HM Treasury and HM Revenue & Customs (HMRC) recently published a joint consultation document relating to the taxation of controlling persons1. This may have considerable implications for the tax status of non-executive directors.
No personal service company
The starting point is that a director is regarded by HMRC as being an office and, as such, remuneration is taxed in the same way as employment income, i.e. PAYE is operated and NICs are deducted (and employer's national insurance contributions (NICs) accounted for).
Use of a personal service company
HMRC accept that if an office holder such as a director contracts via a personal service company the arrangement will not be subject to Intermediaries Legislation 35 (IR35). This is because IR35 only applies where the individual would otherwise be an employee. The position could be different if, for example, the NED obtains some consulting income from the company in addition to the director fees.
Do any other anti-avoidance rules apply?
Not on the face of it, but this may change as outlined in the HM Treasury and HMRC joint consultation document.
The Government is concerned that certain people (i.e. company officers) are side-stepping IR35 and, owing to the political climate, have decided to target such actions.
The target is 'controlling persons' who are loosely and somewhat clumsily defined in the consultation document as:
"The Government proposes that a controlling person is defined as someone who is able to shape the direction of the organisation having authority or responsibility for directing or controlling the major activities of the engaging organisation during the year. This would be someone who has managerial control over a significant proportion of the organisation’s employees and/or control over a significant proportion of the budget of the organisation."
This could mean that directors, including non-executive directors fall within this definition, particularly as the Government appears to be targeting not only those who exercise control/influence but also those who are able to exercise control/influence. The legislation that would be implemented does not yet exist in draft form and it remains to be seen what the outcome of the consultation is. You will be aware that the Government has been forced to climb down recently from some of its preferred positions (the 'pasty tax' is a recent example).
If this new legislation when implemented is triggered it will impose the PAYE/NICs liabilities on the engaging company and not the personal service company (which is how IR35 works).