If you’re in a NED (Non-Executive Director) role where you have high expertise in the industry, it is likely that you may be asked to do consultancy work that is below board level. Whether this is with the company where you’re a NED or another. It’s quite a common situation; however this will then raise the question of how you structure yourself for these roles.
Before discussing this situation, it’s worth looking at how you are (or will be) remunerated for your NED role(s). As a non-executive director, your pay will be subject to tax and National Insurance (NI) deductions, as is the case for a normal employee. However, you may have taken consultancy work in the past or know other consultants that work for their end client via a limited company due to the tax efficiencies that it offers (amongst other benefits). So, why can’t you also do this for your NED role(s)?
The reason why is IR35. IR35 is a tax legislation that has been much publicised in recent months due to its recent public-sector reform and speculated future reform for the private sector. The legislation was implemented to combat tax avoidance from workers that supply their services via a limited company that are in ‘disguised employment’. This means in terms of their contract and working practices, the worker is comparable to a permanent employee (i.e. same benefits, responsibilities, control etc.). Due to this, they will be remunerated the same way via payroll, rather than having the freedom of tax planning and paying themselves through a tax efficient combination of salary and dividends.
Why is IR35 relevant to how an NED is paid and whether they can contract via a limited company?
This is due to the broad definition of directors, which includes both executive and non-executive, being classed as “office holders”. In HMRC’s digital tool to determine a worker’s IR35 status, question 4 is: ‘Is the worker or their business an office holder for the end client?’. If you select ‘yes’ to this, you will be greeted with ‘This engagement should be classed as employed for tax purposes’ without answering any further questions.
Even if the end client agreed to appoint the limited company as the NED, rather than the individual themselves, as the NED is personally performing the duties, this appointment would still be caught by IR35. In this case, the limited company should deduct tax and NI, which removes a great deal of the benefit of working through a limited company. Due to this, NED’s remuneration is subject to PAYE and NIC in the same way that an employee’s is.
So that’s that, as a non-executive director, although it may offer a lot of flexibility in terms of the hours you commit to the boardroom, it won’t offer you a lot of freedom in terms of how you are paid. However, what if you are also going to do some consultancy work on top of the NED work you do?
Even if the consultancy work that you’re performing is with a company that you hold an NED role with, the normal IR35 tests would be applicable to the provision of consultancy work to determine whether this work is caught by IR35. To determine whether your contract is inside (caught) or outside IR35, you should seek professional advice, which we can assist with at Nixon Williams.
It’s important to ensure that your NED role and consultancy services are separate and they both have separate contracts in place. However, HMRC would have the power to question whether the fees that your limited company receives for consultancy work should be reclassified as being for the non-executive directorship duties. Therefore, as well as being wary that your working practices do not reflect that of a ‘disguised employee’, you should also ensure that they would not be classed as board level NED work. Aside from falling foul of HMRC, it would also be beneficial to keep these separate, so you don’t allow the consultancy work to impact the impartiality that makes you such an asset at board level.
To conclude, in terms of tax, having both an NED and a consultancy role can be a complex area and due to this, errors are common. This doesn’t apply simply to how you structure yourself, but also to the expenses you claim via your limited company (you couldn’t claim expenses that relate to the NED role rather than the consultancy work i.e. travel to/from a board meeting).
However, with the right professionals on hand such as Nixon Williams, you can get expert advice on how to run your consultancy business that is separate to your NED role(s).
How can Nixon Williams help?
If you’d like more information on working as both a Non-Executive Director (NED) and consultant, our accountancy expert James Foster is on hand to help. You can give him a call on 01442 275769 or email James.Foster@Optionis.co.uk.