Over 33% of board rooms are internationally diverse – but do organisations understand the tax compliance obligations for their boards?
January 25, 2017
In today’s globalised world, it's not surprising, more than 1 in 3 UK boardrooms are internationally diverse and this trend is on the up.
The appointment of board directors who are non-resident in the UK can create complex reporting and compliance requirements for both the company and for the directors themselves. But what does it mean to organisations, what actions would need to be taken to improve their employment tax compliance approach?
HMRC has launched a Know Your Customer (KYC) initiative to help increase its understanding of how well various tax elements of an organisation work together. This is the latest push to enable HMRC to identify any potential weaknesses or tax risks in governance, compliance, systems and procedures – and one area of focus is on non-resident directors.
From a UK tax perspective, a non-resident director of a UK company is considered an office holder. Fees received for a UK role are subject to UK tax. In general, tax treaties between the UK and overseas countries do not offer exemption from UK tax. However, I am aware that there are a number of organisations uncovering board directors who have visited the UK whilst completing their Short Term Business Visitor report to HMRC where compliance has not been considered previously. HMRC are increasingly analysing the data on Short Term Business Visitors and asking questions about non-resident directors – so companies need to be on the front-foot in managing tax compliance.
There are a number of common pitfalls in non-operation of UK National Insurance where directors are visiting the UK and an exemption is not available. Bearing in mind the employer National Insurance contribution rate of 13.8%, this can present significant unexpected costs to organisations. For one organisation I have worked with, this resulted in a settlement to HMRC for tax and National Insurance in excess of £100k for two non-resident directors alone.
Some organisations have failed to account for the UK tax due on expenses and benefits. HMRC has recently updated its guidance to provide clarification on the assessment of a temporary workplace for a non-executive director. This is likely to be a welcome clarification for many companies; however the tax treatment of expenses and benefits remains a common area of misunderstanding for companies when it comes to their board directors and companies needing to make tax disclosures. HMRC has strived to simplify the treatment of expenses and benefits to ensure employers understand how to apply the rules – but has this really been achieved?
In my view, organisations need to move to a holistic approach in managing their board directors and ensuring that a robust framework is in place to manage compliance - this means the co-operation between those responsible for on-boarding newly appointed directors (often the company secretary rather than human resources), the tax function, and HR and payroll to ensure that the data flow processes are connected.
With HMRC’s focus increasing, as well as the scrutiny around executive pay and disclosure, it is important that organisations are proactively managing the compliance risks around their board directors to mitigate unexpected costs and reputational risks for their most senior executives.