, and filing of Forms P11D.

In some cases, non-resident individuals will be appointed as non-executive directors because of the particular skills they can offer the company, but because they are non-resident and may be considered self-employed in their local jurisdiction (as is not uncommon for statutory directors), the UK reporting and payroll requirements can be overlooked. The overseas implications and obligations for the company will also need to be understood and complied with. This can extend to corporate tax and transfer pricing issues.
 

Why is reporting compliance for directors more problematic?

The complexity, particularly in a group situation, is understanding the purpose of business visits to the UK, and whether the UK trip is in the capacity as director, or solely for some other purpose relating to their overseas employment. In the absence of clear information to the contrary, the assumption from HMRC will be the visit was in capacity as a UK director.

Frequently used reporting relaxations for other Short Term Business Visitors (such as Appendix 4 (STBVA) and Appendix 8 (PAYE Special Arrangement for STBV)) do not apply to board directors. If an NRD is a statutory director of a UK group company, they are an ‘office holder’ in that company and any UK duties (board meeting or wider director responsibilities) will trigger a PAYE liability. Therefore, even if an NRD usually attends UK board meetings remotely (by Zoom etc.) but comes to the UK for as little as one meeting a year, an obligation to operate PAYE and report for RTI (Real Time Information) purposes will arise. There is also a very limited exception for “incidental duties”, but this is qualitative not quantitative, and any work in relation to the directorship will trigger PAYE obligations.

The issue of expenses paid while travelling to the UK to carry out director duties is also complicated: travel costs to and from the UK may be exempt for non-UK domiciled directors but the facts and circumstances need to be reviewed. Hotel, subsistence and other costs will usually be taxable as the location where the board meets is likely to be the director’s ‘permanent workplace’ in the UK.

When it comes to the operation of PAYE, the practical pay arrangements for the individual can be problematic. Where duties arise in the UK, HMRC disregards the fact that the individual may be paid for all group directorships from an overseas parent company; the PAYE obligations for those duties fall on the UK company. Details of overseas remuneration will be required to determine the amount on which PAYE needs to be operated, and strictly 100% in the absence of agreeing otherwise with HMRC, and it will also need to be agreed how the PAYE will be withheld from their overseas pay.
 

Does the social security position follow the income tax position?

The social security position is different to income tax, and both the company and employee can be liable to pay social security in both the UK and their home country in full, without any relief available for the double charge.

Whether or not the UK duties of an NRD trigger UK National Insurance Contributions (NIC) depends on the director’s country of residence and whether there is a social security agreement between the UK and that country which will enable a ‘certificate of coverage’ to be obtained to provide exemption from UK NIC. Even where a ‘certificate of coverage’ could be arranged, unless one has been obtained, NIC needs to be operated.

For countries with which the UK does not have a social security agreement there is a limited administrative concession which may relieve the obligation to operate NIC. Broadly, the concession can apply if the individual makes brief visits to the UK (two nights or less) to attend board meetings only, and attends no more than 10 board meetings a year (or a single board meeting of up to two weeks). Unless the terms of the concession are met in full, then NIC remains due, and all UK directorships need to be taken into account for this purpose.

As there a number of countries with which the UK does not have a social security agreement, the compliance considerations and obligations need to be understood and managed on an individual basis. For example, the position will be different for an NRD who resides in the USA (where there is a social security agreement), compared to an NRD who resides in Australia or South Africa (there is no such agreement).
 

How can HMRC check up on compliance?

For NRDs it is very simple for HMRC to check whether there is potential non-compliance. The UK company’s NRDs will be listed on their Companies House record and this includes information on their nationality and country of residence, even if the address given is that of the UK company. Cross checking this data against the company’s PAYE RTI submissions can immediately highlight where PAYE is not being operated on one or more of the NRDs in a tax year. Failure to operate PAYE or NIC where required will lead to interest and penalties, potentially scrutiny into wider compliance (including other taxes) and will have implications for SAO reporting for companies within the regime. Getting the tax reporting position wrong can also result in a strained relationship with the director who may understandably be disappointed to have their name associated with non-compliance, even if inadvertent. In these times of increased scrutiny of companies’ tax governance there is also reputational risks for the business.