“Do any non-executive directors provide their services to the PLC through a service or consultancy company with a contract between the PLC and the service company – rather than the individual – and pay the fee as a gross amount?
This used to be a fairly normal structure, particularly where a NED has multiple appointments, but we are wondering whether HMRC has tightened its position now.
We have an NED who runs her own consultancy/coaching company and wants her services as NED to be provided through that company. Can this still be done? “
I have had experience of such an arrangement in a previous FTSE 250 company: a few years ago when HMRC changed the rules (apparently to crack down on IT consultants), the NED concerned then decided that 20% of his fee should be channeled through his service company in order to cover administration costs, and took the rest direct through payroll. This was done after he had taken detailed tax advice. I suspect that service companies continue to be the focus of HMRC attention, so would recommend that any company paying in this way has robust claw back and tax indemnity language in the relevant terms of appointment.
Yes, we have two NEDs whose fees are paid in the way, following an invoice of their services. This is all disclosed in our Annual Report.
One of our NEDs had a service company already established when we appointed him. He had a full-time assistant and this allowed him to pay her out of his gross income and offset any other office costs prior to paying his tax. We contributed to the PA’s costs separately to the NED fee.
This seemed to run well for a number of years, but last summer he was having the arrangement queried due to an audit at one of his other directorships, so he decided to unwind it. We’ve now put him and his PA on our payroll and we recharge a proportion of the PA’s time to his other directorships.
Some time ago, we had such an arrangement with one of our NEDs. However, following a routine PAYE/NIC review in October 2003, we were advised by HM Revenue & Customs that we should pay the individual through the payroll. Although the individual concerned had fully accounted for the income tax on his earnings, HMR&C noted that the arrangement had resulted in a shortfall of secondary Class 1 NIC. We now pay this individual through the payroll.
We have 1 NED who is a full time employee elsewhere and 1 NED who has his own service company. Both have letters of appointment with our PLC and both are paid their fees gross on production of a VAT invoice by their company. Within their appointment letter is a sentence stating “In accordance with IR Extra-Statutory Concession ESC/A37, these fees will be paid on receipt of an invoice from your company on the understanding that the income will be declared and chargeable to corporation tax.”
We have one director on this basis (and one to follow). Circumstances sound similar in that the individual’s have a number of other appointments/business interests and have asked all their companies to deal with their appointments on this basis. We took advice from a Birmingham based lawyer (tax and contract/employment) in 2008 when the first individual asked to be appointed via a service company. The individual’s are appointed as directors at Companies House, but a separate consultancy agreement via a service company is put in place which sets out fees/duties etc. This has to be disclosed in the annual report. HMRC have not raised any issues to date. We have a few examples of other companies that put disclosures in their annual reports. If you want more details – David Mensley will pass you my contact info so that you can e-mail direct if you wish.
All our NEDs are contracted directly to the PLC via rolling one year Letter of Appointment.
I can’t help on whether the structure referred to is acceptable. Probably safest to check with your accountants/tax advisers, or directly with HMRC.
We have no directors with arrangements precisely as described in the question, so cannot answer directly. A couple of observations:-
1. The director role is a personal responsibility, so there must be an appointment letter with the director as an individual, not just a contract with their company (it is not clear from the question whether the director is personally appointed).
2. We do have a NED who is also a fulltime employee of another company. Whilst we have a personal appointment letter with that director we have arrangements to pay their fees to their employer’s service company. The arrangements for which (in the NED’s appointment letter) are as follows:-
“At your request (and until further notice), the Company will, in accordance with HM Revenue and Customs Extra-statutory Concession ESC/A37, pay your director
No, sorry can’t help.