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Time to Stop, Think and Review Your Employment Tax Obligations in Respect of Non-Resident Directors in the UK

Employment Tax and Reward experts explain how UK employers and non-resident directors can remain fully compliant and prevent additional costs and penalties arising for failing to adhere to their tax reporting and filing requirements.

Many UK company boards include directors who are residents overseas and attend meetings in person in the UK. Such UK employers are responsible for ensuring UK payroll reporting to His Majesty's Revenue & Customs (“HMRC”) is operated appropriately.

Whilst non-resident directors (“NRDs”) may visit the UK to attend only a single board meeting or work in the UK for only one day during a tax year, these visits nevertheless generally result in Pay As You Earn (“PAYE”) requirements and potentially generate employee and employer National Insurance Contributions (“NICs”).

Over recent months, we have seen an increasing number of UK companies being caught out (especially with travel increasing after the COVID-19 pandemic) and inadvertently failing to comply with their UK PAYE and NICs obligations relating to NRDs spending time in the UK. This can result in employers incurring penalties of varying amounts depending on the reasoning for non-compliance.

Taken together with HMRC’s increased drive in reviewing employers’ overall employment tax compliance, and we strongly encourage employers to examine their tax and payroll reporting obligations in respect of NRDs and to ensure that they are correctly operating PAYE. It is therefore imperative for all businesses to be fully informed of the following and to take appropriate measures.

UK Tax Residence

The UK operates a Statutory Residency Test (“SRT”) to determine when individuals are tax resident in the UK. The SRT is complex and is influenced by factors such as time spent in the UK and an individual’s ties or connections to the UK.¹

The remainder of this article assumes that the directors in question are non-resident in the UK for tax purposes. Where an individual is UK resident for tax purposes, there will be additional tax implications for both the director and the employer to consider.

UK PAYE Position and Payroll

In the UK, directors and other office-holders are, broadly, treated as employees for employment tax purposes.

NRDs receiving director’s fees or other remuneration from or in connection with a UK company (even if paid by another group entity, such as an employing entity in their home countries) are liable to pay UK income tax on those earnings if the income is deemed to be UK sourced. For non-residents, this usually means the income that relates to days worked in the UK.

As with any other employee or office-holder, UK companies have an obligation to report income earned by NRDs through a “real time” UK payroll system and implement payroll withholding for income tax (and potentially for employer and employee NICs).

However, where only some of the duties will be performed in the UK, companies can apply for a section 690 direction (“s.690 direction”) from HMRC to operate PAYE for income tax only, on the estimated proportion of earnings that relate to UK duties. This helps prevent double withholding issues or the necessity for NRDs to claim a large tax refund from HMRC at the end of each tax year.

Where an employer wishes to apply for a s.690 direction, it may do so for up to three years at a time — the tax year in which the application is made and the following two tax years.² The application is made by the employer (or the agent acting on the employer’s behalf) and provides HMRC with information on why the individual is not a tax resident in the UK and the estimated percentage of their working time that they will spend in the UK.

Where it is anticipated that the NRD’s working time in the UK will change significantly, the s.690 direction should be amended.

As the s.690 direction only provides an estimate of the income relating to work performed in the UK, NRDs remain obliged to register and file a UK self-assessment each year (normally due by 31 January after each tax year, assuming it is filed electronically). This tax return should report the income relating to the UK workdays and reconcile the final tax position. Where HMRC have not issued a tax return notice, it is the NRD’s duty to register with HMRC; otherwise, penalties may be imposed.

It is worth noting that individuals who are not tax resident in the UK cannot use HMRC’s own online system to file tax returns — they must either submit electronically via third-party software or file a paper return (which comes with an earlier deadline).

National Insurance Contributions Implications

Where any work is performed in the UK, it is likely that primary (employee) and secondary (employer) Class 1 NICs liabilities will arise under the UK’s domestic rules. It may be possible to remove this liability through either (1) obtaining a Certificate of Coverage — Portable Document A1 where applicable or (2) meeting the conditions for an administrative concession — generally revolving around factors such as attending a limited number of board meetings a year and spending a fixed number of nights in the UK (as counted at midnight).

