HMRC Focuses on Compliance for UK Companies with Non-Resident Directors

Lewin Higgins-Green of FTI Consulting highlights the importance for UK companies to ensure their compliance with Non-Resident Director (NRD) obligations amid HMRC’s renewed enforcement focus. As UK tax authorities intensify their employer compliance checks, many companies with NRDs risk non-compliance.

UK entities must manage payroll reporting and withholding for NRDs who work in the UK, irrespective of whether they directly pay the NRD. Often, companies overlook this, risking penalties. HMRC can easily identify non-compliance by reviewing Companies House records and requesting payroll documents for NRDs, catching companies off guard. Given HMRC’s vigilance in enforcing these obligations, employers must act promptly.

Under UK law, non-resident individuals are taxed on income earned from UK workdays. Although double taxation agreements (DTAs) can exempt income from UK tax for overseas residents, this relief does not apply to UK workdays of directors or employees of UK companies. Consequently, NRDs working in the UK are liable for UK income tax on earnings from their UK workdays, and the UK entity must handle payroll reporting and withholding.

The UK’s statutory residence test determines tax residence based on time spent in the UK and personal connections. For UK-resident directors, there are additional tax implications for both the director and the employer. NRDs owe income tax on earnings from their UK work. Typically, total earnings, including linked employments, are apportioned across total workdays to calculate the amount related to UK workdays. Earnings include cash and non-cash benefits, making the calculation complex.

NRDs must file a UK self-assessment tax return, reporting earnings from UK workdays. They may receive double taxation relief in their home country, either through a tax reduction or exemption with progression, where the exempted income still influences tax rates on other income. This filing obligation exists even if the UK entity is conducting payroll reporting and withholding on a ‘best estimate’ basis.

Under the UK’s PAYE payroll system, the entity for which an individual works, typically including directorships, must withhold income tax, even without direct payment to the NRD. By default, 100% of an NRD’s earnings are subject to income tax withholding. However, a UK entity can seek an HMRC ‘section 690 direction’ to adjust PAYE withholding based on the estimated percentage of UK workdays.

When an NRD is paid by an overseas entity, a ‘shadow’ payroll may be required in the UK. This arrangement allows for the calculation and remittance of income tax without direct payment, and the tax must be recouped from the NRD’s overseas payroll. Failure to do so could necessitate grossing up the UK tax liability or addressing the implications of interest-free loans to the director.

The social security position for NRDs, especially those in the EEA, can be complex. Individuals within the EEA are subject to social security in only one member state. For NRDs subject to EEA social security contributions, the UK entity is deemed to have a business presence in that EEA state and must register as a foreign employer for payroll reporting and contributions. Obtaining a ‘portable document A1’ confirms the correct country for contributions.

For NRDs outside the EEA, a UK-specific exemption from national insurance contributions exists for those traveling infrequently to the UK, such as for board meetings under specific conditions.

Common tax issues for NRDs include ensuring non-cash benefits and share-based remuneration are considered, managing travel expense reimbursements that create UK tax liabilities, and addressing the risk of creating a permanent establishment for corporate tax purposes if NRDs work remotely from abroad.

With the UK’s financial deficit, HMRC is under pressure to close the tax gap and enforce tax collection. Given HMRC’s ease in identifying NRD compliance failures and its potential to trigger broader employer compliance checks, this area remains a key focus. HMRC typically reviews the prior four tax years, potentially resulting in significant liabilities. UK companies with NRDs should thoroughly review their compliance, disclosing and rectifying any historical issues as needed.

By fLEXI tEAM