Tax treatment of executive directors and non-executive directors
We've discussed trading structures for start-up businesses previously and in some circumstances it may be necessary to bring a non-executive director onboard. In this article, we're therefore going to discuss the tax treatment of executive directors and non-executive directors.
An executive director is usually someone engaged in a full-time role and a shareholder of the company concerned. Whereas a non-executive director is often someone brought in from outside the business working in a part-time advisory or technical capacity. They may also be a private investor in the company concerned.
Frequently directors may be an employee under a contract of employment or have a separate service agreement as an officer of the company.
However, office-holders are not automatically regarded as employees and director will only acquire certain employment rights, for example redundancy, if it is proven they are an employee.
The courts have acknowledged that office-holders aren't necessarily employees by default. Although, if you behave and are treated like an employee, you may be an regarded as as an employee.
It is prudent not to combine a director’s service contract with an employment contract as this may provide the office-holder with employment rights that were not originally intended. Nevertheless, employment rights might be created regardless of the terms of any written contract for self-employment. Essentially this must reflect the reality of the situation.
Given the above, it would be sensible to recognise the tax treatment of executive directors and non-executive directors.
For tax and National Insurance (NICs) purposes, company officers are taxed in exactly the same way as ordinary employees.
Therefore a director who has an employment contract will be entitled to statutory redundancy pay if the usual conditions are met.
An executive director will find it difficult to contend they are engaged by a company on a freelance basis for tax purposes. It is highly likely that HMRC will resist any claims and, it is highly risky to assume this will be accepted by default as indicated by the result of the recent Petrol Service Limited tax case.
A director might be able to act as a self-employed consultant for a company as well as acting as their office-holder. However this would only be feasible if the director had an established consultancy business and there was no crossover with their director's duties.
Non-executive directors are taxed no differently than executive directors. Therefore any fees received are treated as employment income for both tax and NIC purposes.
However just like executive directors , it may be possible for a non-executive director to offer additional consultancy services on a self-employed basis if this work is done from an existing business.
Potential IR35 issues
If you're paid director's fees for holding office or employment via you own company, these may potentially be caught by IR35 and may be treated as if it were the employment income of the individual who is providing services. As a result the company may be required to deduct PAYE and NICs on the income it receives under the contract.
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