For NRDs who are resident in the European Union or European Economic Area, it may be that social security contributions are due in their home country. This can result in an obligation on the UK company to register as a foreign employer and operate payroll withholding for social security purposes in that country.

Other Areas to Consider

Cash Bonuses
Where NRDs are awarded cash bonuses, the proportion relating to UK duties will be subject to the same rules as above, and UK employers will be required to report such cash bonuses using the same payroll process.

Travel and Subsistence, and Benefits
When NRDs visit workplaces in the UK, this may constitute a “permanent workplace,” particularly if it is the UK office of the company or to attend board meetings regularly held in the same location. Consequently, travel and subsistence provided may be subject to tax in the UK.

A specific exemption may apply to the NRD in respect of the provision or reimbursement of travel costs between the NRD’s place of residence and their workplace in the UK. This exemption cannot apply if the NRD begins or ends their journey at another location that they have visited for non-business purposes (e.g. where travel is reimbursed from another country where the NRD is on holiday). Such an exemption can only apply indefinitely whilst the NRD remains (1) not domiciled in the UK for tax purposes and (2) not tax resident in the UK under the terms of the SRT.

Only travel and subsistence payments during the journey can be exempt under the above rule, and no exemption is available after arrival. For example, where the NRD is provided with or reimbursed for a hotel near the UK workplace, this would not be exempt.

Other non-cash benefits provided to the NRD will be subject to the usual reporting of requirements as other UK resident employees, including reporting any non-cash benefits on Form P11D, where required. The tax liability that arises on the provision of such other benefits will ultimately depend on the portion of the benefit that relates to the NRD’s duties performed in the UK.

Share-Based Compensation
Specific rules are in place for share-based compensation earned by NRDs. Generally, the amount of UK income tax (and, where relevant, NICs) will be limited to the amount of earnings arising from share-based compensation that relates to duties performed in the UK.

For unapproved option awards, for example, UK income tax and associated PAYE obligations apply to any gain accruing to the option on exercise insofar as that can be apportioned to the NRD’s UK workdays.

The UK portion of the option gain determined on exercise will be subject to UK income tax and, if applicable, to UK NICs and subject to withholding under PAYE.

It may be necessary to consider how the NRD’s home country will seek to tax such share-based compensation awards and whether the tax points (i.e. whether tax is due on grant, exercise and sale of shares) are aligned between the home country and the UK. In this scenario, further, more detailed consideration of the application of the Double Tax Treaty will be vital to determine the UK tax liability and mitigate any double tax being suffered by the NRD.

Employing Through an Overseas Subsidiary?

Whilst outside the scope of this article, employing senior personnel through an overseas subsidiary of a UK parent company can give rise to other tax considerations, which include, but are not limited to, a permanent establishment risk, transfer pricing considerations, and research and development credits. These should be fully considered in order to prevent additional tax implications from arising.

Practical Steps for Employers to Consider with NRDs

The correct application and operation of income tax and PAYE can be particularly complicated when considering NRDs. Below are just some of the practical steps that can be taken by the UK entity to mitigate the risk of non-compliance.

Accurate record-keeping of visits made by the NRD should be maintained by the UK entity — in particular, this will help demonstrate that the relevant percentage of income tax and withholding is being applied where an s.690 direction has been made, ensure that the NRD has not established UK tax residence, and accurately portion any income tax and withholding due on any share-based compensation.
Payroll providers — in both the home country and the UK — should be familiar with the rules surrounding income tax and withholding obligations to mitigate the risk of non-compliance, as well as ensuring that double tax withholding issues do not arise for the individual.
Full details of all benefits provided to NRDs should be obtained to ensure that reporting and tax obligations fully reflect benefits that are available to the NRD at all times (e.g. where private medical care provided in the home country extends to visits to the UK).

How Can We Help?

As HMRC increase their focus on employers’ compliance with employment tax regulations, our Employment Tax and Reward Specialists can help you review your obligations regarding non-resident directors in the UK.

Footnotes:

1: GOV.UK (2020) Guidance Notes— RDR3: Statutory Residence Test (SRT) notes

2: GOV.UK (2024), Form — Apply for a direction to operate PAYE on an employee's earnings — HM Revenue & Customs