Non-resident directors working in the UK

This article will look at the issues surrounding the payment of PAYE and NIC for non-residential directors working in the UK.

Now that the world is returning to some resemblance of normalcy and people are returning to work, we expect to see a return of short-term business travellers to the UK, including directors of UK companies who are based elsewhere.

A UK company will frequently appoint a director who is not a UK tax resident (a ‘non-resident director’).

This could be because a company wants to hire talent from other countries, or it could simply be that a previously UK-based director has relocated and become a resident of another country.

Whatever the reason, when the non-resident director begins working in the UK, the UK company will quickly acquire PAYE obligations, regardless of the length of their stay.

PAYE compliance is frequently overlooked by UK businesses, which makes it an area of interest for HMRC, which can easily identify non-resident directors by reviewing Companies House records.

Failure by a UK Company to operate PAYE could expose it to underpaid liabilities, including income tax, employee’s and employer’s NIC, the apprenticeship levy, and HMRC interest charges and penalties. The increases to NIC from 6 April 2022, and introduction of the Health and Social Care Levy from 6 April 2023 could also increase costs. This, together with the reputational risks of non-compliance and the cost of dealing with a HMRC enquiry, makes getting this right from the beginning crucial.

The UK income tax position

Non-residential directors of UK companies are office holders, and the employment income provisions of the Income Tax (Earnings and Pensions) Act (ITEPA) 2003 apply to offices as well.

In general, double tax treaties do not protect non-resident directors (of a UK company) working in the UK from UK tax.

“Directors’ fees and other similar payments derived by a resident of a contracting state of services rendered in the other contracting state in his capacity as a member of the board of directors of a company that is resident of the other contracting state may be taxed in that other state,” states Article 15 of the UK-US double tax treaty.

This lack of protection in double tax treaties means that a Short-Term Business Visitors Arrangement (HMRC’s EP Appendix 4) cannot be applied in respect of non-resident directors.

Non-resident directors are also specifically excluded from the PAYE Special Arrangement for Short Term Businesses Visitors introduced in October 2015 for individual who cannot meet the strict terms of EP Appendix 4.

As a result, the main issue for income tax purposes is that earnings of a non-resident director of a UK company working in the UK are taxable in the UK. The UK company will almost certainly be required to pay PAYE tax on the director’s earnings.

Establishing the non-resident director’s earnings liable to UK tax under PAYE

When the UK directorship is commercially compensated and the earnings are documented, determining the earnings liable to UK tax is simple.

It becomes more complicated when we learn that the UK directorship is unpaid, the UK company is part of an overseas group, and the non-resident director has other remunerated duties for the overseas group. In these circumstances, and depending on the facts, allocating a portion of their total remuneration to the UK directorship role may be appropriate.

It will be then a case of considering where those directorship duties are performed. If the duties of the directorship are performed only in the UK, then the UK company will need to subject all the non-resident director’s earnings from the directorship to tax under PAYE in the normal way.

If the duties are performed in the UK and overseas, the UK company may want to obtain an ITEPA2003 s 690 direction, allowing it to operate tax under PAYE only on the estimated percentage of the director’s total earnings relating to UK workdays. The director will need to record to UK their actual UK workdays and submit a personal UK tax return following the end of the tax year to reconcile their UK taxable earnings.

Is the director also performing duties of a wider separate employment in the UK?

If the non-resident director is also performing substantive duties of a separate employment with the overseas group in the UK, it is important to consider how this affects PAYE compliance for the UK Company.

Can the duties performed under the separate employment be covered by a Short Term Business Visitors Arrangement under HMRC’s EP appendix 4 or a PAYE Special Arrangement for Short Term Business Visitors? If these exemptions are not available, it may be appropriate to add a portion of the salary from the overseas employment to the earnings subject to tax in the UK for directorship duties.

