Can non-residents be company directors?

It is not uncommon for global corporations to appoint an individual who is a tax resident overseas as a director of a UK company. This could be for a variety of reasons; for example, the UK Company may wish to leverage the experience and talent of an individual resident abroad, or the UK Company may be a subsidiary of a larger overseas-based group and has decided to appoint a senior employee or director to the UK Company’s board of directors. For UK tax purposes, these individuals are referred to as Non-Resident Directors (NRD).

For anyone applying to be a UK company director, the residence of that person is not important. The UK allows a UK company director after company formation to be a non-UK resident and live anywhere in the world. There is no requirement for a director of a UK company to live in the UK during or after their appointment as a company director. However, with today’s globalised world, tax compliance for non-resident directors has come under increased scrutiny from HMRC.

Is it permissible for a UK company to have a non-resident director?

We are frequently asked can a UK company director be based abroad? and the simple answer is yes. There is no legal necessity for a director of a UK company to be a British national, reside in the UK, maintain a base here, or pay regular visits here.

When should an NRD file a tax return?

If an NRD has no UK duties and receives no income from the UK, such NRDs are not required to file a UK tax return.

In general, if a Non-Resident Director has any of the following, they are required to file a UK tax return with HMRC:

• UK workdays (If just for a day).
• A director’s fee.
• Reimbursed expenses.
• Salary in the UK.

HMRC conducts compliance checks on UK companies on a regular basis and would expect relevant NRD’s to make a tax declaration and, in some situations, PAYE on this employment.Despite the above, even if no requirement to file a tax return exists as a result of an NRD, HMRC requires directors of UK companies to file a UK tax return due to their directorships.

Why is it necessary for NRD’s to file?

• Directors are officers of the Company, and as such, any income or expenses reimbursed are taxable in the UK on the NRD as regular UK employment income.
• Under the OECD model and International Double Tax Treaties, officeholders remuneration does not have the same level of protection from taxes like that of employed individuals income received in another jurisdiction.

Thus, even with extremely limited duties in the United Kingdom, NRD’s are nevertheless caught by the legislation.

Note - EU nationals continue to be eligible for the UK Personal Allowance, which means that an NRD can earn up to £12,570 tax-free.

The Impact of Brexit on Non Resident Directors

Brexit has significantly altered the regulatory landscape for non resident directors (NRDs) from the EU. With the UK no longer part of the EU, EU nationals may encounter new challenges when taking on directorships in the UK. Companies looking to hire non resident directors must now navigate a more complex legal and compliance framework.

For companies hiring EU directors, it is crucial to understand the implications of these changes. They may need to reassess their compliance strategies, especially regarding tax obligations and residency status. This includes ensuring that they are aware of the potential need for a HMRC certificate of residence company to clarify the tax position of their non resident directors, especially if they perform duties in the UK.

Taxes/NIC’s non-residents needs to be aware of?

There are some rules and regulations from a tax and national insurance perspective that non-resident directors need to be aware of and things they need to know to avoid UK tax penalty regimes -

Understanding the Legal Framework for NRDs

The legal framework governing directorships uk is primarily outlined in the Companies Act 2006. This legislation stipulates that all directors, regardless of their residency status, must adhere to specific duties and responsibilities. For resident and nonresident directors, understanding these obligations is essential to ensure compliance and avoid penalties.

The implications of this act for NRDs are significant; they are classified as office holders and are subject to UK tax laws even if they reside outside the UK. This classification means that NRDs must be vigilant about their tax obligations and ensure they comply with all reporting requirements.

Company residence for taxation purposes

Regarding taxation, a company will be deemed to be subject to UK taxes (namely corporation tax) if it was incorporated in the UK. This rule applies irrespective of where the directors live or where key decisions for the business are taken.

Tax Residency Considerations

Tax residency is a crucial aspect for NRDs operating in the UK. A director’s residency status determines their tax obligations under UK law. According to HMRC guidelines, an individual is considered a resident if they spend 183 days or more in the UK during a tax year. However, even those who spend fewer days may be deemed residents if they meet specific criteria under the Statutory Residence Test (SRT).

Understanding how tax residency affects the obligations of resident non resident directors is important. For instance, NRDs may be liable for UK income tax on earnings derived from their directorships if they perform duties in the UK, regardless of their residency status. Understanding these nuances is essential for resident non resident directors to ensure compliance with tax regulations and avoid unexpected liabilities.

A resident director is someone who resides in the UK and is subject to UK tax laws on their earnings. In contrast, a non resident director may live abroad but still hold a directorship in a UK company. This classification significantly impacts how their income is taxed and what obligations the company must fulfill regarding PAYE (Pay As You Earn) and National Insurance Contributions (NICs).

Non-resident directors visiting the UK

Overseas directors of UK companies can visit the UK for short periods and do not need to establish tax residence in the UK.

