Changes introduced as a result of the new Off-Payroll Working Rules will have an impact on non-executive directors (NEDs) that provide services through personal service companies. The rules come into effect on 6 April 2021 and apply to both new and existing arrangements.
The Off-Payroll Working Rules and how they could apply to Non-Executive Directors
- What are the Off-Payroll Working Rules?
- When do the Off-Payroll Working Rules apply?
- How do the Off-Payroll Working Rules apply to NED arrangements?
- What action do client companies with NEDs operating through a PSC need to take?
- Should client companies continue to engage NEDs that provide consultancy services through PSCs?
What are the Off-Payroll Working Rules?
Broadly, the Off-Payroll Working Rules affect fee payments made in respect of workers and directors who provide their services through intermediaries such as personal service companies (PSCs). The new rules build on the existing tax regime known as IR35 which was introduced to deal with the government's concern that individuals working like employees/directors should be taxed as such. Both sets of rules effectively tax fees received by a PSC like employment income but there is an important difference between who decides whether the rules apply and who has to pay the tax and National Insurance contributions (NICs) due.
Under IR35, it is the PSC receiving the fee that decides whether the rules apply and is liable to account for income tax and NICs (under PAYE) if they do. However, under the Off-Payroll Working Rules it is the company that the worker or director provides their services to (i.e. the client) and pays the fee that makes this decision and has the tax liability. Initially, the new rules only applied to public sector clients but the government has now confirmed that from 6 April 2021 they will extend to clients in the private sector that are medium or large and have a UK connection.
When do the Off-Payroll Working Rules apply?
Broadly, the Off-Payroll Working Rules apply (as does IR35) where:
- if you ignored the existence of the PSC and assumed that the worker was engaged by the client company direct, the worker would be regarded as an employee or office holder of the client company (a "deemed employment/office holding"); or
- the worker is an office-holder with the client company and the services relate to the office.
If either of these apply, under the Off-Payroll Working Rules the client company must deduct income tax and NICs from the fees paid to the PSC and account for employers' NICs (and apprenticeship levy if relevant) as if they were payments of salary/director's fee.
How do the Off-Payroll Working Rules apply to NED arrangements?
There are different ways in which a NED might be engaged by a client company;
- They might be paid a single director's fee (this is subject to tax and NICs in the same way as employment income) or
- They might be paid two separate fees; one relating to their duties as a director ("director's fee") and one relating to separate consultancy services ("consultancy fee").
NEDs sometimes supply their consultancy services through a PSC. Before, the changes to the rules (i.e. under IR35) it was the PSC that made the decision over whether the rules apply and was exposed to any tax liability. However, under the Off-Payroll Working Rules both the decision and the liability move to the client company.
What action do client companies with NEDs operating through a PSC need to take?
Client companies with NEDs already operating through a PSC need to take action now:
a) They need to consider the arrangement and produce a document (a "Status Determination Statement" or "SDS") stating that the client company considers the consultancy to be:
- a self-employed consultancy that is separate from the director's office holding (i.e. outside the scope of the Off-Payroll Working Rules); or
- for services which relate to the director's office holding or which are provided in such a way that if you ignored the existence of the PSC, the consultant would be regarded as an employee of the client company for tax purposes (i.e. inside the scope of the Off-Payroll Working Rules).
b) The client company needs to take reasonable care in making the decision and the SDS needs to set out the reasons for it. A copy must be given to the NED who should acknowledge receipt of it and who will then have an opportunity to challenge the conclusion reached by the client company.
c) If the client company considers that the arrangement is outside the scope of the Off-Payroll Working Rules it can continue to pay the consultancy fee as before and without deducting tax. However, if HMRC successfully challenge the decision the client will be liable for unpaid PAYE and NICs. It therefore needs to ensure that the consultancy arrangement includes an indemnity for such liabilities although it needs to be aware that an indemnity in respect of employers' NICs/apprenticeship levy is unlikely to be enforceable. The arrangement should also include the ability for the client company to re-price the arrangement in the event that HMRC consider it within the scope of the rules to take account of the increased costs.
d) If the client company considers that the arrangement is inside the scope of the Off-Payroll Working Rules, from 6 April 2021 it must deduct income tax and NICs from the consultancy fee and pay employer NICs and apprenticeship levy (where relevant) as if they were paying employment income or director fees. Consideration will also need to be given as to whether the arrangement needs to be re-priced to take account of the increased costs.
When appointing new NEDs, client companies need to consider these issues before deciding how the arrangement should be structured.
Should client companies continue to engage NEDs that provide consultancy services through PSCs?
If a client company is of the view that the consultancy services are completely separate from the NED's duties as a director (and has taken reasonable care in coming to this conclusion) it may feel able to agree to the NED providing these services through a PSC. However, the client company needs to understand its new responsibilities and the tax risks to it of this kind of arrangement. It should also be mindful of the potential penalties and reputational risks involved in getting it wrong. Listed companies will also have to think about the parameters of their Remuneration Policy.
For more background information about the Off-Payroll Working Rules and how they apply, please read our two Q&A articles on the subject: