Business Finance: Peter Harrup of PKF warns of a pitfall in paying non-executive directors
THERE are many good business reasons to bring an experienced individual on to the board of your company in a non-executive role. There can also be tax benefits for family businesses but there is a pitfall to watch out for.
An individual who joins the board of a company as a non-executive director is an office holder of the company. As an office holder, he or she must be paid under PAYE if remunerated at all for attending board meetings, even if he or she carries out no other duties for the company.
Bringing family shareholders who own at least 5% of the company on to its board can help to ensure that they qualify for entrepreneurs’ relief (ER) on the sale of the shares if the company is sold, securing a potential tax saving of up to �1.8m per person.
In addition, if such individuals own assets that are used by the company, ER could be available on sale of such assets on a takeover, provided that the owner is an employee or office holder of the company. Also, as employees, such individuals can benefit from other tax-efficient remuneration such as pension contributions made by the company.
Tax complications arise if you use “professional” non-execs – individuals who operate on a business consultancy basis for boards on several companies. Such individuals who join the boards of their clients must be paid under PAYE for the work. Even though the individual’s personal service company may invoice the board for a fee, as he or she will control the personal service company, PAYE and NIC should be deducted. Only if the non-exec is supplied by a company which that individual does not control can a fee invoice be paid gross.
Following the furore over the chief executive of the Student Loans Agency being paid through a personal service company, HM Revenue & Customs is paying more attention to so called IR35 issues. Alongside further guidance to clarify the rules, it is setting up three new teams to target individuals operating personal service companies.
These teams will probably target individuals who are named as non-execs and operate personal service companies. However, the fall-out from such activity will not hit the individuals: HMRC will go after the employing companies for the outstanding PAYE and NIC.
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It is worth checking that you have paid your non-execs correctly so that, if necessary, you can put things right now before HMRC catches you out and charges larger penalties for the error.