Non Resident Directors – The Employer PAYE bear trap

Fri 16 Aug 2019

Why is this an issue?

UK companies often appoint non UK resident individuals as statutory directors. These individuals are known as Non Resident Directors (NRDs).

Where NRDs undertake work in the UK, their employer has an obligation to operate PAYE income tax on the NRDs earnings (and potentially NIC).

This PAYE compliance obligation is frequently missed by employers or misunderstood. Consequently this is an area that HMRC often investigate during employer compliance reviews.

Failure to operate PAYE on NRDs earnings can result in HMRC issuing penalties and interest, in addition to demanding payment of the tax due on the NRDs earnings. Additionally, HMRC may use this as a springboard for a wider enquiry into the Company’s employment tax affairs.

Dealing with HMRC enquiries can be expensive and result in reputational risks for the Company, with its HMRC risk profile tarnished.

Example

A US company expands its operations into the UK and its UK subsidiary limited company appoints a US resident employed by the US Company onto its board of directors.

The US resident receives a salary from the US Company and spends 40 days in the UK each tax year to oversee the UK subsidiary’s operations.

Even though the US resident is not paid by the UK company, as they are a UK statutory director and receive earnings that are deemed by HMRC to relate to their UK work days, the UK company will have an obligation to operate PAYE on the NRD’s US salary and other taxable earnings.

How we can help employers manage its PAYE obligations in respect of their NRDs

This can be a complex area, and we recommend that employers obtain professional support in managing their PAYE obligations in respect of NRDs.

We can help employers meets their PAYE compliance obligations in respect of its NRDs by:-

1. helping them implement policies and processes to identify NRDs that have a liability to tax (and potentially NIC) and mitigate their UK tax exposure;
2. determining their PAYE compliance obligations, and the NRDs liability to UK tax and NIC;
3. advising on the tax reliefs available in respect of travel, subsistence and accommodation expenses;
4. providing personal tax return to support NRDs; and
5. negotiating settlements with HMRC in respect of NRDs earnings in earlier years that have not been subject to PAYE.

For more information, please contact Joe Pilley, Robin Bailey, or Sukhraj Kandola.