It is possible that, despite the non-resident director performing substantive duties of a separate wider employment in the UK, they are not working for the benefit of the UK company in this wider role, and thus the UK company has no PAYE obligations in this regard. If this is the case, care must be taken to ensure that it can be proven.

National Insurance

NIC must be considered independently of the UK tax situation.

Individuals must pay NIC if they are gainfully employed and either resident, present (except for any temporary absence), or ordinarily resident in the UK. An office or a directorship are examples of gainful employment. Payments to a director for acting as a director are thus treated as earnings for Class 1 NIC purposes, with some limited exceptions.

As a result, a non-resident director of a UK company may be required to pay Class 1 NIC on their directorship earnings if they perform any of those duties in the UK.

The EU-UK Trade and Corporation Agreement’s social security coordination provision or a reciprocal agreement with the director’s home country may apply. This could imply that the non-resident director is only subject to the social security laws of their home country (and not the UK).

If the social security coordination provision of the EU-UK trade and Corporation Agreement or a reciprocal agreement do not apply, use of an HMRC concession might be possible. Under the concession, no UK NIC liability applies to such a director’s earnings where the director only visits the UK to attend board meeting and:

• The director attends a maximum of ten board meetings in a tax year, and each visit lasts no more than two nights at a time
• If the director only attends one board meeting in a tax year, the visit lasts no more than two weeks.

If the social security coordination provision of the EU-UK Trade and Cooperation Agreement, a reciprocal agreement, or the above HMRC concession do not apply then a liability to NIC in the UK could arise.

Non-resident director’s expenses

In addition, the UK company must apply the proper tax and (where applicable) NIC treatment to expense payments. For example, the UK company may pay for a non-resident director’s travel expenses between their home country and the UK, as well as the cost of UK subsistence and overnight accommodation.

A key consideration is whether the non-resident director’s workplaces in the UK are temporary or permanent (for tax and NIC purposes).

In general, if the non-resident director’s travel, subsistence, and accommodation expenses are attributed to the non-resident director’s necessary attendance at a UK temporary workplace, tax relief will be available on these expenses.

Key consideration is whether the non-resident director’s workplace in the UK are temporary or permanent workplaces.

But if these expenses are attributable to their attendance at a permanent workplace, those expenses could be taxable and (where relevant) liable to NIC. The UK company will then need to report the expenses to HMRC in the appropriate way. Depending on the facts, that might involve:

• Adding expenses to their other earning reported under PAYE and/or.
• Reporting expenses on a form P11D for the director.
• Utilising a PAYE Settlement Agreement PSA if the UK company agrees to settle the liabilities due, and subject to the conditions for PSA inclusion being met.

The following are examples of questions that might need to be asked to establish whether a workplace is a temporary or permanent one:

• What does the director’s service agreement say about their places of work and where their duties are performed?
• What is the purpose of the director’s visits to the UK?
• What is the nature of work undertaken by the directors in the UK?
• Where are the duties of the UK directorship normally performed?
• Are their UK duties defined by reference to a geographical area?

When a non-resident director attends a workplace on a regular basis for a period of more than 24 months and spends 40% or more of their working time (in relation to that directorship) there, HMRC considers the workplace to be a permanent workplace. Travel, substitute, and lodging expenses incurred as a result of their attendance will be taxable and (where applicable) subject to NIC.

There is a limited exception to the temporary and permanent workplace rules. Where the workplace in the UK is treated as permanent workplace, tax relief may still be available for travel expenses between the director’s home country and the UK for five years from their qualifying arrival date in the UK.

The relief is given under IEPTA 2003s 373, but it is only available if the non-resident director is also not domiciled in the UK for tax purposes and has not been resident in the UK for two years before the qualifying arrival date.

The complex nature of the rules surrounding non-resident directors, with different considerations for tax and NIC, and ambiguous rules around expenses, makes the issue of tax and NIC compliance challenging. It is easy for UK companies to reach the wrong conclusion, or not to keep suitable records which substantiate the position taken. Exercising reasonable care to comply is the key.