The UK’s HMRC in recent years has focused on noncompliance by UK companies that fail to subject remuneration paid to non-resident directors (NRDs) to tax under the pay-as-you-go (PAYE) system. In the past, HMRC have operated within a time limit of four prior UK tax years, extending it to six prior UK tax years when there is evidence of carelessness. However, HMRC has recently begun pursuing uncollected PAYE for up to 12 prior UK tax years by classifying the noncompliance as an “offshore matter.”
In Finance Act 2019, UK tax legislation was introduced to extend the time limit for HMRC to recover unpaid tax to 12 years when an “offshore matter” is involved. For individual tax purposes, the retroactive legislation was aimed at UK resident taxpayers with undisclosed offshore income and gains. In addition to extending the period of assessment, the legislation also allows HMRC to impose higher penalties for noncompliance at levels exceeding 100% of the uncollected tax, and in extreme cases up to 200% of the uncollected tax.
Whilst this UK tax legislation has been in place for a number of years, HMRC are only now adopting the approach of pursuing PAYE for up to 12 UK tax years in relation to NRDs. They view the noncompliance as an offshore matter on the basis that the legislation applies to “income or assets received in a territory outside the UK.”
HMRC’s approach will impact UK companies that pay directorship fees to the offshore accounts of directors -- executive and non-executive -- without deducting PAYE. It will apply equally to UK companies when NRDs are appointed to a UK board on behalf of an overseas parent company, and the NRDs perform some of their directorship duties in the UK, even if they are remunerated by the overseas parent company. There are also anti-avoidance rules that apply when the payment is made to a Personal Service Company (PSC) through which the director provides their services.
For a discussion of why PAYE should be collected in relation to NRDs who perform any of their directorship duties in the UK, as well as the NIC implications, see Non-UK Resident Directors of UK Companies -- Income Tax and NIC Obligations.
HMRC does not appear to have applied the “offshore matter” approach to other cross-border working arrangements beyond NRDs. We will provide an update if there are further developments in this area.
HMRC have access to the details of NRDs from Companies House information, which is in the public domain.
UK companies with NRDs that have not deducted PAYE on earnings that either directly or indirectly relate to their UK directorship role should consider obtaining guidance from a trusted tax adviser to both regularise the current reporting positions for their NRDs and to settle past PAYE liabilities. An unprompted disclosure to HMRC could result in a more favourable outcome for the years impacted and the penalty incurred than if HMRC identified the noncompliance. Delaying until the matter is picked up by HMRC, such as by a Business Risk review, may result in greater costs and potential reputational damage.
A tax advisor would also be able to assess if there may be a way to recover the UK tax paid via a foreign tax credit in the NRD’s tax residence jurisdiction.
For more information on HMRC’s new approach to PAYE compliance regarding NRDs, please consult your regular BDO contact or the authors of this article.
Andrew Kelly
James Hourigan
BDO in United Kingdom
Why Has HMRC’s Approach Changed?
In Finance Act 2019, UK tax legislation was introduced to extend the time limit for HMRC to recover unpaid tax to 12 years when an “offshore matter” is involved. For individual tax purposes, the retroactive legislation was aimed at UK resident taxpayers with undisclosed offshore income and gains. In addition to extending the period of assessment, the legislation also allows HMRC to impose higher penalties for noncompliance at levels exceeding 100% of the uncollected tax, and in extreme cases up to 200% of the uncollected tax.Whilst this UK tax legislation has been in place for a number of years, HMRC are only now adopting the approach of pursuing PAYE for up to 12 UK tax years in relation to NRDs. They view the noncompliance as an offshore matter on the basis that the legislation applies to “income or assets received in a territory outside the UK.”
Who Does This Impact?
HMRC’s approach will impact UK companies that pay directorship fees to the offshore accounts of directors -- executive and non-executive -- without deducting PAYE. It will apply equally to UK companies when NRDs are appointed to a UK board on behalf of an overseas parent company, and the NRDs perform some of their directorship duties in the UK, even if they are remunerated by the overseas parent company. There are also anti-avoidance rules that apply when the payment is made to a Personal Service Company (PSC) through which the director provides their services.For a discussion of why PAYE should be collected in relation to NRDs who perform any of their directorship duties in the UK, as well as the NIC implications, see Non-UK Resident Directors of UK Companies -- Income Tax and NIC Obligations.
HMRC does not appear to have applied the “offshore matter” approach to other cross-border working arrangements beyond NRDs. We will provide an update if there are further developments in this area.
What Should Employers Do?
HMRC have access to the details of NRDs from Companies House information, which is in the public domain.UK companies with NRDs that have not deducted PAYE on earnings that either directly or indirectly relate to their UK directorship role should consider obtaining guidance from a trusted tax adviser to both regularise the current reporting positions for their NRDs and to settle past PAYE liabilities. An unprompted disclosure to HMRC could result in a more favourable outcome for the years impacted and the penalty incurred than if HMRC identified the noncompliance. Delaying until the matter is picked up by HMRC, such as by a Business Risk review, may result in greater costs and potential reputational damage.
A tax advisor would also be able to assess if there may be a way to recover the UK tax paid via a foreign tax credit in the NRD’s tax residence jurisdiction.
For more information on HMRC’s new approach to PAYE compliance regarding NRDs, please consult your regular BDO contact or the authors of this article.
Andrew Kelly
James Hourigan
BDO in United Kingdom