The rules are simple on the surface. Any income received by a director (executive or non-executive) for undertaking their role within the UK (e.g. attending meetings) is subject to UK PAYE. Earnings which relate to duties performed in the UK in a tax year are taxable in full.

Double tax treaties don’t usually protect the director. However, if the individual isnt remunerated by the UK or overseas entities for the UK directorship, there will be no UK tax liability (see below about self-assessment).

Directors visiting the UK to open a company bank account

There can be instances where a director needs to visit the UK to open a UK company bank account. Banks are required to comply with both UK and European money laundering provisions. Sometimes a bank requires a company director to visit a UK branch; in other cases, there may be a branch in the director’s home country. Wherever the director visits the bank, the various money laundering and identification procedures must be satisfied by the director through the branch.

Self-Assessment & PAYE for non-resident directors

Any director of a UK company will fall in the criteria for self-assessment. This includes non-resident directors. The rules are as follows:

• If the director is issued with a UK tax return, they must file the return by the relevant filing deadline. Even if there is no tax due and the return is filed after the deadline, a penalty will be incurred.
• If a UK tax return isn’t issued, but the director is obligated to pay tax, then there will be a penalty for failing to notify HMRC unless the tax is paid by the filing deadline (and the return submitted).

Any earnings by the non-resident directors earn outside of the UK can be drawn via salary or dividends without a need to do any UK reporting.

Keeping records for non-resident directors

In some circumstances, HMRC can allocate a proportion of the director’s total pay to the UK director role they fulfil. This is generally difficult for HMRC to do. However, we recommend that companies employing non-resident directors ensure that they have systems and processes in place to keep track of time spent on performing duties in the UK and the value of the director’s income related to the UK duties that the director is carrying out.

It’s recommended that a letter of appointment contains a remuneration clause.

Tax treaties between the UK and other countries

Often people believe that if there is a tax treaty between the UK and the director’s country of residence, this will exempt their income in the UK from UK income tax. However, this isn’t always the case.

Expenses incurred in the UK

There is clear HMRC guidance regarding the accommodation and travel expenses of directors. Whilst the UK employer should continue to report the director expenses via Form P11D or the payroll. Directors may be able to treat these items as non-taxable subject to some conditions. These conditions include only coming to the UK to perform a task for a ‘temporary purpose’ or a ‘limited duration’ and spending less than 40% of their director role at a workplace. These conditions only apply in some circumstances; so check with an accountant if these conditions do apply to you.

Is NIC’s due?

This is a complex area and depends on where the director has ongoing social tax obligations, as well as other directorships, their location, and rules in those tax jurisdictions. We recommend you seek professional advice from a UK accountant.

What should companies and non-resident directors do?

All UK companies with overseas-based directors who may resume board travel to the UK should consider reviewing existing arrangements to ensure that tax and national insurance requirements are met. UK businesses, in particular, should consider the following:

• how to calculate the correct level of earnings-related to UK duties (including expenses and perks) and how these profits should be reported to HMRC.
• The obligation to get a special direction from HMRC (s690 application) allowing the firm to deduct tax only from the portion of a directors pay or fees relevant to projected UK duties.
• If the directors earnings are subject to employee and employer Class 1 NIC, or whether certain exemptions or regulations apply.
• Discussing double taxation issues with the director in cases where they are also taxed in another jurisdiction on these earnings; and.
• Notifying the director of the necessity to file a personal tax return in the UK in connection with the UK directorship and providing guidance on how to avoid double taxation.

If you have any queries or concerns about the handling of non-UK resident directors under employment tax and national insurance, dns can assist you in reviewing the position.

Practical Steps for NRDs to Ensure Compliance

For NRDs looking to ensure compliance with UK regulations, several practical steps can be taken:

Checklist for NRDs:

• Confirm your residency status and understand its implications.
• Apply for a HMRC certificate of residence company if necessary.
• Ensure your company operates PAYE (Pay As You Earn) correctly for any income earned while performing duties in the UK.
• Keep meticulous records of all board meetings attended and any related expenses incurred during visits to the UK.

Best Practices for Record-Keeping:

• Maintain detailed logs of time spent in the UK.
• Document all travel expenses and any NI contributions for directors.
• Regularly consult with tax professionals to stay updated on changing regulations.

Conclusion

Many companies will often draw on global talent and appoint overseas directors to the board. As it’s common for overseas directors of UK companies to visit the UK for short-term trips, non-resident directors and their companies should be aware that such business trips can trigger tax and NIC requirements under PAYE in the UK.

For non-UK tax resident directors of UK companies, both executive and non-executive, the tax position can be complex. We recommend that you seek clear advice from a UK accountant.

dns accountants have a thorough understanding of the tax consequences for non-resident directors of UK companies and can assist you in resolving any issues and ensuring compliance. If you would like to speak with a specialist adviser and want to know more about the non-residents UK company directors, please contact dns right now on 03330886686, or you can also e-mail us at enquiry@dnsaccountants.co.uk.

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