Anyone can be a director of a UK company, no matter where they live in the world. This does give rise to some important questions about paying and taxing non-resident company directors.
The rules for Non-Resident Directors (NRDs) are complex, so it’s difficult to cover every single aspect. To help you avoid penalties we thought it would be a good idea to look at some of the main themes that arise, including:
Can anybody be a non-resident company director in the UK?
Yes, anybody can be a UK company director as long as they meet the key requirements in that they:
Are over 16 years of age
Have not been disqualified from acting as a director
Are not an undischarged bankrupt.
There is no requirement for a UK director to be a UK citizen or resident in the British Isles.
The overseas company director doesn’t even need to visit the UK at any point. The company must have at least one director, but they don’t need to live in the UK.
Do non-resident directors need to file UK tax returns?
As a general rule, the non-resident director does not need to take any action if they:
Are not paid in the UK
Receive no benefits or expenses
Are not informed by HMRC that they need to submit a tax return
This last point is particularly crucial. Non-resident directors who receive a letter from HMRC instructing them to complete a Self Assessment tax return must do so, whether they receive any UK income or not.
Ignore the letter at your peril! Doing so will likely lead to penalties, starting with the standard non-compliance penalty of £100, which increases if the director still does not take action. If there is any tax to pay, then you can be charged penalties and interest of up to 100% of the amount that you owe (on top of the amount itself).
A director who is paid by the company in the UK will always need to submit a Self Assessment return, and pay any tax due by 31st of January each year.
One good bit of news is that non-resident directors do qualify for the personal tax allowance in the UK (currently £12,570 per year) which means that any income below this will be tax-free.
Paying non-resident directors
Directors of UK limited companies are categorised as ‘office holders’ by HMRC, so any salary they receive as a director should be taxed under the PAYE system.
As a consequence, tax and National Insurance contributions are deducted at source. This means the employer (the limited company) deducts tax and NI from the director’s salary before paying them, and sends these deductions to HMRC on their behalf.
The director can claim back any overpaid tax once they submit their Self Assessment tax return.
What is s690, and how it works
In most cases, companies will need to operate PAYE on the whole of the director’s fees or salary payments. However, there may be times where this is not appropriate for the type of work that the director does, and where they do it.
In these cases, companies can apply for a Section 690 agreement. This allows them to only subject part of the payments to UK PAYE and NICs. An s690 is a formal agreement by HMRC that takes into account the practicalities of the director’s position.
For example, imagine a company has a director who is resident in France for tax purposes, and only visits the UK to carry out work for 25% of the time.
The company could apply for an s690 notice from HMRC, which would direct the company to disregard the other 75% of the director’s pay for PAYE purposes.
The key here is that the notice needs to be issued by HMRC before ignoring any part of an employee or officeholder’s pay, as they may not agree with your assessment of the situation.
We should make the point here that HMRC have focused much more on tax avoidance by directors in recent years. As a result, you can expect that any investigation will look very closely at the payment arrangements that a company has with its directors.
It is not enough to claim that the rules are confusing or that you did not know. Rather than letting you off the hook, HMRC will see this argument as careless action to avoid tax, and issue penalties as appropriate.
Are non-resident director expenses taxable?
The answer to this question is – it depends! When looking at travel and accommodation expenses, you need to apply the ‘place of work rule’.
HMRC do not allow tax relief on expenses that are incurred when travelling to the normal place of work.
For directors, the place of work is assumed to be the head office of the company. This means that a company can’t simply pay for a non-resident director to travel to the UK and stay in a hotel, and then claim the cost against its corporation tax bill.
In this case, because the director is travelling to the ‘normal place of work’ according to HMRC’s head office rules, paying their travel expenses is seen as a benefit.
Benefits like this are taxable, so the company (as the director’s employer) would need to report the benefit to HMRC on their annual P11D submission. Both the company and the director would be expected to pay tax on the value of the benefit.
It’s a bit different if an overseas company has a branch in the UK which is a separate UK limited company.
If the director can show that their normal place of work is at the parent company’s head office, then any travel costs to the UK branch are not classed as a benefit, and so are not subject to tax.
This is because they’re travelling to somewhere that isn’t their normal place of work, but the conditions for this are very tightly drawn.
The rules include only coming to the UK to perform a task of ‘limited duration’ or a ‘temporary purpose’, and spending less than 40% of their director role at the workplace. Always take advice before adopting the tax-free treatment!
What if the company needs to reimburse a director for expenses?
Expenses (like most things involving HMRC) can also be complicated. As a general rule, if something is ‘wholly and exclusively for business’ then it’s an allowable expense. This means the company can offset the cost of the expense against its tax bill.
If a director uses their own money to buy something for the business, the company can reimburse them through payroll, and then claim this against corporation tax.
Are non-resident directors subject to National Insurance?
National Insurance is yet another financial minefield and unfortunately, there is no cut and dried answer to this.
In general, you would expect any officeholder to be liable for National Insurance Contributions (NICs) but there are many cases where this is not so.
For example, in some cases a non-resident director will be exempt from paying UK National Insurance if they come to work in the UK from a country:
In the European Economic Area (EEA), or,
Which has a Social Security Totalisation Agreement with the UK
As long as A1 or Certificate of Coverage is held for the relevant working period, there won’t be any employer’s National Insurance charged on the director’s payments. Like we said, it’s complicated!
Just bear in mind that the ability to escape paying NICs is further limited, such as if the director:
Has multiple UK directorships
They spend a lot of time in the country
They do other work, apart from simply attending the occasional board meeting.
We can’t stress enough how complex this area is. Make sure that your motto is “when in doubt, check”. You can find out more about NICs for employees and officeholders here. It’s not light reading, so take advice from an accountant if you need help.
5 things you need to do for your non-resident director’s pay
Although everybody’s situation is different, there are some things every company should do when it comes to non-resident directors’ pay.
Keep full and complete records
This is the very minimum you need to do. Make sure you have a full audit trail of payments for fees, salaries, and expenses.
If in doubt, operate PAYE on your director’s payments. That way you are less likely to receive a penalty, and any overpaid tax can be reclaimed later.
Include any expenses in PAYE or P11D
Make sure you have full and complete records of expenses payments, including per diems, and either put them through payroll as taxable payments, or include them in your P11D.
Make sure they complete a Self Assessment tax return
Overseas directors may not be aware that they have to submit a tax return each year. It’s always best to let them know what their obligations are. Again, ignorance of the rules is no defence.
Check with HMRC beforehand and document your conversations
If you are unsure about any aspect of paying your overseas directors, then do speak with HMRC. Just make sure you keep notes of your conversations should there be any dispute in the future. Alternatively, call us and we’ll deal with them on your behalf.